Construction Law Signal - Insights & Information on Current & Emerging Developments affecting the Construction Industry

By: Lori Wisniewski Azzara and Robert G. Ruggieri

Philadelphia City Counsel recently passed Bill No. 120428-A, which amends Chapter 9-3400 of The Philadelphia Code, to establish a system of benchmarking and reporting energy and water usage data for certain commercial buildings and mixed-use buildings.

The Mayor’s Office of Sustainability is responsible for administering the Ordinance, which applies to “Covered Buildings,” which include commercial buildings with an indoor floor space of 50,000 square feet or greater and commercial portions of mixed-use buildings where a total of at least 50,000 square feet of indoor floor space is devoted to any commercial use.

Under the Ordinance, Covered Buildings must annually report their energy usage (electricity, natural gas, steam and heating oil), water usage and building characteristics through an internet-based data system known as “Portfolio Manager.” Building owners can arrange for their energy and water usage information to be electronically reported directly by the utility/energy supplier. However, building owners must still annually report their building’s characteristics, including, among other statistics, the age of the building, type of use, operating hours, portion of the building that is heated and/or air conditioned, and the number of computers and refrigerators used in the building.

Tenants occupying space in a Covered Building do not have a separate reporting requirement. However, if the tenant’s space is separately metered by a utility company, the tenant must timely provide the required reporting data to the owner.

Failure to comply with the reporting requirements within thirty (30) days of the reporting deadline will result in a $300 fine, plus $100 each day thereafter.

Most notable is the Ordinance’s disclosure requirement. The data reported on a Covered Building is to be provided, upon request, to prospective buyers or lessees. In addition, the Ordinance contemplates having the data available online so that property owners, tenants, prospective purchasers and the public at large can view and compare energy and water usage among buildings. The disclosure will be especially beneficial to prospective tenants and/or buyers who have unique or specific energy needs or goals. It will also allow property owners to see how their buildings perform in comparison to other similar buildings, thereby allowing owners to make their buildings more energy efficient to keep up with market demands.

“Step by step, we are taking action to make Philadelphia the Greenest City in America,” said Councilwoman Reynolds Brown, co-sponsor of the Ordinance and Chair of City Council’s Committee on the Environment. Philadelphia now joins Austin, New York, San Francisco, Seattle and the District of Columbia as cities that have passed energy benchmarking laws.

Lori Wisniewski Azzara is an Associate at Cohen Seglias Pallas Greenhall & Furman PC. Ms. Azzara practices in the areas of construction and commercial litigation and has experience in contract negotiation, claims for delay and inefficiency, mechanics’ liens, and all types of contractual disputes.

Robert Ruggieri is a Senior Associate at Cohen Seglias Pallas Greenhall & Furman PC and practices in the area of complex construction litigation.

Over the past couple of years the solar industry has thrived in Pennsylvania and New Jersey due to federal and state programs that have provided hundreds of millions of dollars in incentives. These programs are necessary for solar energy to compete in electrical markets. One program, utilized by both Pennsylvania and New Jersey, is a program in which producers of solar electricity receive certificates for solar power produced. In Pennsylvania the certificates are called “Alternative Energy Credits” or AECs, and in New Jersey they are called “Solar Renewable Energy Certificates” or SRECs. The certificates are earned as the electricity is produced and can be sold or traded. The certificates are purchased by electricity suppliers in order to meet minimum required levels of sustainable energy in each state and to avoid penalties resulting from noncompliance. The demand for the certificates is created by state programs requiring electricity suppliers to use renewable energy. However, since the certificates are traded on the open market the value of the certificates fluctuates based on supply and demand at any given time. Solar developers’ increased production of solar projects has resulted in an increase in the issuance of certificates.

Revenue generated from the sale of certificates is in addition to revenues or electrical savings resulting from the electricity that producers are feeding back into the grid. This allows producers of solar electricity two avenues to recover the initial installation costs of the solar panels.

