On March 15, 2012, the United States Army (“Army”) released a draft request for proposal for ’up to $7 billion in renewable energy sources,’ a massive procurement to be overseen by the Energy Initiatives Office Task Force (“EITF”).1 The EITF was established by the Army to focus on ‘large-scale renewable, almost utility-scale renewable projects’ that will provide alternative forms of energy to ‘offset all or part of the energy needs of a permanent installation.’2 These initiatives are intended to support the Army’s net-zero strategy, whereby an Army installation is to produce as much energy as it consumes, its plan to enable installations to ‘island’ in the event of power grid failure, and its efforts to meet its renewables mandates.3
The final ‘Request for Proposal for Large Scale Renewable Energy Production for Federal Installations’ was issued on August 7, 2012 in the form of an Indefinite Delivery Indefinite Quantity Multiple Award Task Order Contract (“MATOC”). 4 The scheme outlined in the MATOC is one that relies on the authority of the Army under 10 U.S.C. §2922a (“§2922a”) to enter into contracts with terms of up to 30 years to procure energy (“power purchase agreements” or “PPAs”) as a means of attracting investment in greenfield renewable power projects to be built on-base. Applicants will be pre-qualified by the Army and then will receive task orders inviting bids on identified project opportunities in each of the areas of wind, solar, geothermal, biomass and other alternative energy technologies. The expectation is that a contractor that is awarded a task order will enter into a PPA with the Army, and this long-term payment commitment from the Army will enable the contractor to raise the private sector financing necessary to construct and operate a power plant that will produce the renewable energy required to satisfy project PPA obligations for 30 years.
This large-scale adoption of a long-term PPA approach to renewable energy procurement by the Army has caused great excitement because it represents a material change in Army energy procurement practice and promises to stimulate a large volume of investment in the renewable power sector. However, the novel approach has also generated concerns amongst both those already engaged in supplying energy to Army installations and those new to the scene. A review of the complex legal issues underlying the Army’s renewable energy initiative demonstrates that these concerns are valid. If not addressed and resolved by the Army from the outset, legal uncertainties have the potential to dampen private sector interest, slow EITF momentum and result in higher renewable energy costs to the Army. This Part 1 explores the risk posed by jurisdictional conflicts between the Army and state energy regulatory authorities in relation to a §2922a PPA.
The project regulatory risk that arises in connection with a §2922a PPA is, perhaps, best captured by a recent ‘déjà vu moment,’ when the Army ran headlong into a decades long conflict between federal procurement law and state law governing the electric utility industry in connection with Fort Bragg’s plan to comply with the Army’s net zero strategy. 5 A key part of the plan is to attract private investment for the construction of renewable generation resources at the installation by utilizing authority under §2922a to offer long-term PPAs. The plan was stymied, however, by state law that makes plain that an entity generating and selling electricity to or for the public for compensation is a ‘public utility’ and subject to public utility regulation under North Carolina law.
While the North Carolina Public Utility Commission staff seemed sympathetic to the notion that §2922a confers upon the military the authority to enter into a long term power purchase agreement, they pointed out that the statute is silent as to the status of the contractor, and apparently felt compelled to remind the Army that the Federal Energy Regulatory Commission (FERC) ‘has ceded regulation of retail electric sales to consumers to the states.’ A white paper published by the U.S. Department of Energy (DOE) Clean Energy Application Center (CEAC) for the region reported this and the unfortunate ‘barriers’ posed by state law to the Army’s ability to attract investment in renewable power plants, and then went a step further by invoking the Supremacy Clause of the U.S. Constitution to remind readers that federal statutes such as §2922a are ‘the supreme law of the land.’ The appropriate balance between state and federal jurisdiction raised in this example remains unclear. What is clear, however, is that a project developer of a renewable power project at Fort Bragg could easily get caught in the middle.
