      In the United States Court of Federal Claims
                                     No. 14–1228C

                               (Filed: November 8, 2016)

*************************************
                                    *
GUSC ENERGY, INC.,                  *
                                    *
                    Plaintiff,      *
                                                Grants Made Under the American
                                    *
                                                Recovery and Reinvestment Act of 2009,
v.                                  *
                                                Section 1603; Cogeneration Plants; Cost-
                                    *
                                                Basis Allocation; Recapture
THE UNITED STATES,                  *
                                    *
                    Defendant.      *
                                    *
*************************************

Timothy L. Jacobs, with whom was Hilary B. Lefko, Hunton & Williams, LLP,
Washington, D.C., for Plaintiff.

Jennifer D. Auchterlonie and Jason S. Selmont, Trial Attorneys, with whom were Caroline
D. Ciraolo, Principal Deputy Assistant Attorney General, David I. Pincus, Chief, and G.
Robson Stewart, Assistant Chief, Court of Federal Claims Section, Tax Division, U.S.
Department of Justice, Washington, D.C., for Defendant.

                               OPINION AND ORDER

WHEELER, Judge.

       Plaintiff GUSC Energy, Inc. (“GUSC Energy”) is the owner and operator of an
open-loop biomass facility (the “Biomass Plant”). It brought this action on December 22,
2014, alleging that the Government underpaid it by more than five million dollars when it
issued a grant to GUSC Energy under Section 1603 of the American Recovery and
Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (“ARRA”). Section 1603
allows certain owners of renewable energy facilities to apply for cash grants. Owners of
open-loop biomass facilities like GUSC Energy became entitled to cash grants equal to
thirty percent of the facilities’ cost basis. Id. § 1603(b)(1)–(2)(A). The Government
responded to GUSC Energy’s claims by filing a counterclaim for recapture of the entire
awarded grant, alleging that GUSC Energy has permanently ceased electricity production
at the Biomass Plant.

      The Court held a two-day trial in this case on June 21–22, 2016. During that trial,
the Court heard the testimony of four witnesses. GUSC Energy’s two fact witnesses were
Daniel Maneen and Christopher Lindsey, and its expert witness was Michael Oswald. The
Government’s expert witness was Trent Markell.

        At trial and in the post-trial briefing, it became clear that the parties primarily
disagree on the allocation the Government is required to perform between qualifying and
non-qualifying activities in this case. The parties agree that the Biomass Plant is a qualified
facility, and that all of the property in the plant is qualified property for the purposes of
Section 1603. However, the steam used to generate electricity from the biomass in the
plant is also used to heat the business and technology park in which the plant is located.
Therefore, under this Court’s holding in W.E. Partners II, LLC v. United States, 119 Fed.
Cl. 684 (2015), aff’d without published opinion, 636 F. App’x 796 (Fed. Cir. 2016), GUSC
Energy was required to present its version of a reasonable cost basis allocation between the
Biomass Plant’s qualifying electricity generation and the non-qualifying heating activities.
Instead, GUSC Energy argues that no such allocation is necessary because all of the
qualified property in the Biomass Plant is used to generate electricity. The Court rejected
this argument in W.E. Partners, and it rejects it again here.

       GUSC Energy did not present a competing activity-based allocation at trial, but the
testimony of the Government’s own expert undermined the Government’s allocation.
Therefore, the Court finds that some damages are appropriate, and should be calculated
using Mr. Markell’s activity-based allocation method. The Court also finds that GUSC
Energy has not permanently ceased production of electricity at the Biomass Plant, so the
Government’s counterclaim for recapture is dismissed.