Oversupply of Solar Certificates

The problem that has arisen in Pennsylvania and New Jersey is that solar developers in recent years have built such a large number of projects that there is an oversupply of certificates. In Pennsylvania, this oversupply is exacerbated by the fact that out-of-state solar energy producers are eligible to receive energy certificates. Most states, including New Jersey, only permit in state solar energy producers to receive, trade and sell certificates. Currently, Pennsylvania is projected to generate four times the amount of solar energy needed in 2011-12 to satisfy the state requirements.

Because New Jersey, on the other hand, has a protected market for its certificates (i.e. it does not allow out of state producers to participate) they have not decreased in value to the same extent as those in Pennsylvania. That being said, certificates in New Jersey have experienced a decline in price based on the expectation of an oversupply of certificates in the next 12 months. Current projected estimates show that New Jersey will have a substantial oversupply of certificates for Energy Year 2012. If the projections hold true, certificates in New Jersey will continue to decrease in value (assuming the state requirements are not increased).

An Issue that Needs to be Addressed or Left to Market Regulation?

The oversupply has caused the certificates in Pennsylvania to lose as much as 75 percent of their value in the last year. Certificates in New Jersey have also seen a decrease in value, but to a much lesser extent. Since the demand for the certificates is created by established state requirements, the certificates will either continue to lose value as more projects are built or the state is going to have to increase the amount of certificates electricity suppliers are required to purchase. There are arguments on both sides regarding whether an increase to the state requirements is appropriate. Those in the solar industry are lobbying for an increase in the state requirements. This is because solar developers rely on revenue generated by certificates to recover initial installation costs. If the certificates decrease in value then it will take solar developers significantly longer to recoup their costs. Solar developers will have to consider if it is still cost effective to move forward with solar projects in Pennsylvania and New Jersey in the future.

Those opposing increases to the state requirements argue that an increase in the requirements will raise the cost of electricity for the average consumer because solar energy is more expensive. They also argue that the devaluation of the certificates is a function of supply and demand and is properly moderating solar development. According to those opposing an increase to state requirements there is no current problem in the solar industry, instead the market is functioning as capitalism intended.

A recent study of Pittsburgh’s David L. Lawrence Convention Center (DLCC) showed that the building has been “wasting energy” for years. The finding has brought much criticism from taxpayers.

The study performed by the Green Building Alliance, and funded by the Sports & Exhibition Authority (SEA) and The Heinz Endowments, found that the electrical system in the DLCC has resulted in $70,000 to $100,000 in wasted-power penalties each year since 2003- a cost that has been passed on to taxpayers. While taxpayer-funded power penalties are undesirable on any public building, it is particularly egregious in this case because the DLCC is a LEED Gold rated building that was designed to be energy efficient.

Upon a review of the extra electrical charges from Duquesne Light Company, it was determined that the 1.5 million square foot DLCC was not running as efficiently as possible and that six to eight percent of the annual bill, or $1.27 million was for wasted electricity. Mary Conturo, Executive Director of the SEA, which owns DLCC, explained that the SEA was aware of the problem and undertook a study to cost-effectively address the waste. The eventual solution was to purchase two large capacitors. The capacitors get rid of inactive energy in order to make the electrical system more efficient. Conturo explained that “[l]arger buildings routinely have these power factor penalties unless they have these capacitors”. Of course, the solution begs the question as to why the capacitors were not included in the initial design of the electrical system. Once installed, it will only take approximately three years of power savings for the capacitors to pay for themselves.

The study of the DLCC raises far-reaching questions related to the LEED rating system: what is the correlation between a LEED rated building and an energy efficient building and whether operation and maintenance testing should be required in order for buildings to maintain their LEED rating.

Cohen Seglias Partner Lane F. Kelman contributed to this post.

On April 8, 2011, the Commonwealth Financing Authority announced its approval of $6.5 million in new alternative and clean energy grants. According to C. Alan Walker, acting Secretary of the Department of Community and Economic Development, these grants will help fund the utilization, development, and construction of 13 new alternative and clean energy projects in 10 counties throughout the Commonwealth.

Grants

Texas-based Accelergy Corp. will receive a $1.3 million grant towards a $5.5M coal liquefaction validation unit, coal and bio-liquids unit and photo bioreactors at the Pittsburgh Applied Research Center in Harmar Township, Allegheny County.