The recent application by the Army of §2922a is without precedent. To attract the scale of private capital investment required to fulfill its renewables mandates, the Army needed to offer long-term PPAs. The problem was that a PPA of more than 10 years’ term could not be supported by conventional Army energy procurement contracting authority.
The conventional approach to energy procurement by government is embodied in a Utility Service Agreement. Under this sort of contract, the military is a retail customer generally agreeing to a year-to-year (or a maximum 10 year term) contract for electricity supply at retail rates. The generation mix, as well as transmission and distribution arrangements in respect of the electricity the Army purchases, is generally a function of the local regulatory environment; and options to ensure that a significant portion of energy purchases meet the idiosyncratic requirements of the Army’s renewables mandates are limited. As a result, the Army needed a new way of doing business with the private sector.
It was in this context that the Army roused §2922a PPA authority from nearly three decades of dormancy. §2922a seemed an unlikely candidate to serve as the foundation for the launch of $7 billion in procurement under the MATOC. It had been adopted in 1982 in connection with a bill addressing the construction of military housing, but apparently never employed. However, on its face, §2922a seemed to offer a straightforward solution to the Army’s renewables conundrum by providing broad authority to enter into 30 year power purchase agreements, as follows:
Contracts for energy or fuel for military installations
(a) Subject to subsection (b), the Secretary of a military department may enter into contracts for periods of up to 30 years—.
(2) for the provision and operation of energy production facilities on real property under the Secretary [of a military department’s] jurisdiction or on private property and the purchase of energy produced from such facilities.
The real complications associated with §2922a PPAs are outside of the statute. One of the complications that a private party entering into a §2922 PPA should be alert to is the potential for conflict between the Army’s proposed PPA and the law of the state in which a power project is to be located. This issue was the subject of years of litigation and, ultimately, legislative and regulatory action to require federal agencies to defer to state law when buying electricity. A federal statute (40 U.S.C. §591) commonly referred to as ‘§8093’ states that ‘[a] department…of the Federal Government may not…purchase electricity in a manner inconsistent with state law governing the provision of electric utility service…’
When §8093 was adopted in 1987, there was already a dispute underway in the Eighth Circuit regarding the reach of the military’s procurement practices relative to the states’ regulatory power over utility customers. Black Hills Power & Light Co. v. Weinberger (“Weinberger”) concerned Black Hills Power & Light (“Black Hills”), a state utility with a utility service territory in which Ellsworth Air Force Base (“Ellsworth”) was located. Black Hills raised a challenge to Ellsworth’s attempt to procure its overrun electricity needs through a competitive bid process.6 The Eighth Circuit, finding for Ellsworth, relied on the doctrine of ‘federal enclaves’ to conclude that the Supremacy Clause’s grant of exclusive legislative power to Congress with respect to federal entities bars state regulation unless there is ‘clear and unambiguous’ Congressional action authorizing state regulation of a federal entity.
Congress passed §8093 before the Eighth Circuit issued its decision in Weinberger, however the court reasoned that the legislation did not alter its analysis, explaining that Congress had adopted §8093 out of concern for the particular situation in which a federal facility ‘abandons’ a local utility system, and that the facts of Weinberger raised no such concern.
After the passage of §8093, Black Hills renewed its challenge in West River Elec. Ass’n, Inc. v. Black Hills Power and Light Co. (“West River”), arguing that §8093 supported its previous claim.7 The district court reasoned that §8093 was not a ‘specific grant of jurisdiction’ to the state allowing it to overcome the Supremacy Clause. On appeal, the Eighth Circuit did not disturb its prior conclusion that Ellsworth was a federal enclave and affirmed the district court’s holding that Congress ‘has not provided the necessary authorization to defer its exclusive jurisdiction over Ellsworth.’ It found that §8093...did not evince a ‘clear and unambiguous declaration by Congress to amend the extensive and carefully-crafted body of federal procurement law.’