                                               Findings of Fact

          A. The Griffiss Business and Technology Park

       The Biomass Plant is located in the Griffiss Business and Technology Park (the
“Park”). Stip. ¶ 5.1 The Park is located in Rome, New York, on the site of the former
Griffiss Air Force Base. Id. When the base closed for all military purposes in 1995, the
closure was a major blow to the city of Rome. Stip. ¶ 6; Maneen, Tr. 38–40. Griffiss Local
Development Corporation (“GLDC”) was formed in 1995 as a not-for-profit corporation
in order to transform the Base into the Park. Stip. ¶ 7; Maneen, Tr. 41. GLDC became the
successor to the U.S. Department of Defense as the owner and operator of the Base. Stip.
¶ 7. The Base included (1) an electric distribution system with approximately 300 miles

1
    References to “Stip. ¶ _” refer to the parties’ Joint Stipulations of Fact, filed June 2, 2016 (Dkt. No. 39).

                                                        2
of overhead and underground electrical wires, transformers, and other equipment, (2) a 26-
mile steam distribution system, and (3) a pre-existing steam production plant. Stip. ¶ 8;
Maneen, Tr. 41.

        GLDC became the Park’s steam heat provider in September 1999. Stip. ¶ 9. In
May 2002, GLDC also began to own and operate the Park’s electricity facilities and to
provide electricity to the park’s tenants. Id. The Park currently is home to more than 60
private companies and governmental entities, and over 5,600 employees. Stip. ¶ 10. In
2000, GLDC transferred to Griffiss Utility Service Corp. (“Griffis Utility”) ownership and
operational responsibility for the electric distribution system, the steam distribution system,
and the steam plant. Stip. ¶ 13. Griffiss Utility now is regulated by the New York State
Public Service Commission as an electric corporation and a steam corporation. Stip. ¶ 13.
It is authorized to provide retail electric and steam service to tenants within the Park. Id.
As such, Griffiss Utility is the “provider of last resort”—the default provider for the Park
tenants—and must provide electricity and steam service to those tenants that desire one or
both services. Id.; Maneen, Tr. 50–51. Customers may purchase electricity from outside
the Park if Griffiss Utility’s rates are not competitive, but Griffiss Utility has been able to
keep its electricity rates low in order to avoid customer attrition. Maneen, Tr. 51.

        Griffiss Utility is not an electricity producer. Stip. ¶ 14. Rather, it traditionally has
purchased the electricity that it distributes to Park customers (e.g., from the wholesale
market). Id. Griffiss Utility uses both the Biomass Plant and outside sources to satisfy its
customers’ electricity needs. Maneen, Tr. 53–54. The base electricity load of the Park is
approximately eight megawatts (“MW”) and the peak load is approximately fourteen MW.
Stip. ¶ 14.

       B. The Biomass Plant

        In approximately 2011, Griffiss Utility decided to construct an open-loop biomass
facility to be a combined heat and power plant, Stip. ¶ 16, generating steam to meet the
Park’s steam heat needs and electricity to offset in small part the electricity that it
previously had been purchasing. Stip. ¶¶ 22e, 23. Griffiss Utility formed GUSC Energy
for the purpose of owning and operating the Biomass Plant, and to operate the preexisting
steam plant. Stip. ¶ 16. GUSC Energy sells the steam and electricity generated from the
biomass facility to Griffiss Utility, which in turn sells the steam heat and electricity to the
Park tenants. Stip. ¶¶ 23, 24, 25. GUSC Energy also operates the preexisting steam plant’s
natural gas boilers on behalf of Griffiss Utility, and Griffiss Utility sells this steam to Park
tenants. Stip. ¶¶ 24–25.

        GUSC Energy constructed the Biomass Plant next to the preexisting steam plant. A
biomass boiler burns biomass—here, wood chips—as its fuel source to produce steam.
Stip. ¶ 26. This steam can then be used to generate electricity by running the steam through
a steam turbine and generator system (“STG”). Stip. ¶¶ 22c, 22e.

                                               3
        The Biomass Plant is a cogeneration plant. A cogeneration plant (also known as a
combined heat and power plant) provides steam for both industrial processes (like steam
heating) and power generation. DX 20 at 4. Steam generated by its boiler system first is
used to power its turbine, and then is piped into the Park’s district heating system. Id. at
21. The Biomass Plant contains the following relevant components: (1) a biomass-fueled,
field-erected boiler, designed to produce 40,000 pounds of steam per hour, and (2) a back-
pressure STG with a full load electrical output of 885 kilowatts (“kW”). Stip. ¶¶ 22b, 22c;
PX 28 at GEN000561. In actual operation, during the 2013–2014 heating season, the
facility provided for approximately 2.8 percent of the overall electrical needs of the Park,
and it provided for 46.7 percent of the overall steam heat needs of the Park. Markell, Tr.
304.

