• MMS Issues Final Rule for OCS Alternative Energy Development
  • June 3, 2009 | Authors: Joan M. Bondareff; Margaret Anne Hill; Tara L. Leiter; Jonathan K. Waldron
  • Law Firms: Blank Rome LLP - Washington Office; Blank Rome LLP - Philadelphia Office; Blank Rome LLP - Washington Office
  • New Development

    On April 22, 2009, the Department of the Interior’s Mineral Management Service (“MMS”) issued a Final Rule (the “Rule”) that finalized the framework for the establishment of a program to grant leases, easements, and rights-of-way for orderly, safe and environmentally responsible renewable energy development activities on the Outer Continental Shelf (“OCS”). See http://www.mms.gov/offshore/Alternative Energy/PDFs/AD30RenewableEnergy04-22-09.pdf. The regulations govern the development of alternative energy projects on the OCS and regulate alternate uses of existing or previously used OCS facilities (such as an oil and gas platform) for uses other than those related to oil and gas production. The Rule is accompanied by a Final Environmental Assessment (“EA”) analyzing both the Rule and any potential environmental impacts of the Rule in accordance with the National Environmental Policy Act (“NEPA”). The Rule will become effective on June 29, 2009. MMS also announced that it will issue a guidance document to describe the process and answer further comments.

    Background

    As discussed in our previous advisory, located at http:// www.blankrome.com/index.cfm?contentID=37&itemID=1628, Section 388 of the Energy Policy Act of 2005 (the “Act”) amended the Outer Continental Shelf Lands Act (“OCSLA”) to authorize the Secretary to issue leases, easements, or rights-of-way on the OCS for development and support of energy resources from sources other than oil and gas and to allow for alternate uses of existing facilities on the OCS.

    The goal of the Rule is to strike a balance between competing and complementary uses of the OCS, taking into account the demand and development of the renewable energy industry while simultaneously providing for shared revenues between the U.S. and the affected coastal states.

    The “579 Rule”

    The Rule, known as the “579 Rule” since it is 579 pages long, was finalized after MMS and the Federal Energy Regulatory Commission (“FERC”) signed an agreement on April 9, 2009 clarifying each agency’s jurisdictional responsibilities for leasing and licensing renewable energy projects on the OCS. According to the agreement, MMS has exclusive jurisdiction with regard to the production, transportation, or transmission of energy from non-hydrokinetic energy projects on the OCS, including wind and solar, and will issue leases, easements and rights of way related to OCS lands for such projects. FERC has jurisdiction over all hydrokinetic projects (tides, waves, currents) and may issue a license or exemption for such project after MMS issues the lease.

    The Rule applies to activities under the Act that: (i) produce or support production, transportation, or transmission of energy from sources other than oil and gas; or (ii) use, for energy-related or other authorized marine-related purposes, facilities currently or previously used for activities authorized under OCSLA, such as those authorized to explore and exploit oil and natural gas on the OCS. Other activities under the Act, such as those relating to oil and gas, will be promulgated separately in appropriate parts of existing MMS oil and gas regulations. MMS will have the lead role in regulating OCS alternative energy and alternate use activities, but the new authority does not supersede or modify existing federal laws such as the regime under the Deepwater Ports Act for oil or LNG projects offshore.

    Limited and Commercial Leases under the Rule

    The Rule envisions two types of alternative energy leases—limited leases, which are granted for a period of up to 5 years, and commercial leases, which are granted for periods of up to 30 years. While a limited lease will convey access and operational rights on the OCS to support the production of energy, it will not allow the actual production of electricity or other energy products for sale, distribution, or other commercial use. Limited leases will be issued for site assessment, technology testing and other approved purposes, and may provide the right to produce and sell limited amounts of power in order to offset site assessments and technology testing expenses. Also, since MMS anticipates only small amounts of power to be generated for relatively short durations, there will be no operating fees charged for the sale of power from limited leases. Only rentals will be charged for limited leases. A commercial lease, which is renewable, provides the leaseholder with full rights to produce, sell, and deliver power on a commercial scale through spot market transactions or long-term power purchase agreements.

    MMS encourages applicants to pursue commercial leases even if the sole purpose of the lease is to perform testing, because the applicant would reserve the full right to commercially develop the OCS site. An applicant will not be obligated to remain on a lease for the full term under the commercial lease should the applicant decide not to commercially develop the leasehold. Under the Rule, the issuance of a combined limited and commercial lease is possible and requires that a developer simultaneously request both leases. Preliminary survey work can be conducted under an existing Corps of Engineers Nationwide Permit and does not require MMS approval.

    The Rule describes how MMS will determine when to use a competitive process for issuing a renewable energy lease and identifies auction formats and bidding systems and variables to be used during the lease process. If there is no competition for a lease area, companies can suggest areas for development. Decommissioning of all facilities is required within two years of the termination of a lease, unless MMS grants a waiver.

    Revenue Sharing

    A new section of OCSLA requires payment to certain coastal States of 27 percent of the revenues received by the government from projects located within three miles of the seaward boundary of a coastal State. This sharing requirement is extended to States within 15 miles of the geographic center of the project meaning that multiple States can share the revenue.

    Financial Assurance Requirements

    The Rule provides certain financial assurance requirements. For commercial leases, a basic lease-specific bond or other financial assurance approved by MMS must be provided. The amount of financial assurance required at lease issuance is $100,000. Two additional bonds or other financial assurances are required at various other stages of the lease and licensing process and are in amounts to be determined by MMS. For limited leases, an applicant must provide a $300,000 basic limited lease or grant-specific bond or other financial assurance approved by MMS. For complex projects, MMS may require more guarantees.

    Production Tax Credits and Grants

    As part of the American Recovery and Reinvestment Act (Pub.L.111-5), Congress passed a two-year extension of the Production Tax Credit for electricity produced from qualifying marine and hydrokinetic renewable energy facilities that have a capacity rating of at least 150 kilowatts and are placed in service after October 2, 2008, and before January 1, 2012. A qualified facility is one that produces energy from waves, tides and currents in oceans, estuaries, and tidal areas as well as from ocean temperature differentials. Alternatively, a company could choose to receive a grant equal to thirty percent of the tax basis for the facility as long as it is depreciable or amortizable.

    NEPA, CZMA, and Endangered Species/Critical Habitat Compliance

    Individual project and program compliance with NEPA and the Coastal Zone Management Act (“CZMA”) will be required for the development of specific alternative energy projects. Applicants will bear the burden of providing necessary information for their project to MMS for development of an EIS and to allow the MMS to submit the required information for the CZMA consistency determination. MMS will file the consistency determination for competitive lease sales, however, the burden is on the applicant to provide the consistency certification to the affected coastal State for non-competed projects.

    Furthermore, activities under a lease or grant that may affect threatened or endangered species or that may affect designated critical habitat will require consultation as required under the ESA and/or approval of incidental takings under the Marine Mammal Protection Act.

    Conclusion

    Finally, in the publication of the Rule, there may be a clear path to the licensing of renewable projects offshore. Hopefully it will create significant opportunities for companies interested in, or which are currently pursuing, alternative energy projects or that are interested in the alternate use of existing facilities. Of particular note, the Rule codifies the Administration’s policy to grant MMS the lead for the development of offshore wind projects on the OCS. MMS is required to follow the NEPA and CZMA consistency process for each lease sale. Although MMS is the primary coordination point to resolve issues, MMS must consult with other federal agencies to resolve issues. It remains to be seen how long and arduous it will be to obtain approval of a project. MMS must consult with other federal agencies before approving a lease, but the Rule does not grant MMS one-stop permitting authority.