The Department of Defense (DoD) recently issued an interim rule amending the applicable Defense Federal Regulation Acquisition Supplement (DFARS) related to country of origin determinations for photovoltaic (PV) devices covered by a DoD contract. This interim rule should provide further clarity for project developers as to how certain PV panels sourced from foreign countries used in the performance of DoD contracts will be covered by special domestic preference requirements contained in the DFARS and other applicable laws and regulations - the "PV Device Requirements."
The PV Device Requirements were legislated as part of the 2011 National Defense Authorization Act (the 2011NDAA) the President signed into law in January 2011. The DoD implemented the PV Device Requirements in procurement regulations applicable to DoD projects in May 2012. The PV Device Requirements specify that acquisition of PV devices under certain types of DoD contracts must comply with the "Buy American Act," subject to the exceptions of the Trade Agreements Act.
The PV Device Requirements apply to specified types of DoD contracts that result in "DoD ownership" of PV devices. One would expect this to limit the rules to contracts under which DoD takes title to the devices. However, the 2011NDAAdefines "ownership" in an artificial, expansive way. Even if the government does not take title to PV devices, DoD is considered to "own" them if (i) the devices are installed on DoD property or in a facility owned by DoD; and (ii) the devices are "reserved for the exclusive use of DoD" for their full economic life.
It is understood that this unusual conception of "ownership" will generally result in the PV Device Requirements applying to DoD solar projects. As a consequence, developers performing these DoD contracts generally must source PV panels from the United States or other designated or qualifying countries.
Designated and qualifying countries include parties to the World Trade Organization (WTO) Procurement Agreement, that have a free trade agreement with the United States, or that have certain qualifying reciprocal defense procurement arrangements with the United States. These countries include: Aruba, Austria, Bahrain, Belgium, Bulgaria, Canada, Chile, Costa Rica, Cyprus, Czech Republic, Denmark, Dominican Republic, El Salvador, Estonia, Finland, France, Germany, Greece, Guatemala, Honduras, Hungary, Iceland, Ireland, Israel, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Morocco, Netherlands, Nicaragua, Norway, Peru, Poland, Portugal, Singapore, Slovenia, Spain, Slovak Republic, Sweden, Switzerland, Taiwan and the United Kingdom.
Notably absent from this list is China. China is the leading producer and exporter of PV panels. But it is not a party to the WTO Government Procurement Agreement or any other agreement that would result in it being a qualifying or designated country. Consequently, the PV Device Requirements are expected to prevent sourcing of PV panels from China for most or all DoD solar energy projects.
For covered contracts that will entail acquisition of PV devices valued at over $202,000, the PV Device Requirements instruct DoD to procure only PV devices that are either wholly manufactured or have been "substantially transformed into a new and different article of commerce" in a qualifying country or a designated country. The interim rule seeks to amend the PV Device Requirements and affects how the second, "substantially transformed" prong will be determined.
The interim rule provides that a PV device will be considered to be substantially transformed into a new and different article of commerce as long as the PV device "is not subsequently substantially transformed outside" of the country certified as the country of origin. DoD issued this rule because it had been receiving a number of questions regarding where substantial transformation of some PV panels had occurred, especially where different phases of the production process occurred in different countries. The interim rule notice indicated that DoD consulted with the United States Trade Representative to clarify this country of origin determination.
Assuming the interim rule becomes final, it is important for investors and developers to understand whether a PV device will be considered to be substantially transformed in the United States or a qualifying or designated country. Importantly, if a device contains all qualifying component solar cells but is assembled in China, the item still would not qualify under the PV Device Requirements. Conversely, if the solar cells were all from a non-qualifying country but the panel was assembled in the United States (or a qualifying or designated country, like Taiwan), the device could, depending on the circumstances, be considered to be substantially transformed in the United States or such qualifying or designated country. Developers utilizing PV devices should be careful to ensure that the final country of origin is qualifying or designated and that further activity significant enough to constitute substantial transformation does not occur in a non-qualified or designated country following PV device assembly.
The interim rule also added an additional paragraph to the PV Device Requirements that directs the party offering the PV device to certify that the origin of the PV device shall be consistent with country of origin determinations by the U.S. Customs and Border Protection if the PV devices to be offered exceed $25,000. If the party is uncertain as to what the U.S. Customs and Border Protection would determine regarding the PV device origin, the rule provides that the party must request a U.S. Customs and Border Protection determination.
The DoD is seeking comments on the interim rule in writing on or before February 18, 2014.