       In addition to the Biomass Plant, GUSC Energy retained its preexisting steam
plant’s natural gas-fired boilers. Stip. ¶ 24. Retaining these boilers allowed GUSC Energy
to meet the Park’s peak steam demands, to add redundancy if the biomass boiler was non-
functional, and to have options as to which facility to use depending on comparative fuel
prices. Id.; Maneen, Tr. 401–06, 408–09. Additionally, neither Griffiss Utility nor GUSC
Energy operated the Biomass Plant during the summer months when the Business Park did
not need steam heat. Maneen, Tr. 408.

        The Government concedes that all of the property costs GUSC Energy included in
its grant application relate to property that is integral to the production of electricity at the
Biomass Plant. See Def. Post-Trial Br. at 23, Dkt. No. 47 (Aug. 17, 2016); Second Supp.
Stip. of Fact, Dkt. No. 56 (filed Sept. 29, 2016). The weight of the evidence further
confirms this conclusion—the Biomass Plant did not contain property that could only be
used for generating steam for heating purposes.

       C. Operating and Idling the Biomass Plant

        The Biomass Plant only operated continuously during the 2013–2014 heating
season, from November 2013 to May 2014. See Stip. ¶ 37; Markell, Tr. 303–04. GUSC
Energy idled the facility in May 2014 for the summer, and decided in the fall of 2014 not
to restart operations. Stip. ¶ 37. GUSC Energy decided not to restart the Biomass Plant
because natural gas prices had fallen so low that operating the plant was not economical.
Id.; Maneen Tr. 407. The plant briefly operated in April 2016, but otherwise has remained
idle. Stip. ¶ 42. Testimony at trial showed that GUSC Energy has maintained the Biomass
Plant in good working order for the entire time the plant has been idle. Maneen, Tr. 424–
27. The Government seeks to recapture the Section 1603 grant it paid to GUSC Energy,
claiming that the extended idling of the Biomass Plant is really a permanent cessation of
electricity production at the plant.



                                               4
       D. GUSC Energy’s Section 1603 Grant Application

        GUSC Energy submitted its final Section 1603 application and supporting
documentation to the Treasury on or about March 6, 2014. Stip. ¶ 27. GUSC Energy stated
that its qualified cost basis was $18,230,094, and therefore its requested payment was
$5,469,028 (30 percent of its claimed basis). Stip. ¶¶ 32, 33. With its application, GUSC
Energy submitted an independent accountant report that opined its cost basis was fairly
stated. Stip. ¶ 32. In additional communications, GUSC Energy confirmed that
“approximately 6.6 percent of the total steam energy available for end-use is converted to
electricity.” DX 4 at 333–34; see Lindsey, Tr. at 172. Therefore, the Treasury reduced
GUSC Energy’s eligible cost basis to 6.6 percent of the claimed cost basis submitted on
the application, and on June 26, 2014, awarded a grant equal to $316,609 (30 percent of
the eligible basis, minus a 7.2 percent deduction for sequestration). Stip. ¶ 34.

        At trial, the Government’s expert, Mr. Markell, took issue with the Government’s
analysis. Mr. Markell instead proposed a method (the “efficiency method”) that allocates
between qualifying and nonqualifying activities by focusing on the energy used for
electricity generation, and compares that generation efficiency to the efficiency of a
hypothetical electricity-only biomass plant. DX 20 at 33; Markell, Tr. 316–18.
Specifically, Mr. Markell examined the actual heat input of plaintiff’s facility (66,602,690
Btu/hr), and divided that number by the heat rate of a typical biomass facility that produces
only electricity (13,500 Btu/kWh). DX 20 at 33. Mr. Markell found that GUSC Energy’s
heat input could generate 4,934 kW of electricity. Id. During the period when the Biomass
Plant was operational, it actually generated only 752.1 kW. Therefore, according to Mr.
Markell, GUSC Energy’s facility generates only 15.24 percent of the electricity it would
generate if it only generated electricity. So, under Mr. Markell’s analysis, 15.24 percent,
rather than 6.6 percent, of GUSC Energy’s claimed costs should have been counted as
eligible cost basis.

