Category: The Americas

1
EPA Survives Challenge to Cross Border Air Pollution Rule
2
Energy Tax Incentives Prominent in Senate Finance Committee’s Extenders Package
3
President’s Budget Sets Energy Tax Priorities
4
SCPPA Amends “Rolling RFP” to Encourage Energy Storage Submissions by April 1
5
DOJ’s Bird in the Hand: MBTA and BGEPA enforcement
6
Important Upcoming Energy Storage Events on the US West Coast
7
CFTC and FERC Begin Formal Data Sharing
8
K&L Gates Policy Insight: Will Wyden Recharge the Batteries on the Finance Committee’s Energy Tax Reform Proposal?
9
Southern California Public Power Authority (SCPPA) Issues Renewable Energy and Energy Storage RFP
10
California Independent System Operator Corporation (CAISO) Proposes Transmission Tariff Changes

EPA Survives Challenge to Cross Border Air Pollution Rule

Yesterday the U.S. Supreme Court upheld the U.S. Environmental Protection Agency’s (“EPA”) regulation of cross border air pollution.  In a 6-2 ruling,[1] the Supreme Court reversed the D.C. Circuit, holding that EPA’s cross border air pollution rule (the “Transport Rule”)[2] did not violate the Clean Air Act (“CAA”) by establishing a new federal scheme for regulating upwind emissions that drift over state lines.  The decision likely will impact those power plants in “upwind states” that contribute to cross border air pollution by imposing more stringent air emissions limits for those facilities.  However, the decision may also spur an increase in development of renewable energy and lower emission natural gas fired plants.

The Transport Rule establishes good neighbor obligations among 28 states for three primary pollutants: NOX, SO2, and ozone, and EPA has established National Ambient Air Quality Standards (“NAAQS”) for each of these pollutants.[3]  Any state whose ambient air quality exceeds the NAAQS is considered in “non-attainment.”  The CAA requires that upwind states, whose emissions cause or contribute to exceedances of NAAQS standards in downwind states, control their emissions to the extent required to avoid such contribution.  The Transport Rule is made up of two basic components: it quantifies each state’s emissions reduction levels under the good neighbor provision and imposes Federal Implementation Plans (“FIPs”) to implement those reductions at the state level.

EPA calculated the necessary emissions reductions in a two stage approach.  The first stage screens from its requirements all upwind states that contribute less than 1% of any downwind state’s nonattainment.[4]  The second stage applies a multi-factor assessment to set reductions in those upwind states on a cost-per-ton reduction basis (which relied on the costs to install pollution reduction technology) that was distributed across all power plants in the upwind states.[5]  Finally, the Transport Rule proposed to achieve cost-per-ton reductions over multiple years, beginning in 2012 and relying on a maximum budget for each pollutant that a state’s power plants may collectively emit through 2014.[6]  Since EPA found that many State Implementation Plans (“SIPs”) did not properly provide for these emissions budgets, EPA invalidated those SIPs and instead required those states to comply with new state-specific FIPs.  It did so without giving the states an opportunity to correct their SIPs based upon EPA’s objections, and (at least according to some) without giving the states guidance on how to address those objections.

The Supreme Court reviewed the D.C. Circuit Court’s conclusion that the Transport Rule exceeded EPA’s statutory authority to impose more stringent air quality requirements through the good neighbor provisions of the CAA.  First, the D.C. Circuit Court determined that the Transport Rule exceeded CAA authority because the good neighbor provision could impose emissions reductions on upwind states that could go beyond those states’ significant contribution to downwind air pollution in other states.  Second, the D.C. Circuit concluded that the Transport Rule failed to provide states with the first opportunity to implement the good neighbor reductions through their own SIPs.  Instead, EPA quantified the states’ good neighbor reductions and simultaneously set forth EPA-designed FIPs to implement those obligations at the state level without first providing the states an opportunity to correct their SIPs.

The Supreme Court overturned the D.C. Circuit Court decision, concluding that EPA reasonably interpreted the good neighbor provision and that the CAA did not required EPA to give states  a grace period to file revised SIPs.

