Tag: electricity

Declaring National Emergency, President Trump Orders Restrictions on Electrical Equipment Supplied By “Foreign Adversaries”

In an Executive Order issued on May 1, 2020, President Trump declared that the unrestricted supply of electrical equipment from foreign countries represents an “unusual and extraordinary threat to the national security, foreign policy, and economy of the United States” because foreign adversaries may use such equipment to sabotage the nation’s electric power supply. While the scope of the order will not be clear until rules to carry it out are put in place, the order could prove disruptive to the supply chains for substations, transformers, and other equipment essential to operation of the nation’s electric power system, as well as to a new generation of “smart grid” devices that are transforming the electric grid, especially for devices that are manufactured in China.

The vulnerability of the electric system to malicious software and other threats embedded in equipment or components manufactured in the territory of hostile powers has long been recognized as a potential problem. In fact, the North American Electric Reliability Corporation, the entity responsible for promulgating and enforcing mandatory electric reliability standards, has developed a reliability standard (CIP-013-1) governing “Supply Chain Risk Management,” although the effective date for the standard was recently delayed by the Federal Energy Regulatory Commission due to the COVID-19 crisis.

In contrast to CIP-013-1, which requires each entity subject to the standard to develop its own plan for ensuring that relevant supply chains are free from cybersecurity risks, the new Executive Order contemplates a top-down approach, in which certain “foreign adversaries” would be identified and imports from those “adversaries” would be prohibited, although transactions with certain vendors would be allowed if they are on a “pre-approval” list. Notably, the Executive Order applies “notwithstanding any contract entered into or any license or permit granted prior to the date of this order” and authorizes the Secretary of Energy to act against “pending transactions” that might violate the order. Hence, the Executive Order could be applied retroactively, particularly to transactions that are now in process.

This aspect of the Executive Order is particularly troubling because it is likely to be at least several months before the exact reach of the Order is known. The Order directs the Secretary of Energy, in cooperation with other federal departments, to promulgate rules carrying out the Executive Order within 150 days. It is likely that the list of “foreign adversaries” will include China, which is an important link in the supply chain for many companies, as well as Russia, Iran, and North Korea. But that remains an unknown, as does the list of suppliers that might be included on the pre-approved list. The Executive Order is limited to the “bulk electric system”—high voltage transmission lines, substations, and related equipment – but contains a provision that could expand its reach to electric distribution systems, an area generally left to state regulation, based on recommendations from a security task force to be formed under the Executive Order.

The Executive Order creates new and potentially serious regulatory, contractual, and supply chain management issues for companies engaged in operation of the bulk electric system, in the manufacture of equipment necessary for operating the bulk electric system, and for emerging “smart grid” technologies that promise to improve the operation and efficiency of the bulk electric system.

© 2020 Beveridge & Diamond PC

For more on America’s electric infrastructure, see the National Law Review Environmental, Energy & Resource law section.

Chase Barfield v. Sho-Me Power Electric Cooperative: Major Verdict in Electric Utility Easement Case

Lewis Roca Rothgerber LLP

More than five years after starting in state court before later restarting in federal court, a federal court jury in Missouri has issued a major verdict in litigation concerning the use of electric utility easements for commercial telecommunication purposes.  On February 6, 2015, the jury in Chase Barfield, et al., v. Sho-Me Power Electric Cooperative, et al., (U.S.D.C. Western District of Missouri, 2:11-cv-4321NKL), found that the compensation owed to the plaintiff-landowners totaled $79,014,140 representing the fair market rental value of the defendants’ use of the utility easements for commercial telecommunication purposes.  While there have been other cases around the country alleging similar misuse of utility easements, those cases have all settled and the Sho-Melitigation appears to be the first to proceed through trial to a final jury verdict.

In 2010, a small group of Missouri landowners filed a state court lawsuit, which was subsequently dismissed and refiled in federal court the next year, alleging that certain electric utilities and affiliated entities in Missouri and Oklahoma installed and operated commercial fiber optic lines on the plaintiffs’ properties without the right to do so and without paying compensation to the landowners.  The lawsuit alleged that Sho-Me Power Electric Cooperative and its subsidiary Sho-Me Technologies, LLC, KAMO Electric Cooperative and its subsidiary K-PowerNet, LLC, and Cooperatives’ Broadband Network, collectively installed over 2,000 miles of fiber optic lines within easements that were limited to electric transmission and distribution line purposes.