       In contrast, Plaintiff’s expert Mr. Oswald argued that all costs GUSC Energy
incurred should be treated as qualifying, reasoning that all of the equipment GUSC Energy
used was necessary for electricity generation. PX 178 at 14–15, 17. Mr. Oswald testified
that no other engineering basis existed to allocate costs between qualifying and
nonqualifying activities. Oswald, Tr. 210.

       Further, GUSC Energy and the Government disagreed at trial on whether certain
costs could be included in GUSC Energy’s eligible cost basis. Specifically, the parties did
not agree on whether total costs of $65,938 associated with “iron works,” site clean-up,
paving, and landscaping were eligible. See Second Supp. Stip. of Fact, Dkt. No. 56 (filed
Sept. 29, 2016). The parties now agree that these costs are properly includable in Plaintiff’s
eligible cost basis. Id. GUSC Energy seeks reimbursement of the difference between its
claimed cash grant and the grant it actually received.


                                              5
                                               Discussion

        A. GUSC Energy is Entitled to Damages Based on a Reasonable
           Activity-Based Allocation

        In W.E. Partners, this Court set out a three-step inquiry that applies when a court
analyzes whether a Section 1603 grant should be awarded to the owner of an open-loop
biomass facility: (1) the facility must be a “qualified facility,” (2) the property costs the
plaintiff claims as its cost basis in the facility must relate to “qualified property,” and (3) the
cost basis claimed for qualified property must relate to a “qualifying activity.” See 119
Fed. Cl. at 692, 694. The Court will address each step in turn.

                1. The Biomass Plant is a Qualified Facility

        First, the facility must be a “qualified facility” under ARRA Section 1603. Open-
loop biomass facilities are one type of “qualified facility” that constitutes specified energy
property under Section 1603, see ARRA § 1603(a), 45 U.S.C. 45(d)(3) (2012), and the
parties do not dispute that the Biomass Plant at issue in this case is an open-loop biomass
facility. Therefore, the Biomass Plant is a qualified facility.

                2. All of GUSC Energy’s Claimed Costs Relate to Qualified Property

       Second, the cost basis GUSC Energy claims in the qualified facility must relate only
to “qualified property.” Section 1603 incorporates the definitions in Section 48 of the
Internal Revenue Code (“IRC”), see § 1603(h), which defines “qualified property” as
“tangible property . . . used as an integral part” of grant-eligible facilities. 26 U.S.C.
§ 48(a)(5)(D) (2012). Treasury Guidance for the Section 1603 program excludes as
qualified property “electrical transmission equipment, such as transmission lines and
towers, or any equipment beyond the electrical transmission stage, such as transformers
and distribution lines.” Treasury Guidance at 12.2 Here, the parties now agree that all
property for which GUSC Energy claims a grant is qualified property because it is integral
to electricity generation. Still, as noted above, the Government’s original grant did not
take into account $65,938 in eligible costs associated with “iron works,” site clean-up,
paving, and landscaping, which the parties now agree are eligible costs that relate to
qualified property. Thus, to calculate damages, GUSC Energy’s qualified property costs
must be revised upward in an amount equal to these stipulated costs.



2
  References to “Treasury Guidance” refer to U.S. Treasury Dep’t, Payments for Specified Energy Property
in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009 (Rev’d Apr. 2011),
available at https://www.treasury.gov/initiatives/recovery/Documents/GUIDANCE.pdf. The Guidance “is
entitled to considerable weight as a reasonable interpretation” of Section 1603. W.E. Partners, 119 Fed. Cl.
at 692.

