Welcome to the July/August 2008 edition of
Business Leasing and Finance News (BLFN)

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FOUNDER'S NOTE
By David G. Mayer 

Fuel Hardship 

Is anyone exempt from the pervasive effect of volatile fuel prices? From what I read and see in my law practice, everyone (with few exceptions) has been hurt by the rapid increase in cost of oil.

For example, general aviation (GA) has had to make a sea change in flight operations. GA covers a wide range of aircraft, from small turbo-props to large cabin executive jets. According to Ed Bolen, President and CEO of the National Business Aviation Association (NBAA), rising fuel prices constitute a “crisis” for GA. Bolen noted that: “Across the country, this industry is feeling these effects – flight hours are down nationally, and operations at general aviation (GA) airports are dropping.” The Federal Aviation Administration (FAA) just reported activity at GA airports is down significantly, citing as an example, operations at Springfield, IL, which have recently declined by 30 percent. See Business Aviation Challenged by Rising Fuel Costs, Bolen Tells Panel (July 15, 2008).

The cost of oil has fanned the fires of inflation, a critically important issue for the Federal Reserve Bank and the U.S. economy. Although no one can escape the forces of fuel cost escalation, BLFN’s lead article in this issue describes how Texas, the leading producer in America of wind energy, welcomes developers and financiers of wind energy with relatively scant regulation and good incentives.

A significant reduction in retail fuel costs seems unlikely to occur now or at any point in the near future. If we damp our thirst for oil, and increase our reliance on renewable energy, the laws of supply and demand should, in theory, reduce the budget-busting results of current oil prices. We have little choice but to adapt to the crisis. However, we have many choices of how to combat it over the long-term. For the good of our families, our businesses and the overall U.S. economy, we must make the rights choices. See A Generational Challenge to Repower America, by Al Gore (July 17, 2008).

Thanks for reading BLFN. Look for BLFN’s next issue, in the September – October time period because this issue begins BLFN’s new bi-monthly publication schedule.

1. Wind Energy Development Is a Breeze in Texas

Wind power projects have the potential to generate tremendous amounts of energy and revenue. New wind farms create benefits for a wide array of parties: tax revenues for federal and local governments; jobs at turbine plants and construction sites; and reliable, renewable power for homes and businesses. In 2007, General Electric Energy Financial Services released a study finding that wind farms built in 2007:

• Carry a net present value benefit to the US Treasury of $250 million;
  
  
• Generate an estimated $6 million/year in local property taxes, $15 million annually in state income taxes on wages and profits during construction and $1.5 million/year in taxes while operating;
  
  
• Create more than 17,000 construction-related jobs and 1,600 long-term operations-related jobs; and
  
  
• Avoid about 10 million metric tons/year of carbon dioxide emissions.

See GE Energy Financial Services Study, Impact of 2007 Wind Farms on US Treasury (June 18, 2007).

Texas has certainly enjoyed these benefits. The state became the national leader in wind power installations in 2007 and has nearly double the wind power capacity of its closest rival, California.

Several factors make Texas a particularly good place for developing new wind energy projects:

1.  Natural Resources:

• Gusting Wind Speeds (See graphics below). The majority of the state’s existing turbines are located in the windy hills and plains of West Texas and the Panhandle. Future development will likely continue near existing turbines, but developers, such as Galveston-Offshore Wind, LLC, also plan to harness the energy potential of Gulf Coast winds.

*Technical Point: Wind power offers significant potential to supplement energy needs in Texas as the following chart illustrates:

Graphics reproduced from Texas Comptroller of Public Accounts, The Energy Report, May 2008

• New Environmental Concerns. Wildlife activists like the Audubon Society are concerned that turbines in birds’ migratory flight paths will adversely affect populations. However, the majority of West Texas and the Panhandle are not located in migratory flyaway zones. The state’s principal conservation concern in the region is maintenance of natural vegetation, which is incompatible with current land use for cattle grazing. Wind farms are an excellent alternative: farmers, ranchers, and even owners of non-productive oilfields are compensated in exchange for allowing turbines to be built and operated on their property.

Technology:

In-State Production. Companies that manufacture turbines may relocate to Texas to produce machines to meet the local demand. For example, TECO-Westinghouse Motor Company and Composite Technology Corporation announced plans to build a DeWind D8.2 turbine manufacturing plant in Round Rock, Texas.

Collaboration. Structuring partnerships between producers and developers has the potential to create growth in the manufacturing, construction and energy sectors. In Europe, manufacturing and energy companies have already seized on the revenue potential from wind energy by creating multi-billion dollar relational contracts. Gamesa, a Spanish turbine manufacturer, reached a €6.3 billion deal to provide turbines, construction and services to Iberdrola Renovables SA. Once completed, this project’s wind farms are expected to generate over 4,500 megawatts of energy in Europe, Mexico, and the United States.

