If the goal of Congress is to provide market-wide incentives to promote long-term growth and investment, then tax-based incentives are not an effective tool for tax-exempt entities, including public power utilities.
The Association believes a more direct, and more effective, approach would allow for the issuance of direct payment bonds for targeted energy-related investments, Desmarie Waterhouse, the Association’s Vice President for Government Relations and Counsel, said in a recent letter to Sens. John Thune, R-S.D., and Debbie Stabenow, D-Mich.
The Association on June 14 sent a letter and white paper on comparable incentives to the Senate Finance Committee Energy Task Force. The task force was one of five announced on May 16 by Senate Finance Committee Chairman Charles Grassley, R-Iowa, and Ranking Member Ron Wyden, D-Ore., to consider the fate of expired and expiring tax provisions.
The task forces are working with stakeholders and other Senate offices to discuss each expired or expiring provision’s original purpose and whether the provisions are still necessary.
Desmarie Waterhouse, the Association’s Vice President for Government Relations and Counsel, sent a letter to Sens. John Thune, R-S.D., and Debbie Stabenow, D-Mich., co-leads of the Energy Task Force.
In the letter to Thune and Stabenow, who are co-leads of the Energy Task Force, Waterhouse said the Association strongly supports the efforts of the Energy Task Force to find long-term solutions to expired and expiring energy-related tax provisions.
The Association agrees that these provisions are handicapped not only by their temporary nature, but by their design. “Specifically, if the goal is to provide market-wide incentives to promote ‘long-term growth and investment,’ then tax-based incentives are not an effective tool for tax-exempt entities, including public power utilities,” Waterhouse wrote in the letter.
While direct grants, loans, and loan subsidies are available, federal tax expenditures are the primary tool Congress uses to incentivize energy-related investments. “However, such provisions do not provide an effective incentive for tax-exempt entities, including public power utilities,” Waterhouse said.
She noted that public power utilities receive only the indirect benefits of these credits, and then only after costly and complex purchase power agreements.
The Association believes a more direct, and more effective, approach would allow the issuance of direct payment bonds for targeted energy-related investments, Waterhouse said.
In the white paper, the Association points out that tax-exempt entities, including public power utilities, cannot directly benefit from energy investment tax credits or a production tax credit that both remain in effect today.
“Likewise, a public power utility cannot feasibly enter the sort of partnership flip transaction that electric cooperatives can use to indirectly access the ITC or PTC. Public power utilities can indirectly benefit from such credits by entering long-term power-purchase agreements with taxable entities that can benefit from the credits. However, the transactional costs of such agreements can be high. Additionally, only a portion of the value of the tax credit is generally considered to be passed on to the purchaser, thus muting the incentive effect,” the white paper said.
The Association noted that these costs and limitations are problematic in that public power utilities and rural electric cooperatives serve a substantial percentage of the nation’s retail electric customers (14.5 percent by public power and 12.9 percent by rural electric cooperatives), “a significant omission if Congress is seeking market-wide changes in energy-related investment and production decisions.”
Clean Renewable Energy Bonds
The white paper said that Congress has tried several methods of addressing these problems.
In the Energy Policy Act of 2005 (EPAct05), Congress sought to provide an investment incentive for certain tax-exempt entities similar to the ITC by creating the Clean Renewable Energy Bond (CREB).
Qualified CREB issuers included public power utilities, states and localities, and rural electric cooperatives. Interest paid on a CREB is taxable, but the CREB holder receives a tax credit.
“However, tax credit bonds are quite complex, and issuers had a difficult time finding willing buyers,” the white paper pointed out. As a result, in 2010, Congress modified CREBs -- now called New CREBS -- to allow issuers the option of receiving a direct payment from Treasury in lieu of providing bond holders a tax credit.
CREBs and New CREBs were hamstrung by an overall volume limit which was initially set at $800 million, but eventually increased to $2.4 billion. This limit was problematic in that allocating volume was time consuming and burdensome both for issuers and the Internal Revenue Service. The limit was also substantially lower than needed to meet demand.
For example, in 2009, the IRS received 38 applications from public power utilities requesting a total of $1.45 billion in New CREB bond volume, but just $800 million of bond volume was available for public power. New CREBs issued as direct payment bonds were further handicapped by budget sequestration, across the board cuts applying to all mandatory spending, including payments to issuers of direct payments bonds.
In 2017, Congress prohibited the issuance of any additional New CREBs as part of the Tax Cuts and Jobs Act.
Transferability and Clean Energy Bonds
In some instances, Congress has forgone trying to provide comparable incentives to tax-exempt entities that cannot benefit from tax expenditures, and instead allowed for the transfer of these tax benefits to taxable entities that can.
Meanwhile, in the 116th Congress, Wyden introduced S. 1288, the Clean Energy for America Act of 2019, which would replace existing ITCs and PTCs with a technology neutral tax credit. The Association voiced support for the legislation.
The tax credit could not be transferred, but public power utilities could issue Clean Energy Bonds for comparable investments. Akin to New CREBs, CEBs could be issued as either tax credit or direct payment bonds. The credit to bondholders and credit payment to bond issuers would equal up to 70 percent of interest paid on the bond—roughly equivalent in economic benefit to the upfront 30 percent tax credit provided to taxable entities. Unlike New CREBs, there would be no limit on the volume of CEBs that could be issued.
The Association believes that tax-based incentives should be drafted to accommodate tax-exempt entities, including public power utilities.
“New CREBs and transferability both provide good examples of how such comparable incentives could be accomplished,” the white paper said. In the case of New CREBs, many of their shortcomings can be overcome, including the imposition of a volume cap that is not imposed on otherwise tax-credit qualifying projects.”
The Association also said that any such approach should follow the model adopted by Wyden in exempting direct payments to issuers from budget sequestration.
The Association said it also supports the transferability of tax credits, noting this transferability is already proving a critical lifeline to advance nuclear power projects in Georgia and Idaho.