While some of the fiber optic capabilities were utilized for the utilities’ own operations consistent with the underlying easements, the plaintiffs alleged that some of the fiber optic lines were used by the defendants or leased to third-parties for commercial telecommunication purposes in violation of the limited utility easements that had been granted.  The landowners asked the court to declare that the defendants had no legal rights to use the easements for commercial telecommunication purposes and also brought claims for trespass, disgorgement of profits, an injunction to prevent future commercial fiber optic uses of the easements, and punitive damages.  The defendant utilities and their subsidiaries admitted many of the facts related to their telecommunication activities, however, they denied that such activities were inconsistent with their easement rights.

In 2013, the federal court granted class status thereby allowing the named plaintiffs to represent the interests of more than 3,000 landowners who were crossed by the defendants’ fiber optic lines.  After many months of complex litigation addressing multiple issues, in March, 2014 the federal court issued its summary judgment decision on the primary claims.  The court adopted the plaintiffs’ categorization of the nearly 6,500 express easements and condemnation orders describing the property rights at issue; then proceeded to conduct a detailed analysis of whether the defendants’ fiber optic lines and the uses thereof were permitted under the terms of the easements and orders.  The court concluded that, under Missouri law, the defendants’ actions were inconsistent with the easements and court orders in three of the eight categories, totaling more than 3,000 individual easements and orders.

The jury’s recent decision sets the damages attributable to the defendants’ breach of the easements and court orders and resulting trespass, as found by the court.  In determining this amount, the jury considered the parties’ evidence that the value of the landowners’ claims was between $100,000, as argued by the defendants, and in excess of $100 million dollars, as argued by the landowners after considering the revenue the defendants received from the fiber optic lines and the associated expenses.  The jury’s award covered only the ten year period prior to the judgment and did not include prejudgment interest, attorney fees and costs, or future compensation.

Lessons Learned

As the national demand for improved and expanded electrical and telecommunication infrastructure continues to grow at an apparently ever-increasing pace, utilities and telecommunication service providers are faced with the challenge of where to locate such new and improved infrastructure.  Opportunities to site brand new infrastructure corridors are becoming more limited.  To the extent such opportunities exist, many landowners do not welcome such uses on their property and some complain of “easement fatigue” as a result of requests from multiple utility, telecommunication, pipeline, and other infrastructure companies.  As a result, local governments frequently require infrastructure companies to consider first the use of existing easements and corridors so as to minimize impacts on private property and to optimize the land uses within their jurisdictions.

Whether motivated by landowner concerns, local government requirements, or other project considerations, utilities and other infrastructure companies are trying to squeeze every permissible use out of their existing land rights.  For example, use of technologies such as fiber optic ground wires that combine an electrical ground wire with bundled fiber optic lines allow electric utilities to maximize the use of their existing easements with little or no physical intrusion on the property on which the infrastructure is located.  This technology was at issue in theSho-Me litigation.  However, the analysis is not limited to the extent of the physical intrusion on the underlying property.  At the heart of such disputes is the landowner’s right to control and be compensated for the beneficial use of his or her property.

The Sho-Me court explained that resolution of such issues requires consideration of “how changing technologies should be harmonized with historic real property principles.”  Furthermore, “[w]hether an additional use is reasonable and necessary depends on whether the additional use represents only a change in the degree of use, of whether it represents a change in the quality of the use.  If the change is in the quality of the use, it is not permissible, because it would create a substantial new burden on the servient estate.”  As the court concluded, where the additional use exceeds that which is authorized by the easement, a trespass occurs and a landowner may be entitled to compensation.

As demonstrated by the recent decision in the Sho-Me litigation, such compensation can be substantial.  Given that most instances of this type of dispute involve lengthy linear infrastructure projects – electric transmission or distribution lines, pipelines, railroads, etc. – crossing many landowners’ properties, the risk associated with large awards for trespass or unjust enrichment cannot be ignored.