The most recent discussion of §8093 by a federal court appears in Baltimore Gas and Electric Company v. United States (“BG&E”). The validity of a separate Act allowing for privatization of utility services on military bases was before the United States District Court for the District of Maryland in BG&E.8 The court adopted a Government Accountability Office (“GAO”) decision, which found persuasive a legal opinion (the “DOD Opinion”) prepared in 2000 by the Office of General Counsel of the U.S. Department of Defense (“DOD”), that the section applies only to the purchase of the commodity electricity, and not to the conveyance of an electricity distribution system. In the course of its review, the court stated that §8093 stands for the proposition that ‘federal statutory provisions and regulations require that the Army must follow state law and regulations, including utilities regulations and
franchise agreements, in its purchase of the commodity electricity.’ The court did not attempt to square its contrary characterization of §8093 with that of the Eighth Circuit in West River.
Advocates for exclusive federal jurisdiction in relation to projects awarded under the MATOC have a strong legal argument that West River is still good law. However, those who believe that state regulatory powers should prevail would make the counter-argument that the lower court in West River distinguished that specific case from application of §8093 on the narrow grounds that the Ellsworth solicitation was not within the scope of Congress’s concern to ‘protect utility abandonment by their federal customers.’ In contrast, the Army’s stated intention underlying the MATOC is to replace the electricity that installations presently purchase from the local utility. In addition, BG&E can be construed as a more modern statement of the meaning of West River; and, indeed, the Federal Acquisition Regulation, a comprehensive set of regulations governing federal procurement, now incorporates the limitations imposed by §8093.
Whatever the exact scope of §8093, it does seem that, as a practical matter, the Army has admitted to its application to Army electric power purchases and, for purposes of the MATOC, is relying on a statute that happens to be an exception to §8093 in the form of §2922a. §8093 expressly provides that it ‘does not preclude the Secretary of a military department from entering into a contract under [§2922a]...’ Thus, it would appear that, even if to do so would be inconsistent with state law governing the provision of electric utility service, the Army may enter into a §2922a PPA and dispense with the complications of §8093 jurisprudence described above.
Unfortunately, however, this is where the next level of complexity begins, because even as the §2922a exception informs the Army of its position relative to state regulatory law, it is silent as to the position of the Army’s PPA counterparty. We are left to wonder how a contractor is to be regulated, if at all, in a world in which §8093 does not apply. The question becomes even more pressing in the context of a specific project that is interconnected with the grid and, particularly in the case of intermittent resources such as wind or solar, is an integrated piece of a larger puzzle that relies on back-up energy from the local utility.
As it turns out, this very question was addressed, at least indirectly, in West River, BG&E and the DOD Opinion. Not surprisingly, the inference that may be drawn from each regarding federal and state jurisdiction is different. One may reasonably conclude that the West River court would uphold exclusive federal jurisdiction (as it did before the passage of §8093), while inferring that the BG&E court would apply a combination of federal and state interests. Arguably, however, it is the DOD’s own Office of the General Counsel that has best explained the balancing act that would result.
The DOD Opinion, in its analysis of federal and state jurisdiction over utility services, noted that, whereas federal laws trump states laws when Congress has ‘left no room’ for state regulations, the answer is ‘less clear-cut where state and federal laws do not directly conflict.’9 In such cases, the DOD Opinion maintains, the Supreme Court has balanced federal policies against whatever safety, economic or health concerns the state could articulate. On this basis, the DOD Opinion concludes with respect to the specific circumstances under review that the state could not impose a preclusive license requirement on prospective contractors, but could regulate the operation of contractors to protect state policy interests.
In the case of a contractor under a §2922a PPA, it would appear that a project’s exposure to regulation as a utility (or as another form of entity based on the degree and structure of regulation in the relevant state) will depend upon the specific characteristics of the project, the objectives of the federal policy, the prevailing local energy regulatory regime, the safety, economic, reliability or other regulatory measure proposed by local regulatory authorities and the degree to which it would conflict with the federal objective in each case. From a developer’s perspective, this represents uncertainty and, unless state and federal authorities reach a consensus on a mutually acceptable regulatory regime from the outset, this uncertainty will pose an impediment to investment and financing.