It is still uncertain how the Supreme Court’s decision will ultimately affect the implementation of and reductions required under the Transport Rule.  Significant issues lie ahead for EPA related to regulatory impacts and the legal implications for the Transport Rule.  For example, since EPA is already several years behind the start date for the rule—January 1, 2012—the agency will likely have to issue new regulations to modify implementation dates.  Likewise, EPA may need to adjust the Transport Rule to address revisions and updates to air quality standards for ozone and particulate matter.  And finally, EPA may face further litigation that was stayed since the D.C. Circuit decision, or litigation related to technical revisions to the Transport Rule during the stay.[7]

Despite these issues, the Supreme Court decision presents two significant implications. First, by agreeing that EPA may foreclose a state’s ability to determine how emission reductions are to be achieved and allocated among sources, the decision may have changed the fundamental federal/state regulatory relationship under the CAA.  Second, the decision demonstrates the broad deference to EPA on substantive and technical issues, and reaffirms the Court’s view that when reasonable minds differ on technical issues, EPA’s interpretation will prevail as long as it is rational and supported by the record. Both points support EPA’s continuing efforts to impose greater regulation on the fossil fuel industry, which may accelerate the adoption of new pollution control technologies or the replacement of fossil fuel energy production with alternatives that do not emit, or emit less of, these criteria pollutants.

For additional information on the decision underlying the Supreme Court’s decision, see:


[1] Justice Alito did not participate.  Justices Scalia and Thomas joined in dissent.

[2] Federal Implementation Plans: Interstate Transport of Fine Particulate Matter and Ozone and Correction of SIP Approvals, 76 Fed. Reg. 48,208 (Aug. 8, 2011).

[3] For additional details on the regulated pollutants, see 76 Fed. Reg. 48,208.

[4] EME Homer City Generation LP v. EPA, 696 F.3d 7, 11 (D.C. Cir. Aug. 21, 2012).

[5] Id. at 11-12.

[6] Id. at 12.

[7] Utility Air Regulatory Group v. EPA, D.C. Cir., No. 12-1346, 9/27/12; Wisconsin Public Service Corp. v. EPA, D.C. Cir., No. 12-1163, 4/6/12.

Energy Tax Incentives Prominent in Senate Finance Committee’s Extenders Package

The Senate Finance Committee approved its long-awaited tax extenders package on April 3, 2014. The Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act, which the Committee approved by voice vote, would extend dozens of temporary tax incentives that expired at the end of last year or are set to expire at the end of this year. Moreover, the package includes numerous energy tax incentives that lapsed at the end of last year.

The EXPIRE Act would extend the following energy tax provisions:

  • * Production tax credit and investment tax credit with respect to facilities producing electricity from certain renewable sources (e.g., wind) (Sections 45 and 48)
  • * Deduction for energy efficient commercial building property (Section 179D)
  • * Credit for residential energy efficient property (Section 25C)
  • Alternative fuel refueling property credit (Section 30C)
  • Credit for electric motorcycles and three-wheeled vehicles (Section 30D)
  • Second generation biofuel producer credit (Section 40)
  • Special depreciation allowance for second generation biofuel plant property (Section 168(l))
  • Tax credits for biodiesel and renewable diesel (Section 40A)
  • Credit for the production of Indian coal (Section 45(e)(10))
  • Credit for energy efficient new homes (Section 45L)
  • Alternative fuel and alternative fuel mixture credit (Sections 6426 and 6427(e))
  • Credit for new qualified fuel cell motor vehicles (Section 30B) (expires in 2014)

* Provision was not included in Senator Ron Wyden’s (D-OR) “Chairman’s mark” but was added to the package before the Committee’s mark-up.

That said, the EXPIRE Act is, for the most part, a “clean” extenders package, meaning that the proposal mostly changes termination dates and includes few changes to underlying policy. As a result, certain modifications sought by the renewable energy industry were not included. For example, the proposal would not expand Master Limited Partnerships (MLPs) along the lines of Senator Chris Coons’ Master Limited Partnerships Parity Act (S. 795). Additionally, the EXPIRE Act would not impose a “commence construction” requirement (as opposed to a “placed in service” requirement) with respect to solar projects under the investment tax credit under Section 48. Finally, it would not extend the credit for energy efficient appliances under Section 45M.