                                                     6
              3. GUSC Energy has not Presented an Activity-Based Allocation Method,
                 but the Government’s Allocation Method Also Fails

        The third step is where GUSC Energy hits a snag. Apparently disagreeing with the
W.E. Partners analysis, it argues that all costs associated with qualified property must be
includable as eligible cost basis for the purposes of a Section 1603 grant. As a result,
GUSC Energy presents no activity-based allocation, but rather only a property-based one.
The Court rejected this argument in W.E. Partners. In that case, the Court similarly found
that all property costs the plaintiff had claimed as eligible cost basis related to qualified
property. 119 Fed. Cl. at 693. This finding did not prevent the Court from concluding that
“the eligible cost basis of qualifying property must be reasonably allocated between the
non-qualifying chicken rendering processes and the qualifying electricity generation.” Id.
at 694. The Treasury found that the steam from one of the three boilers at issue in that case
was necessary to produce the amount of electricity that the turbine produced, so only the
costs associated with one of the three boilers was includable in the plaintiff’s eligible cost
basis. Id.

        GUSC Energy argues that this case is different from W.E. Partners because there is
only one boiler at the Biomass Plant, so all the steam that boiler generates is necessary for
electricity production. Mr. Oswald testified that this approach made sense from an
engineering perspective. Still, this approach misses the activity-based nature of the W.E.
Partners allocation scheme. In W.E. Partners, the Treasury determined that only one boiler
was necessary to produce the electricity, but the Court merely examined whether the
Treasury’s determination reasonably allocated qualified property costs associated with
eligible and ineligible activities. The Court’s analysis means that the result would have
been the same had there been only one large boiler that supplied steam to generate
electricity, with the exhaust steam going to the chicken rendering processes.

        In effect, that is the situation in this case. Just as in W.E. Partners, the Biomass
Plant here was designed as a cogeneration plant. While the steam from the plant’s single
boiler powers the turbine, the steam is predominantly significant for its role in the Park’s
district heating system. The Biomass Plant supplied 46.7 percent of the Park’s steam
heating needs when it was operational, but supplied only 2.8 percent of the Park’s
electricity. Furthermore, the Park does not operate during the summer months because its
cogeneration design means it cannot operate when GUSC Energy’s customers do not
require steam heat. These factors mean that costs associated with the Biomass Plant’s
qualified property must be allocated between that property’s roles in electricity generation
and thermal heat generation.

       GUSC Energy did not present an activity-based allocation at trial. On the other
hand, the Government’s activity-based allocation, which it used in making its grant award,
also lacks merit. Mr. Markell, the Government’s own expert, testified that the
Government’s allocation method unrealistically assumes a perfect conversion of energy in

                                              7
the electricity generation process. DX 20 at 32; Markell, Tr. 314–15. Mr. Markell instead
applied an approach that focuses on the energy used to generate electricity. His approach
compares the generation efficiency to that of a typical biomass plant producing only
electricity. Mr. Markell’s efficiency method would allow GUSC Energy to claim 15.24
percent of its costs as eligible cost basis. This result means that while GUSC Energy
presented no activity-based allocation method at trial, the Government likewise could not
support its position. Therefore, the Court finds it appropriate to award damages, but only
to the extent that these damages are supported by Mr. Markell’s efficiency method.

        GUSC Energy protests that this result discourages the construction of cogeneration
plants, citing several sources that recommend cogeneration in biomass plants and the
expenses associated with non-cogeneration plants. This policy argument is not convincing.
In passing Section 1603, Congress created 30 percent grants to subsidize electricity
production, not steam heat production. In effect, cogeneration allows the owner of a
biomass plant to further “subsidize” the production of electricity by taking in additional
revenue from steam heat customers, so a lower Government subsidy in such instances is
appropriate from a policy perspective. Indeed, in W.E. Partners, this Court approved an
activity-based allocation scheme because it recognized the added benefits a biomass plant
owner could receive from steam heat use. The Court sees no reason to depart from this
methodology here.

