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Defense Energy Issues:

Defense Energy Issues:. Drivers and Challenges. Bob Tritt McKenna Long & Aldridge LLP Monday, February 27, 2012. DoD Energy Use, FY2010. DoD Energy Consumption FY10: 875,244 BBTU FY09: 931,557 BBTU. U.S. Army Energy Consumption, 2009. United States. Federal Government.

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Defense Energy Issues:

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  1. Defense Energy Issues: Drivers and Challenges Bob Tritt McKenna Long & Aldridge LLP Monday, February 27, 2012

  2. DoD Energy Use, FY2010 DoD Energy Consumption FY10: 875,244 BBTU FY09: 931,557 BBTU

  3. U.S. Army Energy Consumption, 2009 United States Federal Government Department of Defense • Facilities • Vehicles & Equipment • (Tactical and Non-tactical) U.S. = 94,578 Trillion Btu DoD = 880 Trillion Btu Fed Gov = 1,096 Trillion Btu U.S. Army = 190 Trillion Btu Sources: Energy Information Agency, 2009 Annual Energy Review; Agency Annual Energy Management Data Reports submitted to DOE's Federal Energy Management Program (Preliminary FY 2009) 3

  4. On-Base Renewable Generation: Benefits • Fulfills mandates • On-base generation needed to meet renewable standards • Furthers energy security • May lower cost of energy • Leverages private sector funding • Lower cost than self-generation because of private sector tax benefits

  5. DoD Calculus REQUIREMENTS: • EPACT 2005 Renewable Mandate for Electric Energy 3% 2007-2009 5% 2010-2012 7.5% 2013 and beyond • DoD must produce or procure not less than 25% of the electric energy it consumes by 2025 [10 USC § 2911(e)]

  6. Renewable Energy Goal DoD Progress Towards 10 USC 2911(e) • DoD produced or procured 9.6 TBTU of renewable energy in 2010. • DoD needs to increase this amount to 17 TBTU to meet the 2025 goal.

  7. DoD Response • Military Construction (Milcon) Projects  --Generally small solar  --Funds limited and diminishing • Utility-Scale Projects to sell off base --500 MW Fort Irwin, CA --500 MW Edwards AFB, CA • Smaller Scale Projects to generate and consume on base

  8. DoD Looks To Private Sector • Military Family Housing has been successfully privatized • $25 Billion of Private Sector Investment: $2.5 Billion DoD Investment • Utilities distribution on base has been successfully privatized

  9. Essential Elements • Pricing • Real Estate Authority • Power Purchase Authority • OMB Scoring • State Utilities Law

  10. Pricing • Renewable energy costs more to produce than non-renewables • Military services won’t (can’t/haven’t) paid a premium • But in some cases, if private sector receives renewable energy certificates (RECs) and federal incentives, private sector can provide renewable energy at or below cost of non-renewables • DOD has advanced the ball considerably with long term PPA’s

  11. Real Estate Authority Enhanced Use Leasing (10 USC § 2667) • Underutilized Assets • Up to 50 years • In-kind consideration But Also – Easements • 10 USC § 2668 (Fort Bliss – El Paso Desalination Plant) • 40 USC § 1314 (Air Force Academy – Photovoltaic Project) • 43 USC § 961 • 10 USC § 2688

  12. Power Purchase Authority FAR 41.103 • 10 year, renewable at government option Western Area Power Authority • At least 20 year authority • Western states Energy Savings Performance Contracts (42 USC § 8287) • 25 years • But revenues only from savings

  13. Power Purchase Authority (cont’d) Utilities Privatization (10 USC § 2688) • 50 years • Cost effective requirement Utility Energy Service Contract • 25 years • Only local utility 10 USC § 2922(a) (formerly 10 USC § 2394) • 30 years • Sec Def approval, now delegated to Deputy Under Secretary of Defense

  14. 10 USC § 2922(a) Secretary of military departments may enter into contracts for up to 30 years • Under 10 USC § 2917 (geothermal); AND • Operation of energy production facilities on real property under the Secretary’s jurisdiction…and the purchase of energy produced from such facilities • But requires approval of Secretary of Defense (now delegated) CONJUNCTIVE VS. DISJUNCTIVE

  15. OMB Scoring • Purchase of Asset vs. Use of Assets • Financial Accounting Board Standards (OMB Circular A-11, Appendix A & B)

  16. OMB Scoring (cont’d) If Capital lease • present value of all [lease] [PPA] payments If Operating lease • one year [lease] [PPA] payments, plus termination liability

  17. Definition of an “Operating Lease” • X • X • X • pv lease [PPA] payments don’t exceed 90% of asset Fair Market Value, and • lease [PPA] term is not greater than 75% of the economic life of the asset, and • no bargain-price purchase option, and • ownership of asset remains with lessor and is not transferred to the government, and • asset is a general purpose asset, not built for special purpose of the government, and • private sector market for the asset

  18. State Utility Laws • With some exceptions for distributed generation, many states permit retail electric sales only by certain public utilities. • A difficult and evolving issue for DoD • Will distributed generation exceptions work? • Can it be sold through public utilities or WAPA? • Do state laws even apply? • Federal law (40 USC § 591) says must buy electricity in accordance with state law • But West River Electric Association v. Black Hills Power (918 F.2d 713, 8th Cir. 1990)(if exclusive enclave, still not subject to state law) • ESPC and 10 USC § 2922(a) excepted from statute

  19. Summary • Pricing • Good for now for some • Real Estate Authority • Good to go • Power Purchase Authority • Good, but more Wall Street validation useful • State Regulatory Issue • DOD as customer needs to drive it

  20. McKenna Long & Aldridge LLP Robert E. Tritt rtritt@mckennalong.com www.mckennalong.com Albany, Atlanta, Brussels, Denver, Los Angeles, New York, Philadelphia, San Diego, San Francisco, Washington DC

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