K&L Gates hosted Chairman Wyden for a breakfast meeting on April 8. Wyden stated that he is working with Senate leadership on a strategy that would bring the EXPIRE Act to the Senate floor. Some staff indicate that floor action could occur as early as the next congressional work period, during the weeks of April 28 or May 5. Meanwhile, the House Ways and Means Committee may also consider energy tax incentives soon as part of its planned series of hearings on tax extenders.

We will provide more updates as this debate unfolds over the coming months.

President’s Budget Sets Energy Tax Priorities

On March 4, President Obama released his annual budget request to Congress. The President’s Fiscal Year (FY) 2015 request includes many proposals from previous years, but it also includes some new ideas—including on energy taxes. Below is a summary of the Administration’s energy tax proposals.

  •  Modify and Permanently Extend the Renewable Electricity Production Tax Credit (PTC).  As in its budget request last year, the Administration would make the Internal Revenue Code (IRC) Section 45 PTC permanent, refundable, and available to solar facilities. However, there are two significant changes from last year: (1) the Administration would make the credit available for electricity consumed directly by the taxpayer; and (2) solar facilities could choose to use either the PTC or the investment tax credit (ITC) under IRC Section 48 through the end of 2016. After 2016, the proposal would repeal the permanent 10 percent ITC for solar and geothermal property.
  • Modify and Permanently Extend the Deduction for Energy-Efficient Commercial Building Property. The Administration would raise the current maximum deduction for energy-efficient commercial building property to $3.00 per square foot, increase the maximum partial deduction for each separate building system to $1.00 per square foot, and provide a new deduction to reward energy savings achieved by retrofits to existing buildings, among other changes.
  • Provide a Tax Credit for the Production of Advanced Technology Vehicles. The Administration would replace the existing tax credit for plug-in electric drive motor vehicles with a credit for “advanced technology vehicles” that: (1) operate primarily on an alternative to petroleum fuels; (2) use technology employed by few other vehicles in the U.S.; and (3) exceed the “target” miles per gallon gasoline equivalent (MPGe) by at least 25 percent.
  • Provide a Tax Credit for Medium- and Heavy-Duty Alternative Fuel Commercial Vehicles. The Administration would create a new tax credit for alternative fuel vehicles weighing more than 14,000 pounds. The credit would equal $25,000 for vehicles weighing up to 26,000 pounds and $40,000 for vehicles weighing more than 26,000 pounds.
  • Extend the Tax Credit for Cellulosic Biofuels. The tax credit for the production of cellulosic biofuels under IRC Section 40 (recently re-titled the “second generation biofuel producer credit”) expired at the end of 2013. The Administration would retroactively extend the credit through 2020 at its current level of $1.01 per gallon.
  • Modify and Extend the Tax Credit for the Construction of Energy-Efficient New Homes. The Administration would extend the tax credit for new energy-efficient homes acquired before 2015. For homes acquired between 2015 and 2025, the proposal would provide a $1,000 credit for the construction of a qualified ENERGY STAR certified new home.  The Administration would also provide a $4,000 tax credit for construction of DOE Challenge Homes.
  • Reduce Excise Taxes on Liquefied Natural Gas (LNG) to Bring Into Parity with Excise Taxes on Diesel. The Administration would lower the 24.3 cents per gallon excise tax on LNG to 14.1 cents per gallon after 2014.

The Administration has also proposed to repeal numerous tax preferences for conventional energy companies. In particular, the President proposed to repeal the following provisions:

  • Credit for Enhanced Oil Recovery (“EOR”) Projects
  • Credit for Oil and Natural Gas Produced from Marginal Wells
  • Expensing of Intangible Drilling Costs 
  • Deduction for Tertiary Injectants 
  • Exemption to Passive Loss Limitation for Working Interests in Oil and Gas Properties 
  • Percentage Depletion for Oil and Natural Gas Wells
  • Domestic Manufacturing Deduction for Oil and Natural Gas Production
  • Expensing of Exploration and Development Costs
  • Percentage Depletion for Hard Mineral Fossil Fuels
  • Capital Gains Treatment for Royalties
  • Domestic Manufacturing Deduction for the Production of Coal and Other Hard Mineral Fossil Fuels

In addition to repealing these provisions, the Administration would increase the geological and geophysical amortization period for independent oil producers from two years to seven years.