              4. GUSC Energy is Entitled to Damages

       In sum, the Court awards GUSC Energy damages using Mr. Markell’s “efficiency”
allocation method. The eligible net costs relating to qualified property, as stipulated by the
parties, are $18,230,094 (this figure includes the stipulated $65,938 in iron works,
landscaping, paving, and site clean-up costs). Mr. Markell found that 15.24 percent of
these costs related to a qualifying activity. Therefore, GUSC Energy’s eligible cost basis
for a Section 1603 grant is $2,778,266. Grants under Section 1603 are calculated by taking
30 percent of this eligible cost basis, which is $833,480.

        This grant award also would have been reduced under sequestration. Sequestration
is the name given to a series of discretionary spending cuts made under the Budget Control
Act of 2011, Pub. L. 112-25, 125 Stat. 240. While the Government does not argue the
point in its post-trial briefing, Section 1603 grants were subject to a 7.2 percent reduction
for sequestration during the time period in which GUSC Energy received its grant. See
IRS Notice 2014-39, 2014-26 I.R.B. 1109 (June 11, 2014) (“[A] Section 1603 Award made
to a Section 1603 applicant on or after October 1, 2013, and on or before September 30,
2014, is subject to a sequestration rate of 7.2 percent, irrespective of when the application
was received by Treasury.”). GUSC Energy received its award letter on June 26, 2014, so
its award was subject to a 7.2 percent sequestration reduction. Indeed, the Government’s
original grant took this reduction into account. See Stip. ¶ 34.


                                              8
        GUSC Energy argues that a sequestration reduction is not appropriate because this
is a de novo proceeding, and judgments of this Court are not subject to sequestration. See
Pl. Post-Trial Response Br. at 60, Dkt. No. 53 (filed Sept. 6, 2016). This argument misses
the mark. Allowing GUSC Energy to claim damages in the amount of a Section 1603
award without a sequestration reduction essentially would turn this Court into a backdoor
maneuver around sequestration. The point of damages in these cases is to place plaintiffs
in the position they would have been in had the Treasury awarded correct grants under
Section 1603. Here, the Treasury’s award would have been reduced under sequestration,
so the Court’s award must take the sequestration reduction into account. Therefore, the
grant GUSC Energy should have received was $773,469 ($833,480 minus a 7.2 percent
sequestration reduction of $60,011). The Court awards GUSC Energy damages equal to
the difference between this amount and Treasury’s $316,609 award, which is $456,860.

       B. GUSC Energy has not Permanently Ceased Production at the Biomass Plant

        A Section 1603 grant is subject to recapture by the Government if the specified
energy property use on which the grant was predicated “changes so that [the property] no
longer qualifies as specified energy property.” Treasury Guidance at 19. One such change
is a “permanent cessation of production” at the energy facility. Id. The Government argues
that the extended idling of the Biomass Plant is, in reality, a permanent cessation of
production. If one can idle a plant with only general plans to restart operations at some
point, the Government reasons, owners of biomass plants could keep their grants while
idling their facilities indefinitely. Therefore, the Government proposes a strict intent
standard that would find a permanent cessation of production whenever a facility owner
idled its plant without the intent to restart operations at the plant at a specific time.

       The Court finds that the Government’s proposed intent requirement is too stringent.
The Treasury Guidance does not support the Government’s interpretation. The Guidance
notes that “[t]emporary cessation of energy production will not result in recapture provided
the owner of the property intends to resume production at the time production ceases.” Id.
The Guidance does not attach a specific date or time requirement to the “intent to resume
production” requirement. Therefore, a better approach would require evidence of an
affirmative intent to permanently cease production at the energy facility before allowing
recapture. There is no such evidence here, as GUSC Energy has maintained the Biomass
Plant in good working order for the entire time the plant has been idle. Reasonable business
persons do not generally construct multimillion-dollar energy facilities, idle them, and then
maintain them in good working order, never to use them again. Therefore, the Court finds
that GUSC Energy has not permanently ceased production at the Biomass Plant, and the
Government’s counterclaim for recapture is dismissed.




                                             9
                                   Conclusion

      The Clerk is directed to enter final judgment for Plaintiff and against the
Government in the amount of $456,860. No costs.

      IT IS SO ORDERED.

                                            s/Thomas C. Wheeler
                                            THOMAS C. WHEELER
                                            Judge




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