APPA on Dec. 12 sent a request for guidance to Treasury Assistant Secretary Kenneth Kies in relation to private use regulations for output facilities.
APPA is asking that the existing three-year limit on long term contracts with retail customers be increased to 15 years for “large” customers.
APPA is also asking for further clarification of rules relating to the acquisition of existing output facilities and equity allocations for public power utilities.
In relation to contracts with large customers, under current law and regulations, if more than 10 percent (or $15 million) of bond proceeds for a project are “used” by a private business, then the bonds are considered taxable private activity bonds. A “customized” contract with a retail customer is considered to be “private use” unless certain requirements are met.
Briefly summarizing current regulations, such a contract is considered private use if:
• The term of the contract is longer than three years;
• The contract is not negotiated at arm’s length or is not based on generally applied rates;
• Debt for projects used to serve the customer were issued to financed property the principal purpose of which is serving the customer.
APPA has long sought to simplify private use rules and laws. For example, it has proposed amending the tax Code to eliminate the $15 million limit – which applies only to output facilities – and instead allow issuers to rely solely on the 10 percent limit on private use.
It has also sought regulatory changes to extend the three-year limit to 10 years.
With recent load growth fueled, in part, by data center deployment, customized contracts are becoming increasingly important for the utility seeking to mitigate the risk of stranded assets, APPA noted.
However, such contracts with larger customers can exceed the private use limits and jeopardize the tax-exempt status of a utility’s debt. In addition, given the scope of investments needed to accommodate such customers the 10-year limit on contracts APPA had previously sought may no longer suffice.
In addition, while much attention has been paid to data center deployment by hyperscalers, the fastest growing segment in the sector is reportedly “edge data centers” with 500 KW to 2 MW of demand.
For all but the largest of public power utilities, edge data centers could still trigger private use concerns.
For example, of the 1,545 public power utilities for which EIA had data, 1,401 had peak winter or summer demand of less than 200 MWs; i.e., for whom 20 MW would be 10 percent or more of their peak demand. And, for more than 1,000 of the 1,545, just one 2 MW customer would be 10 percent or more of their peak load.
As a result, APPA is seeking to define “large” customers for purposes of qualifying for the 15-year contract limit as the lesser of 20 MW or 10 percent of the utility’s peak demand.
Also, in response to request for comments some joint action agencies (JAA) expressed concerns about the effect of contracts with large customers negotiated by project participants.
APPA does not tackle the JAA concerns directly in its comments, but APPA believes that a reasonable definition of a “large” customer for smaller project participants should address them.