Although it’s unclear whether Congress will enact any of these proposals into law, the Administration’s budget request is significant in that it establishes the President’s position on energy tax issues moving forward. This positioning is especially important as Congress debates tax extenders legislation and energy tax reform. It’s also important when considered in comparison to recent proposals from House Ways and Means Committee Chairman Dave Camp (R-MI), whose tax reform discussion draft would repeal incentives for alternative energy, and former Senate Finance Committee Chairman Max Baucus (D-MT), whose tax reform staff discussion draft would establish a regime of technology-neutral tax incentives to reward reductions in greenhouse gas emissions while eliminating other energy tax provisions.

Stay tuned for more information as this debate unfolds.

SCPPA Amends “Rolling RFP” to Encourage Energy Storage Submissions by April 1

The Southern California Public Power Authority (“SCPPA”) recently amended its “rolling RFP” for renewable energy and energy storage projects–the original RFP was described on this Blog in an earlier post). 

California’s AB 2514 requires publicly-owned utilities to submit to the California Energy Commission by October 1, 2014 appropriate targets for the procurement of cost-effective energy storage.  As a result, SCPPA’s members are now actively seeking proposals for energy storage system development.  Because SCPPA expects to conduct its first in-depth analysis and review of energy storage-related proposals during April 2014, it “strongly encourages” energy storage respondents to submit proposals on or before April 1, 2014.  The RFP amendment adds that energy storage-related proposals will be accepted after April 1, 2014 and throughout the term of the RFP (through December 31, 2014), but states that SCPPA’s current request is intended to encourage proposals that may be immediately evaluated for their near term cost-effectiveness and viability for SCPPA’s members.

SCPPA’s RFP, as amended, can be found here

DOJ’s Bird in the Hand: MBTA and BGEPA enforcement

The American Bar Association recently held its 28th annual conference for the White Collar Crime Institute in Miami, Florida.  http://www.americanbar.org/calendar/2014/03/white_collar_crime2014.html?sc_cid=CEN4WCC-CRS.

The Institute prides itself for showcasing the most significant white collar crime issues across the country.  At this year’s meeting, Stacey Mitchell – Chief of the Environmental Crimes Section at U.S. Department of Justice (DOJ) – discussed new areas and developments during a panel discussion on “The Expanding Net of Environmental Crimes Prosecutions.”

During the Q&A, Ms. Mitchell was asked about new areas of environmental criminal enforcement for DOJ.  She responded that enforcement actions against the wind energy industry would be new this year, and specifically, enforcement actions under the Migratory Bird Treaty Act (MBTA) and the Bald and Golden Eagle Protection Act (BGEPA).

While there is a lengthy history of MBTA and BGEPA enforcement, the focus thus far has been largely on individuals and the oil/gas industry – think poachers, farmers, and oil spills.  DOJ’s enforcement record has been mixed as it relates to prosecuting companies that are operating legally but where migratory birds are injured.  This year, however, Ms. Mitchell announced that DOJ would be taking a closer look at how wind companies comply with these laws.  Ms. Mitchell pointed to a recent plea deal with Duke Energy Renewables, and alluded to more cases on the horizon.  Just a few months ago the House Committee questioned the U.S. Fish & Wildlife Service about why it was prosecuting oil and gas companies under the MBTA and BGEPA, but not wind companies (see http://1.usa.gov/1fqL5Yt).

The Duke Energy Renewables (DER) plea was the first of its kind against involving a wind energy company.  In late 2013, DER plead guilty to two counts of MBTA violations for killing approximately 163 migratory birds, including 14 golden eagles at two wind farms in Wyoming.  Under the terms of the plea agreement, DER will pay nearly $1 million in fines and restitution, commit to taking up to $600,000 in operational adjustments per year for the life of the wind projects, and agree to file for an eagle take permit.

Other companies are being investigated under the MBTA and BGEPA, which establish criminal liability for unintentional take of migratory birds and eagles.  The MBTA is a “strict liability statute,” and the BGEPA is enforced under a general intent criminal standard.  The stakes are high for the wind industry given the low legal standards to sustain a conviction, the steep costs of operational adjustments, and the uncertain risks underlying bird/turbine interaction.  These risks are compounded by the fact that there is no MBTA permit for incidental take of migratory birds from industrial activities, and that an eagle take permit has never (to date) been issued to a wind farm.