Although the Army has generally indicated in the midst of the MATOC fanfare that it has been working with local utilities in connection with its preparation of project opportunities, it has not engaged in a direct discussion of §2922a PPA-related state and federal jurisdictional issues with prospective participants under the MATOC or in connection with other PPA opportunities at Army bases. To the contrary, in the most recent bid documents issued by the Army, bidders are required to represent and warrant that they will not be regulated as utilities under relevant state law.
If the Army does not take early and transparent action to acknowledge that there are open regulatory questions requiring resolution on a project-by-project basis by means of direct engagement between the Army and local regulatory authorities, then it risks losing momentum in its efforts to satisfy its renewables mandates. Prospective participants receiving requests for proposal that do not adequately identify legal risks or reflect efforts made to mitigate such risks will be discouraged by uncertainty and high transaction costs. Local regulatory authorities with limited opportunity to reach a consensus approach to complex jurisdictional issues are more likely to cause delay. In addition, of course, if legal risks are left unresolved, and the potential for litigation persists, then the Army can expect to pay a risk premium for those projects that do proceed.
The Army’s renewable energy initiative represents an historical opportunity in the U.S. to achieve government infrastructure objectives using project development and finance methodology. If the Army takes the lead to address the regulatory concerns of all stakeholders in this new way of doing business, the initiative may serve as a powerful example of public-private and federal-state partnership success.
About the Author
Maura Goldstein, a Partner in the Global Projects Group of the law firm of Baker Botts L.L.P., represents developers, equity investors and lenders in connection with major infrastructure projects, including power projects, worldwide. Maura has extensive experience structuring gas and coal-fired, solar, wind, energy storage, and biomass power projects, and negotiating power purchase agreements, project site leases, construction contracts, technology procurement, and project financing arrangements for power projects. Baker Botts’ energy and transactional associates Katrina Smith, Yuefan Wang, and Kyle Wamstad, provided valuable assistance in the research and development of this article.
1 Rob McIlvaine, Army commits to security through renewable energy, Army News Service (Dec. 18, 2012, 3:57 PM), http://www.army.mil/article/80303/Army_commits_to_security_through_renewable_energy/
2 C. Todd Lopez, New task force to focus on renewable energy, Army News Service (Dec. 19, 2012, 12:35 PM), http://www.army.mil/article/63389
3 Id.
4 Department of the Army, Pre-Solicitation Notice for W912DY-11-R-0036: Renewable and Alternative Energy Power Production for DoD Installations (2012), https://www.fbo.gov/index?s=opportunity&mode=form&id=6a303b822f9b86a42dadab3f4c86219d&tab=core& tabmode=list&=
5 U.S. Department of Energy Clean Energy Application Center Southeast, Barriers to Military Installations Utilizing Distributed Generation from Renewable Energy Resources: Third Party Power Purchase Agreements (2011), http://southeastcleanenergy.org.violet.arvixe.com/resources/reports/SERAC_3rd_Party_PPA_Whitepaper_%20110518.pdf
6 Black Hills Power and Light Co v. Weinberger, 808 F.2d 665 (8th Cir. 1987)
7 West River Elec. Ass’n, Inc. v. Black Hills Power and Light Co., 918 F.2d 713 (8th Cir. 1990)
8 Baltimore Gas & Elec. Co. v. United States, 133 F. Supp. 2d 721 (D. Md 2001)
9 Memorandum, The General Counsel of the Dep’t of Defense to the General Counsel of the Army, the General Counsel of the Navy, and the General Counsel of the Air Force about The Role of State Laws and Regulations in Utility Privatization (Feb. 24. 2000) http://www.acq.osd.mil/installation/utilities/policies/policies.htm