It is important to note that real property law is, for the most part, a matter of state law.  While the basic principles of real property law are generally similar among most jurisdictions, the specific law and the analysis of the facts under that law will vary from state to state.  Therefore, before proceeding with a new or additional use on an existing easement, utilities and other infrastructure companies must conduct a careful analysis of the land rights supporting a particular project  considering the laws of the specific states involved.  The decisions and jury verdict in the Sho-Me litigation should provide an instructive, cautionary tale.

ARTICLE BY

Thomas J. Dougherty
OF
Lewis Roca Rothgerber LLP

Letters Of Intent For On-Site Solar Energy Transactions

Sills-Cummis-Gross-607x84

An increasing number of retail, office, industrial and warehouse/distribution property owners are utilizing electricity generated by on-site photovoltaic (also referred to as “pv” or “solar”) systems to meet a portion of their properties’ electrical energy needs. The pv systems can be located on the roofs of buildings, in parking fields, on open areas of the property or on two or more of these locations.

One of the most common methods that property owners are using to obtain such on-site solar-generated electricity is to enter into a power purchase agreement, often referred to as a “PPA,” with a solar developer, frequently referred to as a “provider.” In a PPA, the property owner, often called a “host,” provides leasehold or license rights on its property to the provider for the installation and operation of the pv system, and the provider sells the electricity that the pv system generates to the host. The provider generally owns all of the governmental and utility company incentives provided in connection with the pv system, and the host usually owns the net metering rights for the pv system.

However, the negotiation of a PPA frequently takes more time and is more complex than the economic benefits of the PPA to the provider and the host warrant. One of the major reasons for this problem is that the typical initial letter of intent (“LOI”) for a PPA transaction frequently fails to address the issues that often cause the most difficulty when the host and provider attempt to negotiate and finalize the PPA itself. The balance of this article sets forth several of these additional issues that should be included in a PPA LOI and explores methods of ameliorating the conflicts they create between the provider and the host.

Electricity Rate Cap

Many LOIs include a cap on the rate that the provider will charge the host for the electricity that the pv system generates. The cap usually provides that the rate that the provider charges to the host cannot exceed the rate that that host’s regulated local electrical utility, referred to in this article as the “Utility,” or the host’s third-party power supplier, charges the host for electricity at the property in question.

However, in setting this cap, it is important to remember that the Utility charges the host, whether or not the host also has a third-party power supplier, for many items other than the electricity itself, some of which are based on electricity consumption and some of which are static. Accordingly, when the host and provider agree on the rate cap in the LOI, they should clearly state what portions of the Utility and third-party power provider rate are included in determining the cap.

Interconnection Agreement

In order to operate a pv system and to obtain net metering for the excess electricity that the pv system generates, the Utility requires that its customer, usually the host, sign an interconnection agreement. The terms of the interconnection agreement are set forth in the Utility’s tariff and are, hence, non-negotiable. While the host must sign the interconnection agreement, most of the undertakings in the interconnection agreement are the responsibility of the provider under the PPA. Accordingly, the LOI should provide that the host will sign the interconnection agreement and that each party will agree to perform its obligations under the interconnection agreement, while indemnifying the other party for its failure to do so.

Purchase Of Excess Electricity

Pv systems by their nature cannot provide all of a property’s electricity needs all of the time. Additionally, in most jurisdictions, either the Utility or a government regulator limits the size of the pv system, so that it will not generate more than a maximum percentage (for example, 80 percent) of a property’s electricity usage. However, notwithstanding these circumstances, there are times when the pv system will generate more electricity than the property is using, causing the Utility meter to run backwards, referred to as “net metering.” In many jurisdictions, usually by means of the interconnection agreement, the Utility will pay the host or credit the host’s future electric bills for the amount of this excess electricity.

For this reason, most PPAs provide that the host will purchase all of the electricity the pv system generates and own all the net-metering credits. However, before entering into a PPA, a host should review its third-party electricity supply contracts to make sure that they do not contain prohibitions against pv or other on-site systems or do not contain minimum usage requirements. The PPA and LOI should

also address the situation where the property becomes vacant, because most net-metering programs have limitations on how much excess electricity the Utility has to buy.