It remains to be seen how DOJ will exercise its enforcement discretion to target wind companies.  But what is clear is that the wind industry may be DOJ’s bird-in-the-hand for high-profile environmental cases in the years to come.

Important Upcoming Energy Storage Events on the US West Coast

There’s a busy week ahead for those who are involved in energy storage on the US West Coast.

In California, the three investor owned utilities (Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric) have now applied to the California Public Utilities Commission (CPUC) for review and approval of their energy storage procurement plans.  The plans explain how each IOU intends to procure by 2020 its share of the 1,325 MW energy storage target set by the CPUC in D. 13-10-040.  The CPUC will be holding a workshop to provide information on the applications from 10am to 4pm on Friday, March 14, 2014, at the CPUC’s auditorium at 505 Van Ness Avenue, San Francisco.  There is also a call in number for the workshop: 866-830-4003, Participant passcode: 9869619.

A little to the north of California, energy storage is becoming a focus of attention in Oregon.  Renewables Northwest will be holding its Second Energy Storage Meeting in K&L Gates’ Portland Office, 1 SW Columbia St, 19th Floor, from 10am to Noon on Thursday, March 13.  The meeting will help interested parties prepare for an energy storage workshop organized by the Oregon Department of Energy and the Oregon Public Utility Commission, which will be held from 8am to 4:30pm on Wednesday, March 19 at the White Stag Building, 70 NW Couch St, Portland, OR 97209.   You can register for the workshop here.

Still further north, K&L Gates will be sponsoring a Washington Clean Technology Alliance meeting on Progress and Promise in U.S. Grid Energy Storage, Including Washington State, featuring special presentations by Dr. Imre Gyuk, U.S. Department of Energy, and Richard Locke, Washington State Department of Commerce.  This event will be held on March 20, 2014 from 4:00 to 6:30 pm at K&L Gates’ offices in Seattle, 925 4th Ave, Suite 2900.  Advanced tickets are required, and they’ll be on sale through March 16.  You can obtain tickets for the event here.

K&L Gates attorneys will be attending each of these events, and we look forward to seeing you there!

CFTC and FERC Begin Formal Data Sharing

On March 5, 2014, the Commodity Futures Trading Commission (CFTC) and Federal Energy Regulatory Commission (FERC) announced that they had shared data for the first time under an information sharing Memorandum of Understanding (MOU) that was signed by the two agencies at the beginning of this year.  The purpose of the MOU is to minimize duplicative information requests when the agencies are conducting market surveillance or investigating possible manipulation, fraud or market abuse.  Congress directed the agencies to enter into the MOU as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

The data that is subject to sharing under the MOU relates to information about market participants as well as entities regulated by either agency.  Accordingly, FERC may share data concerning Regional Transmission Organizations (RTOs), Independent System Operators (ISOs), and the independent market monitor of RTOs and ISOs, which is the North American Electric Reliability Corporation (NERC).  The data subject to sharing also includes information about interstate pipelines and storage facilities, which are regulated by FERC, and designated contract markets, swap execution facilities, derivatives clearing organizations and swap data repositories, which are regulated by the CFTC.  Any data shared by the agencies remains confidential unless it is used in an enforcement proceeding.

The agencies also announced the formation of a staff level Interagency Surveillance and Data Analytics Working Group to coordinate information sharing between the agencies and focus on data security, data sharing infrastructure, and the use of analytical tools for regulatory purposes. 

Dodd-Frank mandated a second MOU between the agencies, which also was signed at the beginning of this year, that is intended to resolve conflicts concerning potential overlapping jurisdiction and avoiding conflicting or duplicative regulation.  That MOU addresses circumstances where an entity seeks, or an agency considers sua sponte, an authorization or exemption to engage in activities that the agency thinks may also come within the other agency’s jurisdiction.  This MOU has yet to be invoked.  The second MOU specifically states that it “does not expand, alter or limit the . . . [a]gencies’ respective authorities pursuant to applicable statutes and regulations.”  It therefore remains to be seen whether the agencies will cooperate and coordinate with respect to enforcement matters, or whether we will instead see the prospect of another Amaranth case with multiple actions brought by both agencies.