Technological Advances: Purchasing turbines remains costly and “global demand has created a waitlist of at least two years for a new turbine.” See Winds Shift in Energy Debate, The Wall Street Journal, SW Ed., Page A:11, Col 1 (June 19, 2008). However, in-state production may reduce obstacles by increasing turbine production and decreasing the outright costs of shipping finished pieces.

3.  Research Facilities: The U.S. Department of Energy will locate one of the nation’s two large-scale wind turbine research and testing facilities in Southeast Texas – the National Large Wind Turbine Research and Test Center. The facility will test turbine planes and produce research to enhance the efficiency of turbine technology. See Texas Lands Major Wind Turbine Research Lab (June 26, 2007). See also Research and Test Center Homepage.

4.  Capital Investment: In October 2006, Texas Governor Rick Perry announced commitments from wind energy companies to invest $10 billion in Texas wind projects. After the RPS was implemented, Texas wind corporations and utilities invested $1 billion in wind power, creating jobs, adding to the Texas Permanent School Fund, and increasing the rural tax base. In May of this year, T. Boone Pickens announced plans to build a multi-billion dollar wind farm with hopes of reaping his expenditure and more in light of ever escalating oil costs.

Texas may be able to produce the wind power or other alternative energy, but the real issue is whether Texas can deliver the power to metropolitan and other areas where it is most needed. The lack of transmission capacity from such producing areas as West Texas has inhibited growth and investment in Texas. However, Texas is taking the first steps to remedy transmission congestion. On July 18, 2008, state officials approved the construction of nearly $5 billion dollars worth of electricity transmission lines to carry power generated by new wind farms in West Texas and the Panhandle to metropolitan areas of the state such as Austin, Dallas and Houston. See Texas to Spend Billions on Wind Power Transmission Lines (July 18, 2008).

*Tip: Identify the likely interconnection points to the new transmission lines as a fundamental part of your development and financing diligence of wind farms. Exercise caution. Transmission projects typically face strong head winds in the form of greater regulation and lengthy construction periods.

5.  Production Tax Credit (PTC): At the Federal level, the Production Tax Credit currently subsidizes new wind projects. It is a valuable, if not absolutely essential, component of making a wind project viable.

*Warning: Congress has failed to pass the PTC extension, which expires at the end of 2008. The PTC provides a 2 cent per kilowatt-hour tax benefit to wind energy projects. If Congress does not extend the PTC, the future of wind energy could suffer a significant setback for years ahead.

The American Wind Energy Association (AWEA) provides a fact sheet on the critical importance of passing the PTC this year. AWEA expresses urgent concern that the economic slow down in wind energy is already becoming apparent. If Congress does not pass the PTC, the industry could lose many of its 76,000 jobs, developers could lose anticipated opportunities to build new wind farms and the U.S. would be deprived of many of the benefits of renewable energy from wind power. See Wind Energy Production Tax Credit – Fact Sheet, AWEA (2008).

According to Julius Steiner, CEO of Gamesa USA: “Thanks in part to the production tax credit, U.S. wind power capacity is now over 16,800 megawatts – or enough to serve the equivalent of 4.5 million average households – and wind has been the second largest source of new electrical capacity in the nation, behind natural gas, for the past three years.” Bragging rights may be silenced if the PTC is not renewed soon. See Wind Credit Blown Off Course (July 14, 2008).

6.  Regulation: Pro-Wind Legislation. Texas’ Renewable Portfolio Standard, introduced in Senate Bill 7 in 1999, required that electricity providers generate 2,000 megawatts of renewable energy by 2009. The State Conservation Energy Office (SCEO) found that “After the RPS was implemented, Texas wind corporations and utilities invested $1 billion in wind power, creating jobs, adding to the Texas Permanent School Fund and increasing the rural tax base.” Senate Bill 20 has helped to close the gap between turbines and pathways for transmission to grids in non-local markets. The SCEO explains that the bill “laid the groundwork for large transmission lines in order to accommodate present wind industry needs and to further accelerate the use of wind power in the state.”

• Few State Restrictions. While project developers must contend with federal regulations that might hinder the placement of new turbines, many of the typically relevant environmental restrictions have not applied in Texas, for the reasons discussed in Part 1. There is a relative dearth of state regulations on turbine placement.
  
  
• Local Regulation. Texas communities have historically objected to turbine construction out of concern for aesthetics and disruptive sounds. However, there appears to be a sea change in public receptiveness to new construction. In part, this change can be reconciled with wind energy’s potential to reduce utility bills and tax expenditures on energy. Greater social consciousness of environmental issues may also be changing Texan’s receptiveness. See Winds Shift in Energy Debate, The Wall Street Journal (June 19, 2008). Texans have offered much less resistance to new developments than other states’ residents, perhaps in part because of a “’cavalier attitude’” toward the land but more likely because the areas slated for development are rural, less densely populated, and have relatively low property values. See Texas is More Hospitable than Mass. to wind farms, The Boston Globe (September 25, 2006).
  