Power Source, LLC, located in Wayne County, will be issued a $2 million grant for the research and development of a sodium sulfur battery that will have six times the energy storage capacity and eight times the lifespan of a standard lead acid battery.

Other notable grants will be extended to the following:

• Pennsylvania State University for the design, procurement and installation of Smart Grid research and development facilities at the Philadelphia Navy Yard in Philadelphia County;
• The Tamaqua Area School District for the purchase and installation of a geothermal system at three school buildings in Tamaqua Borough and West Penn Township, and for future energy efficient upgrades for five school buildings in Tamaqua Borough, Rush Township and West Penn Township;
• Apple Shamrock Dairy Farm LLC for the purchase and installation of a 750 kW wind turbine in Steuben Township, Erie County; and
• Clean Green Hydro, LLC for the installation of 25 kilowatt in-line turbines at three Greene County mine water treatment plants:AMD Reclamation Inc. and Dana Mining Company of Pennsylvania LLC., both in Dunkard Township, and Duquesne Light Co.’s Warwick Mine in Monongahela Township.

In total, these alternative and clean energy program grants are intended to yield about $40 million in private investments in the Commonwealth, and will help citizens, businesses and local governments save nearly $127,000 each year on their energy bills.

For further details on the 13 alternative and clean energy and renewable energy approved projects, or for information on how to obtain funding through the Commonwealth Financing Authority, visit www.newpa.com.

Cohen Seglias Partner Lane F. Kelman contributed to this post.

Update: Christie Signs NJ Power Plant Bill

New Jersey Governor Chris Christie signed into law last Friday the controversial power plant bill (S-2381) that, among other things, is aimed to lower energy rates by increasing the energy generated in-state and create construction jobs.

The new law enables LS Power Systems to build a power plant in West Deptford, NJ, and provides an incentive for companies such as Competitive Power Ventures to build at least three additional plants in the state, with long-term, ratepayer subsidized energy contracts. Proponents of the bill believe that the long term capacity agreements (LCAPP) will reduce the cost of energy for ratepayers, thereby reducing the state’s reliance on out-of-sate generation and will create jobs in the construction and energy industries.

Opposition to the bill remains strong. Critics say that it locks ratepayers into 15 years of subsidies for some power suppliers and that the new bill does not guarantee lower tax rates for the public.

We will continue to monitor the controversial law, and report on its effectiveness.

$261 million tax reimbursement for Revel casino

Governor Chris Christie announced on February 1 that the half finished Revel Casino project can resume construction, beginning as early as next week. Through the Economic Development Authority, and the Atlantic City Rescue Package, Christie has authorized the state to provide $261 million to the casino. With this agreement, Revel will share 20 percent of its profits (up to $261 million) with the state and the state will hold a minority ownership in the casino. Revel lined up an additional $1.5 billion in private financing needed to complete the project. Christie’s administration cited the prospect of thousands of jobs and billions in future tax revenue as an incentive to back the project.

The project is on schedule to be completed in June 2012 and will create about 2,000 construction jobs. When fully operational, Revel will employ 5,500 people. Additionally, the casino plans to build 1,100 hotel rooms, as opposed to the 1,800 rooms originally planned.

Christie commented on the renewed project by saying that, “This is a landmark day for Atlantic City, and the beginning of its transformation”.

On November 18, 2010, Pennsylvania’s Independent Regulatory Review Commission (IRRC) unanimously approved new standards that will make natural gas wells safer. The new standards were approved just days before a 13,000 gallon fracking fluid spill in Penn Township, Lycoming County. The Department of Environmental Protection (DEP) is currently investigating the spill, which happened at a site owned by XTO Energy.

Department of Environmental Protection (DEP) Secretary John Hanger praised the IRRC vote because the regulations will impose stricter standards on gas well construction, which will make the wells less likely to allow natural gas to seep out and contaminate water supplies or cause safety concerns:

When gas migrates from a poorly constructed gas well through the ground, it can contaminate water supplies or build up to explosive levels in water wells or even homes . . . These strong rules will eliminate or significantly reduce the problem of gas migration from poorly designed or constructed gas wells, as long as the rules are followed or enforced.