The agencies have taken a long time to get to this point.  Dodd-Frank provided that the MOUs should be entered into by January 2011, and they were not actually entered into until three years later.  In the interim, the CFTC gave priority to the promulgation of the dozens of regulations that it was also required to adopt under Dodd-Frank.  In addition, last April the CFTC issued Orders exempting from the Commodity Exchange Act (1) certain electric operations transactions entered into by certain government and cooperatively-owned electric utility companies, and (2) certain transactions entered into by ISOs and RTOs that are authorized by a tariff or protocol approved by FERC or the Public Utility Commission of Texas.

The implementation of the information sharing MOU was carried out while each agency is being lead by an Acting Chairman.  Hopefully, the sharing of information under the MOU signals an era of greater cooperation and coordination between FERC and the CFTC than has sometimes been the case in the past.  It will be particularly important to observe this relationship as each agency gets new permanent leadership and the Dodd-Frank regulatory structure is developed.  It is a further reminder that, even though the jurisdictional issues among international regulators arising from cross-border swap transactions have grabbed most of the market’s attention, there are jurisdictional issues among U.S. regulators that have yet to be resolved.

 

K&L Gates Policy Insight: Will Wyden Recharge the Batteries on the Finance Committee’s Energy Tax Reform Proposal?

 

In late 2013, the Senate Finance Committee released a tax reform staff discussion draft on energy (the “energy draft”) as part of a series of tax reform proposals. According to Committee staff, the energy draft “proposes a dramatically simpler set of long-term energy tax incentives that are technology-neutral and promote cleaner energy that is made in the United States.” Although the departure of former Chairman Max Baucus (D-MT) from the U.S. Senate has thrown the fate of energy tax reform into doubt, there is ample reason to believe that his energy draft has hydrogen left in the fuel cell. This alert describes the energy draft and offers insights on the possible next steps for the proposal.To read the full alert, click here.  Additional Resources: With so many different pieces to tax reform, it is easy to lose track of various proposals and materials. To access the most relevant tax reform information from the House Ways and Means Committee, Senate Finance Committee, the Administration, and others, please visit our Tax Reform Resources page.

February 25, 2014

Authors:
Mary Burke Baker
Government Affairs Advisor
mary.baker@klgates.com +1.202.778.9223
Cindy L. O’Malley
Government Affairs Counselor
cindy.omalley@klgates.com
+1.202.661.6228
Nicholas A. Leibham
Partner
nick.leibham@klgates.com
+1.202.778.9284
Karishma Shah Page
Associate
karishma.page@klgates.com
+1.202.778.9128
Ryan J. Severson
Associate
ryan.severson@klgates.com
+1.202.778.9251
Andrés Gil
Associate
andres.gil@klgates.com
+1.202.778.9226
David A. Walker
Government Affairs Specialist
dave.walker@klgates.com
+1.202.778.9346
 

For more information, please contact our Public Policy and Law professionals, or visit our practice page on the Web.

This Policy Insight is presented as part of the Global Government Solutions® initiative.

 

Southern California Public Power Authority (SCPPA) Issues Renewable Energy and Energy Storage RFP

The Southern California Public Power Authority (SCPPA) recently announced a Request for Proposals for Renewable Energy and Energy Storage Projects. In the RFP, SCPPA seeks proposals for — in addition to customary renewable energy products — “Permanent Load Shifting (PLS), including energy storage and permanent load-shifting technologies” and “energy storage solutions (ESS) for both distribution and grid levels.” According to the announcement, respondents may propose (i) project ownership by SCPPA, (ii) a power purchase agreement (or, for storage, an “equivalent commercial agreement”) with an ownership option, or (iii) a power purchase agreement (or, for storage, an “equivalent commercial agreement”) without an ownership option.

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California Independent System Operator Corporation (CAISO) Proposes Transmission Tariff Changes

On January 30, 2014, the California Independent System Operator Corporation (“CAISO”) submitted proposed tariff changes to the Federal Energy Regulatory Commission (“FERC”) in Docket No. ER14-1206-000 to implement policy and process enhancements to the project sponsor competitive selection process that takes place during the third stage of CAISO’s transmission planning process. The proposed tariff changes were developed by CAISO over the past several months as part of its Competitive Transmission Improvements stakeholder initiative, which began in September 2013. The proposed tariff changes address five issues:

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