Electricity Production Guaranty

Many hosts assume, in their financial planning for a property’s operation, that the pv system will generate a minimum amount of electricity in each calendar year. Accordingly, they request a production guaranty. If the host wants a production guaranty, this should be set forth in the LOI. Additionally, the adjustments to the guaranty for weather, system shutdowns and force majeure events should be spelled out.

Taxes

Many jurisdictions provide limited sales and use tax exemptions on the sale of electricity from on-site pv systems and exclusions from increases in real property taxes by reason of their location on a property. However, other jurisdictions do not provide such exemptions or the exemptions are very narrow and do not apply to every situation. Accordingly, the host and provider should determine whether or not a tax exemption exists or applies before they enter into a LOI. If the exemption is available, the LOI should set forth which party is responsible for obtaining it. If no exemption applies, the LOI should set forth which party is responsible for the particular tax.

SNDAs

Most properties are subject to mortgage secured debt. Under the Uniform Commercial Code, as adopted in most jurisdictions, the PPA can provide that the pv system is the personal property of the provider, not a fixture, and thus not subject to the lien of the mortgage on the property. However, most loan and security agreements for most mortgages also provide for security interests in the personal property located at the property. The language in these documents is often extremely broad. Additionally, the provider needs access rights over the property to install and repair the pv system and rights to place the pv system on the property. PPAs generally provide these rights as leasehold or license rights. Finally, many mortgages require mort- gagee consent for the installation of pv systems on the property.

Accordingly, the LOI should set forth whether or not, and at whose cost, the host will obtain subordination, non-disturbance, attornment and lien waiver agreements (“SNDAs”) from all current and future holders of mortgages on the property. Such a provision can provide for the sharing of the cost to obtain the SNDA between provider and host, with a waiver or cancellation option if the cost exceeds a certain amount.

Non-interference With PV System And Property Access

Many retail tenants, in particular, have consent rights over the roofs of their stores, rights to install HVAC systems and antennas on their roofs and exclusive rights over certain parking lots and common areas. The provider cannot allow its pv system to be moved, damaged or shaded. Additionally, the provider needs laydown, storage and parking areas for its installation, repair and maintenance of the pv system. Accordingly, the LOI should address tenant consents and lease and OEA amendments, if required, in order to insure non-interference with the pv system and necessary provider access. The LOI should also address which party is responsible for obtaining the consents and access and non-interference rights and at whose cost. Additionally, the LOI can provide for a non-penalty termination of the PPA if these consents and rights cannot be obtained.

Temporary PV System Relocation, Removal Or Shutdown Most PPAs have a term of 15 to 20 years. During such a time period, roofs often have to be repaired and parking lots resurfaced. The cost to relocate or temporarily remove and reinstall a pv system is significant. Additionally, the cost to the provider in lost electricity revenue and more importantly lost incentive revenue can be substantial. Accordingly, the LOI should set forth which party will bear these costs or how they will be shared. Cost sharing may shift later in the term of the PPA because the provider’s loss of incentive revenues will likely be less and the need for repairs will be more likely to occur.

PV System Purchase Options

If the PPA is going to provide for a purchase option, the LOI should address at what times in the term the host can exercise its option and set forth the method for determining the fair market value of the pv system at the time of the exercise of the option, including what factors will be used in determining the value of the pv system.

Assignment

The LOI should state when, under what terms and to whom the parties can assign their rights under the PPA and whether a party and, if applicable, its guarantor, remains obligated under the PPA after an assignment.

Limitations On Liability

The LOI should specify whether the parties will be responsible for consequential damages, whether there will be absolute limitations on all damages, including indemnification obligations, and the dollar amount of these limitations.

Parental Guaranties

Most pv systems are owned through a single-purpose entity whose only asset is the pv system, and most shopping centers are owned by single-asset, single-purpose entities. Accordingly, the provider and the host should determine in the LOI if they are going to provide parental guaranties to each other and under what terms.

Conclusion

While the list of issues this article covers is by no means exhaustive, the author hopes that it will be helpful in streamlining the negotiation of PPAs.

This article appeared in the March 2014 issue of The Metropolitan Corporate Counsel. The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis & Gross P.C. Copyright © 2014 Sills Cummis & Gross P.C. All rights reserved.

Article by:

Kevin J. Moore

Of:

Sills Cummis & Gross P.C.