The regulations were deemed approved by the House and Senate Environmental Resources and Energy committees, and will next go to the Office of Attorney General for final review and approval. Once all reviews and approvals are obtained, the regulations will go into effect upon publication in the PA Bulletin.

According to the DEP press release, the new standards will require drillers to report production and waste volumes electronically and to submit detailed reports of the chemicals used in the fracking process. Additionally, operators will be required to keep a list of emergency contact phone numbers at the well site and follow a new set of instructions on what steps to take in the event of a gas migration incident. The regulations also include provisions clarifying how and when blow-out prevention equipment is to be installed and operated.

The DEP met with numerous oil and gas operators, industry groups and environmental groups while drafting the regulations to discuss them in detail. The DEP also utilized information obtained from public comments to the regulations, making changes which will improve well safety by preventing accidents. Some of these changes include provisions that:

• Require operators to have a pressure barrier plan to minimize well control events
• Require operators to condition the wellbore to ensure an adequate bond between the cement, casing and the formation
• Require the use of centralizers to ensure casings are properly positioned in the wellbore
• Improve the quality of the cement placed in the casing that protects fresh groundwater

Hopefully, the new regulations will make gas drilling incidents like the Penn Township one less likely to happen in the future. The well-construction standards come on the heels of the news that the Pittsburgh city council recently approved a ban on gas drilling within the city. Although Pittsburgh was the first city to ban gas drilling in Pennsylvania, the vote was just one of many recent moves to curb Marcellus shale drilling within the state.

The New Jersey state legislature recently approved A1084, a bill that would require solar panels to be included in the design and construction of all new public schools across the state. The Assembly Appropriations Committee is awaiting assurance from the Legislative Council that A1084 does not violate any New Jersey statutes. New Jersey’s school construction budget is one of the largest in the nation.

Controversy Over Solar Panel Mandate A1084

In addition to the benefits derived from switching to a clean, renewable form of energy, proponents of A1084, most notably Assemblyman Reed Gusciora, a well-known advocate of Green initiatives for New Jersey, argue that the mandate will also help create jobs, and help offset the rising costs of energy. According to the Statement section of A1084:

Installing a solar power system is equivalent to prepaying for 40 years of power at a fraction of the current cost. As energy rates increase this difference will only increase, leading to escalating savings for the school district over the life of the system.

Opponents of A1084 argue that the law would not be practical for all school districts in New Jersey, some of which are still struggling financially. The New Jersey Principals and Supervisors Association supports the legislation, but only as an “incentive based approach, rather than a mandate to meet our state’s school facilities’ needs.”

Pennsylvania School District Positively Impacted By Solar Power

Although Pennsylvania hasn't approved a similar mandate, one school district is reaping the benefits of its investment in solar energy. Soon after A1084 was approved, the Carlisle, Pennsylvania school district began using solar power. The district is now getting about a sixth of its energy from the sun. It is estimated that solar panels will provide 16 percent of the energy that the district needs. The project is also expected to reduce the school system's carbon footprint by offsetting more than 2 million pounds of carbon dioxide emissions annually.

We will continue to monitor mandate A1084 and update you on any developments.

It is becoming increasingly important for owners of land with Marcellus Shale gas wells currently in use, or that may be in use in the future, to make sure that they have a plan in place to ensure financial stability for themselves and their families. Marcellus Shale landowners can anticipate significant royalty payments for many years into the future, along with bonus payments. It is critical that owners consider how this money will be distributed to their families. Proper planning now will ensure that future generations will still be reaping today’s rewards.

Why Wealth Management is Critical for Marcellus Shale Landowners

Individuals and families who own Marcellus Shale gas wells must now decide how to pass significant royalty profits from one generation to the next while minimizing substantial Federal Estate Taxes, Income Taxes and Pennsylvania Inheritance Taxes. Without a carefully crafted and fully implemented wealth management plan, much of the wealth gained through bonus and royalty payments may be lost to taxes, divorce or even creditors. Proactive and effective estate planning is essential to reduce exposure to these costly taxes and other pitfalls. Timing is critical. Adopting and implementing a plan prior to production will accomplish this goal.

