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Bonds and Financing

Fairness in energy incentives is within reach

Public power utilities are a critical part of the U.S. electricity marketplace. Of course, I am biased, but only after 20 years working in the industry. 

With that in mind, here are a few items to demonstrate that criticality. 

First, public power utilities are the most reliable of the three utility types: they focus on keeping the lights on as much as possible. Data from APPA’s eReliability Tracker supports this assertion, as do other sources. According to the federal Energy Information Administration, public power customers experience about half the average outage time as customers of other utilities. 

Second, public power utilities’ rates are lower overall because they provide electricity at cost – meaning, no added profit margin. Note that I am not condemning for-profit businesses whether in the electricity marketplace or elsewhere. Rather, electricity delivery and production are essential to every element of our modern way of life and are also naturally monopolistic – meaning, creating robust competition is difficult at best. Therefore, electricity rates and marketplaces are regulated.

For regulators to best understand the costs involved when for-profit entities provide this essential service, they need objective ways to measure such costs. Public power utilities can provide that measure, which is why Franklin Roosevelt referred to public power as a “yardstick” nearly a century ago. This measure helps all consumers of electricity – from businesses to households. There are other benefits: local decision-making; economic development; etc. But in the interest of brevity, I think you get the picture (and you can also always peruse more information here on our website).

Why, then, has the federal government’s energy tax policy almost exclusively favored for-profit entities over the last 30 years? The cynical view is that such entities have deeper pockets and have put those dollars to use lobbying for preferential treatment. While that may be partially true, I am not a cynic. In this case at least, I think the situation is more nuanced. Public power utilities are not-for-profit, meaning they are not intended to generate revenues beyond their costs. Public power utilities can put some excess revenue into rainy-day reserves. They also contribute “payments-in-lieu of taxes” to their local governments. However, they do not use excess revenues to reward investors and so, for the most part, try to balance income and expenses. Also, as governmental entities, public power utilities are statutorily exempt from federal taxes. So, public power utilities – generally – do not generate profits that could be taxed and – under the statute – are not subject to federal tax.

The problem is that, while Congress could use direct grants, loans, or loan subsidies to incentivize energy-related investments, it has instead chosen tax credits. These credits are not intended as tax relief, but as financial compensation for making targeted investments. But as tax-exempt entities, public power utilities cannot benefit from these tax “expenditures.” Rural electric cooperatives also operate on a not-for-profit basis and are exempt from federal taxes, so they are in the same situation. That means that the federal government is effectively missing public power utilities and rural electric cooperatives, which collectively serve nearly 30 percent of retail customers in the U.S., or 90 million Americans.

Now, some will argue that tax-exempt entities shouldn’t get tax relief. I agree. But – again – these tax credits aren’t tax relief, they are financial incentives to make highly targeted energy-related investments. We’ve also heard some say that public power utilities’ ability to issue tax-exempt bonds is our “bite at the apple.” Well, we’ve done the math and the value of tax-exempt financing pales in comparison to a 30 percent investment tax credit, or a 2.5 cent per kWh production tax credit. In fact, in the 30 years that these tax credits have been around they have generated significant revenue for for-profit entities – including independent merchant generators and investor-owned utilities. Billions of dollars worth of significance. These incentives have spurred major development of renewable resources such as wind and solar, but perhaps not as much as could have been achieved had our part of the sector been included. 

Over those same 30 years, some public power champions in Congress and the Executive Branch (especially coming from the energy policy side, but some on the tax side as well) have recognized this inequity and tried to rectify it. Of course, they did so with a push from APPA and our members. Unfortunately, those provisions had significant strings attached and were therefore not feasible to implement.

Now, however, public power utilities are on the brink of a comparable tax incentive for clean energy development that would take the form of a direct-pay refundable credit. There is bipartisan support, and the backing of key leadership: House Ways and Means Committee Chairman Richard Neal (D-MA) and Select Revenue Subcommittee Chairman Mike Thompson (D-CA) in the House and Senate Finance Committee Chairman Ron Wyden (D-OR) and fellow committee member Senator Michael Bennet (D-CO). When passed, this type of credit will allow public power utilities to directly own applicable energy projects and pass the savings from the incentives back to their customers. This development acknowledges the critical role public power plays in the industry and can continue to play in the future, accelerating the good work we have already undertaken to provide reliable and affordable power while doing out part to reduce greenhouse gas emissions.