Renewable Energy Treasury Grant Program Included in Fiscal Cliff Sequestration

The Budget Control Act of 2011 requires Congress to enact a plan to reduce the deficit by $1.2 trillion. If that does not occur, automatic federal budget cuts, known as “sequestration,” are to be triggered starting in fiscal year 2013; such cuts would result in across-the-board budget cuts for many government programs. Congress has yet to enact such a plan, and given the current political climate, it is not entirely clear whether such a plan will be enacted in time to avoid the mandatory budget cuts. Facing the prospect that sequestration may become a reality, Congress enacted the Sequestration Transparency Act of 2012 (P.L. 112-155), which requires the Office of Management and Budget (OMB) to submit a plan to Congress outlining the across-the-board cuts. OMB’s report was released on September 14, 2012.

OMB’s report contained a significant surprise for the renewable energy industry: the Treasury grant program enacted in Section 1603 of the American Recovery and Reinvestment Tax Act of 2009, as amended, is subject to sequestration. Weeks before the OMB report, Treasury officials had informally indicated that they did not believe that the Treasury grant was within the scope of sequestration, and none of the grant guidance published on the Treasury’s webpage indicated that sequestration was in the offing.  

The report characterizes the Treasury grant as a “Nondefense Function” subject to a “mandatory” 7.6% sequestration. Sequestration of the Treasury grant would reduce the deficit by $279 million in the 2013 fiscal year.

It appears that the Treasury grant available for each eligible renewable energy project will be “scaled down” by 7.6%. Therefore, rather than the Treasury grant being 30% of “eligible basis,” that it will be 27.72% (i.e., 30% less 30% multiplied by 7.6%, or 2.28%) of eligible basis. Thus, for example, if a renewable energy project with $100,000 of Treasury grant-eligible basis would have received a $30,000 Treasury grant, it appears that the project will now be entitled to receive only a $27,720 Treasury grant. However, the report does not expressly describe any particular methodology, and the actual implementation of the reduction could be different.

Further, the effective date of the sequestration is not specified. For instance, what if a renewable energy project files a preliminary grant application prior to October 1, 2012, is placed in service prior to December 31, 2012 and files a final grant application in early January 2013? Is such a project subject to sequestration?

Further, what if the renewable energy project files a preliminary grant application prior to October 1, 2012, is placed in service on November 1, 2012, and also files a final application on November 1, 2012? If Treasury complies with the statutory requirement that it pay grants within 60 days of receipt of the final application, the grant would be paid in 2012. However, assume that, 59 days after it receives the final application, Treasury opts to request a copy of an ancillary project contract that is not required by the instructions to the application, but that Treasury feels is relevant in determining the amount of the Treasury grant. It is Treasury’s practice that the 60-day period is re-started once the additional information is provided. Therefore, the Treasury grant would now be paid in 2013. Is such a payment a fiscal year 2013 expenditure subject to sequestration?

In terms of the Treasury grant program receiving some relief from the application of sequestration, OMB has authority with respect to how sequestration will take effect; however, it is not clear yet to what extent it will defer to Treasury with respect to the grant program.  Thus, both agencies should be consulted on these matters. The other avenue for relief is that Congress at any time can amend the Budget Control Act, which triggers sequestration.

Contact Information

If you have any questions regarding this alert, please contact—

David K. Burton
dburton@akingump.com
212.872.1068
New York
Jeffrey D. McMillen
jmcmillen@akingump.com
202.887.4270
Washington, D.C.
Edward W. Zaelke
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213.254.1234
Los Angeles - Downtown
Adam S. Umanoff
aumanoff@akingump.com
213.254.1300
Los Angeles - Downtown
W. Thomas Weir
tweir@akingump.com
713.220.5822
Houston
Jacob J. Worenklein
jworenklein@akingump.com
212.872.1027
New York
Juliane C. Sullivan
jcsullivan@akingump.com
202.887.4037
Washington, D.C.
Dino E. Barajas
dbarajas@akingump.com
310.552.6613
Los Angeles - Century City
Elliot Hinds
ehinds@akingump.com
310.229.1035
Los Angeles - Century City
Joshua R. Williams
jrwilliams@akingump.com
212.872.8014
New York