There are powerful IRS tax credits available to families with wealth or those acquiring significant wealth through royalty and bonus payments. A simple will stating, “I leave everything to my spouse and if my spouse is not living, then I leave everything to my children,” is insufficient to take full advantage of these benefits.

Many of the Marcellus Shale landowners have created Limited Liability Companies (LLCs) to hold the mineral rights. With the use of valuations and applicable discounts, gifting can be used to transfer limited liability ownership to future generations. This is the easy part. It is more difficult for the original owners to decide who should control the LLC in years to come. It is never too early to begin these discussions. Currently, natural gas prices are low. This decreases the value of the limited liability interests, so now is the best time to start planning.

The families affected by the Marcellus Shale boom will benefit from proper and timely estate planning. Although estate and gift planning are not the most pleasant topics of conversation, they are too important to ignore. Individuals who are proactive and seek tax advice can save themselves tremendous amounts of money, time and frustration.

To maximize taxation benefits through the estate planning vehicles mentioned above, it is important for Marcellus Shale landowners to consider a subsurface valuation of mineral rights preferably prior to the commencement of drilling operations on their property or in their pooling unit. To maximize wealth management benefits, landowners should act prior to exposure to potentially significant royalty wealth.

To assist in managing this highly complicated area of taxes and inheritance, the Wealth Preservation Group at Cohen Seglias has developed a sophisticated practice in federal and state tax, estate planning, family limited partnerships, LLCs, estate administration and wealth management as specifically applied to Marcellus Shale gas leases.

For more information, please contact Wayne C. Buckwalter, Chair of the Wealth Preservation Group.

Christopher P. Soper, LEED AP, associate with Cohen Seglias, contributed to this post.

This summer, Delaware Governor Jack Markell signed into law four renewable energy bills designed to expand Delaware's wind and solar power industries. The new legislation creates incentives aimed toward attracting companies in these industries to Delaware.

The bills also offer incentives that will benefit solar designers, manufacturers and installers. There can be little doubt that demand for solar electric systems will increase since both homes and businesses will be able to sell back 110% of their aggregate electrical consumption to the grid, and because of the newly created ability to place ground-mounted solar energy systems on property zoned for residential use.

In addition, the bills promote alternate sources of renewable energy, such as offshore wind infrastructure or a large wind park off the coast of Delaware. According to Collin O’Mara, who serves as both a member of Governor Markell’s Cabinet and as Secretary of the Delaware Department of Natural Resources and Environmental Control:

More than 95 percent of Delaware’s electricity comes from fossil fuels with 70 percent from coal-burning power plants. These green energy bills will help the state transition at a faster rate to renewable energy. We can dramatically reduce our reliance on fossil fuels in the next 15 years and move closer to the healthy environment and green economy we want in Delaware. The bills also provide an opportunity for all Delaware citizens to participate in buying clean power, using clean power and being a part of the clean technology transition.

Work opportunities for metal fabricating contractors, electrical contractors and marine trade contractors are anticipated. Job creation, less dependence on fossil fuels and rate stability are just some of the goals envisioned by the legislation which could serve as a template for clean energy bills for years to come.

The state has wasted no time in making good on its efforts to increase its reliance on renewable energy sources. On September 7, 2010, the Delaware Public Service Commission (PSC) approved 2 Delmarva Power contracts for renewable energy. The PSC approved the 20-year, $42.6 million purchase of power from a solar electricity farm planned in Dover, as well as moving back the dates for deliveries of electricity from the NRG Bluewater Wind offshore wind project to no later than the end of 2016, 2 years later than the original contract. Also in the works, the Dover SUN Park is expected to start operations next summer. The City of Dover will be buying all of the power from SUN Park, which is expected to generate enough electricity to serve 1,300 homes.

Initiatives similar to these bills recently passed in New Jersey and are currently before the Pennsylvania legislature.

For more information or to obtain a copy of the bills, please e-mail Christopher P. Soper, or call (215) 564-1700.