  
• Texas at Ease. Some authorities note that the absence of regulations may preclude development because property owners remain uncertain with regard to their wind rights. However, they also recognize that Texas’ national reputation as a pioneer in the field of energy law, particularly as to oil, gas and mineral rights ownership, creates potential for regulation that will increase rather than inhibit installation of new turbines. See Laws regarding wind energy development headed for Texas, San Antonio Business Journal (August 24, 2007).

*Action Point: Developers and financiers should take opportunities to invest in this wind energy in Texas and other states where they stand to reap the benefits of current energy markets that must cope with oil prices of about $140 per barrel. However, these opportunities may encounter economic disruption if the PTC does not pass soon. Contact your legislators to support the PTC passage.

The favorable environmental, business and legislative conditions in Texas enhance the state’s capability to rely on wind energy. As fossil fuel prices soar, some Texans are eager to hear the hum of new turbines. Legislative action to pass the PTC may be the fuel that makes this development possible. Without passage of a multi-year extension in 2008, the failure of Congress to act could realistically knock the wind out of the sails of an industry on the move.

Thanks to Kelly Cataldo, a summer associate at Patton Boggs LLP, for her contribution to this article.

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2. FAA Registration Proposal Fosters Compliance Anxiety

The Federal Aviation Administration (FAA) proposed to amend requirements concerning the registration of aircraft, and, judging from almost all of the 100 comments on the proposal, no one likes it. See Federal Aviation Administration, 14 CFR Part 47 [Docket No. FAA-2008-0188; Notice No. 08-02] (Feb. 28, 2008).

The FAA civil registry maintains registrations on approximately 340,000 civil aircraft. It estimates that 30 percent of these registrations are invalid and should be revoked. The reasons include bad addresses, unidentified aircraft, exported aircraft, destroyed aircraft, and aircraft that have been reported sold but not re-registered by the new owner. Each of these reasons requires a change in the registration (such as a new registered owner) or removal of the aircraft registration from the records of the registry (such as when the aircraft is destroyed or exported).

With laudable goals, the FAA has said that its “proposal is based on the need to increase and maintain the accuracy of aircraft registration information in the Civil Aviation Registry.” Explaining further, the FAA said that the proposed procedures would ensure aircraft owners periodically provide information regarding changes in registration to … provide more accurate, up-to-date aircraft registration information to all users of the Civil Aviation Registry database.” The FAA justifies its proposal on the basis that it would aid law enforcement organizations and the FAA Registry in verifying the identity of aircraft owners.

The Air Transport Association of America, Inc. (ATA), the principal trade and service organization for major scheduled carriers, urged the FAA to withdraw its proposal or exclude air carriers operating under Part 121. On the business jet side of the issue, the National Business Aviation Association, Inc. (NBAA), also objected to the FAA proposal (Comment: May 28, 2008). The NBAA suggested that the proposal would be neither efficient nor cost effective. The NBAA urged the FAA to modify the proposal to take into account the difficulty of the FAA keeping the registration system current, the lack of clarity in the proposal regarding the cancellation of registration numbers and the real cost to prepare and submit the updated application for registration.

As a highly influential member of the aircraft finance industry, GE Capital Solutions stated that “the Proposed Rule [would] impose onerous burdens on, and result in significant risks for the entire aviation industry, particularly aircraft financing companies.” Even if a financing organization implemented effective administrative procedures, any failure to register or renew registration as proposed could potentially alter priority of security interests or provide insurance companies a basis to disclaim otherwise enforceable insurance coverage.

*Technical Point: Perfecting a security interest in a civil aircraft (49 CFR §40102(a)(6)) occurs exclusively by filing (for recordation) a “conveyance” (such as a security or lease agreement) which affects title to, or any interest in, any civil aircraft of the U.S. See 49 U.S.C. §40102(a)(19), FAR Part 49 §§49.17, 49.31, 49.41 and 49.51. If the registration is not valid, it is arguable that the filings to perfect an interest in the affected aircraft would likewise be invalid. As a result, other interests in the aircraft, such as judgment liens, could unexpectedly gain priority over an otherwise fully enforceable security interest in or lease of the aircraft. The Cape Town Convention controls priority of “international interests” in “aircraft objects.” Because the Convention is relatively new and there is no case law, it is difficult to determine what impact the revocation of aircraft registration would have on an international interest and this just adds another uncertainty to the FAA’s proposal.

Supporting GE’s comments, the Equipment Leasing and Finance Association warned that: 

Under this proposal as presently drafted, the rights of the financing parties could be severely jeopardized due to a customer’s non-compliance with the proposed registration requirements. These rights include the enforceability and priority of the financing party’s lien or other rights relating to the financed aircraft, the reliability of the required casualty and liability insurance policies, and the impairment of the ability of the customer to perform its financing obligations thus redounding to the financing provider’s detriment.

*Tip: As the proposal is finalized financiers should track its changes and evaluate whether to:

• hire and/or train staff to administer the registration proposal,
  
  
• adapt systems for tracking registration documentation,
  
  
• confirm that loan or lease documents contain specific covenants to maintain effective registration and to provide written reports on the status of registration at the FAA,
  
  
• obtain a registration power of attorney that enables the financ