Bonds and Financing

APPA Weighs in on Energy Tax Provisions of Inflation Reduction Act

In comments filed with the Internal Revenue Service (IRS) and the Treasury Department on Nov. 4 related to the implementation of the Inflation Reduction Act, the American Public Power Association (APPA) weighed in on several key issues tied to the energy tax provisions of the IRA.

Tax-Exempt Bond Financing

A  number of IRA sections include a reduction in the respective credit for tax-exempt bond financing.

APPA addressed the question of what additional guidance would be helpful in determining how to calculate the reduction.

APPA said that further clarification is needed to help in determining how to calculate the reduction.

The first clarification relates to the allocation of bond proceeds to qualifying facility costs for purposes of investment tax credits (ITCs). 

Qualifying facility projects likely will be quite complicated and include elements that qualify as basis for an ITC and elements that will not, APPA said.

“We respectfully request that Treasury allow a project owner to use the same cost allocation rules for purposes of determining what aspects of a project are financed with tax-exempt debt, thereby applying them with regard to the calculation of any reduction under 26 USC 45(b)(3) or other comparable provisions applying to other energy tax credits.”

The second clarification relates to pledges of tax credit direct payments.

In financing a qualifying facility, a project owner may issue debt that pledges direct payment proceeds to the payment of principal and/or interest on that debt. Insofar as that debt meets the requirements of Internal Revenue Code (IRC) section 103, interest paid on that debt would be exempt from federal tax. In turn, IRC section 149(b) provides, in part, that the requirements of IRC section 103 are not met if the debt is “federally guaranteed.”

APPA believes that a decision to pledge direct payment credits to the payment of principal and/or interest should not constitute a federal guarantee. The reduction in credits for tax-exempt bond financing provided under IRC sections 45(b)(3), 48(a)(4), 45Y(g)(8), 48E(d)(2) “clearly indicate Congress’ intent to allow for the tax-exempt financing of tax-creditable facilities.”

The manner in which the owner of the facility and issuer of debt chooses to use the direct payment credit does not change this intent. “As such, Treasury and IRS should make clear that pledging direct payment proceeds to the payment of principal and/or interest on debt does not constitute a federal guarantee of that debt for purposes of IRC section 149,” APPA argued.

Investment Credit Facility

APPA also responded to the question of whether guidance is needed to determine whether an investment credit facility that elects to claim the Section 48 investment tax credit in lieu of the Section 45 production tax credit is subject to all of the requirements of Section 45, including the requirement that electricity generated by the investment credit facility be sold to an unrelated person.

“APPA strongly believes that IRC section 45 should not include a requirement that electricity generated by an investment credit facility be sold to an unrelated person, at least as far as state and local entities, including public power utilities, are concerned.”

One of the key purposes of making tax credits available by direct payment to state and local entities is to encourage ownership of such facilities, APPA said.

“Direct ownership will allow more of the value of these tax credits to be used to reduce project costs – and so result in lower rates to consumers – or used to make further grid investments. Both would be helpful in meeting the IRA’s clean energy and climate goals,” APPA said.

“Direct ownership also means local jobs, for local generation, under local control. One role of these facilities will be to power local facilities, such as town halls, police departments, fire departments, convention centers, traffic lights, rapid transit, and the like.”

Requiring that power be sold to an unrelated person for purposes of an ITC would preclude a governmental entity from owning qualifying facilities, and thus require them to rely on power purchase agreements to serve its own electric power needs, APPA said.

“Likewise, one of the IRA’s goals is to promote energy security by encouraging entities to pair generation with storage and the appropriate switching equipment to create renewably powered microgrids. Each of these investments is encouraged through tax credits under the IRA, and the concept of independent and energy secure microgrids occurred throughout the development of this legislation.”

However, if an unrelated party rule were imposed and if a municipality wanted to create such a microgrid to service a related governmental entity, it would be required to contract with an outside contractor to own these facilities to qualify for these tax credits. In other words, a municipality would have to privatize such a microgrid for the related grid, generation, and storage to qualify for a tax credit, APPA said.

“This is a perverse outcome that would be contrary to the fundamental purpose of the underlying statute and to the purpose of the direct pay provisions.” 

Congress “had years in which to amend draft legislation to extend the PTC’s unrelated party rule to the ITC, and yet there is no indication Congress ever intended to do so. APPA would strongly urge Treasury and IRS not to extend the unrelated party rules to the ITC.” 

Nuclear Power Production Credit

APPA also addressed a question related to the IRA’s addition of a zero-emission nuclear power production credit.

Section 45U(a)(2) reduces the amount of the Section 45U credit by a “reduction amount” that is calculated, in part, based on the gross receipts from any electricity produced by the facility. Section 45U(b)(2)(B) provides that gross receipts generally include any amount received by a qualified facility that are from a zero-emission credit program unless an exclusion applies.

APPA responded to the question of whether guidance is needed to clarify the meaning of the term “gross receipts,” especially as it applies to taxpayers receiving revenue through cost-of-service regulation or regulated contracts and who do not sell electricity in a manner attributable to individual nuclear reactors such as through sales into organized electricity markets or via power purchase agreements to third parties.

“Any definition of gross receipts should apply equally across entities claiming the new zero-emission nuclear power production credit, regardless of the ownership of such entities,” APPA said.

For example, if taxable entities are allowed to deduct depreciation and other cost against revenue for purposes of calculating gross receipts, tax-exempt entities should be treated the same for purposes of calculating the new credit, APPA said.

“Failing to do this would mean that owners in similar circumstances, or even co-owners of the same facility, could qualify for differing levels of credits or even have one owner qualifying for a credit and another owner qualifying for no credit at all. This would be inequitable and would also work against the purpose of the provision, which is to encourage the continued operation of these facilities,” APPA argued.

Along with these topics, APPA also weighed in on a number of other areas related to the IRA.