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The Energy Policy Act of 2005 and Tax Incentives for Public Power

The Energy Policy Act of 2005 and Tax Incentives for Public Power. Presented by Joe Nipper Senior Vice President, Government Relations APPA Seminar: The Energy Policy Act of 2005: How Will It Affect Public Power? Washington, DC November 10, 2005. Title XIII—Energy Policy Tax Incentives.

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The Energy Policy Act of 2005 and Tax Incentives for Public Power

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  1. The Energy Policy Act of 2005 and Tax Incentives for Public Power Presented by Joe Nipper Senior Vice President, Government Relations APPA Seminar: The Energy Policy Act of 2005: How Will It Affect Public Power?Washington, DC November 10, 2005

  2. Title XIII—Energy Policy Tax Incentives • $14.8 billion over 10 years • Four categories of incentives: • Energy Efficiency and Conservation Measures • Renewable and Clean Energy • Electric Reliability • Oil and Gas Production and Enhanced Refining

  3. Incentives Provided for Investor-Owned Utilities • Transmission property treated as fifteen-year property • Sales of electricity transmission property to implement restructuring policy • 5-year Net Operating Loss for electric transmission equipment • Extension and modification of renewable electricity production credit (Section 45) • Credit for investment in clean coal facilities • Electric Cooperatives Only: • Treatment of Income of Certain Electric Cooperatives (85/15 Test)

  4. Incentives for Public Power • Section 1303—Clean renewable energy bonds • Section 1327—Arbitrage rules not to apply to prepayment for natural gas • Incentives provided for public power systems minor in comparison to those given to IOUs

  5. Clean Renewable Energy Bonds • New financial incentive for consumer-owned utilities for construction of renewable energy generation • Modeled after the Qualified Zone Academy Bonds (QZAB) program for school construction • Refined product of tradable tax credits that failed in previous Energy Bill debates in 107th and 108th Congresses

  6. CREBS: How They Work • Allows consumer-owned utilities to issue interest-free bonds to finance construction of renewable generation facilities • Bondholder receives a tax credit in lieu of interest payments • Qualifying entities include: state and local governments, political subdivisions, Indian Tribal governments, rural electric cooperatives (CoBank, CFC) • Issuance of bonds authorized between January 1, 2006 to December 31, 2007

  7. Qualified Projects • Qualifying renewable facilities include (Sec. 45): • Wind • Solar • Geothermal • Landfill gas • Trash combustion • Open-loop and closed-loop biomass • Incremental hydro

  8. Allocation of Volume Cap • Secretary of Treasury responsible for formulating process for allocation of volume cap • No direction to Treasury provided by Congress on allocation process • National allocation limitation of $800 million; $500 million for “government bodies” • APPA supports a project-by-project allocation process in lieu of a state-by-state process • Working with Treasury to get rule in place quickly before first day of issuance--January 1, 2006

  9. Maturity Limitation of Bond • Treasury is responsible for determining • Maximum maturity: • Term the Secretary estimates will result in the present value of the obligation to repay the principal • Principal used is equal to 50% of the face amount of the bond • Interest rate used will be average annual rate for 10-year TE bond • Issuer is required to repay the principal amount in level annual installments • At current rate, APPA estimates average limitation of 11-14 years (most be rounded up to whole number)

  10. Example to Determine Maturity Limitation: • Issue $10 million of CREBs and applicable Treasury discount rate is 6% • Maturity limitation: • How long it will take $5 million (50% of face amount) invested at 6% (discount rate) to equal $10 million • Maturity Limitation: 13.8 years, rounded to 14 years

  11. Additional Requirements of CREBs • Arbitrage Restrictions; • similar to tax-exempt bonds • Expenditure Requirements for bond proceeds; • 95% must be spent within 5 years, extension possible • Reimbursement and Refinance; • Reimbursement and refinancing allowed after effective date and resolutions are adopted in timely manner

  12. Section 1327—Prepayment for Natural Gas • Applies to municipal gas and municipal electric systems • Provides safe harbor from arbitrage rules for tax exempt bonds used to finance prepayment of natural gas supplies • Contracts may not exceed the annual average of gas purchased by customers within service territory over past 5-years • Municipal electric system must be within the service territory of a municipal gas system to receive safe harbor

  13. QUESTIONS? Joe Nipper, Senior VP Government Relations 202/467-2931 jnipper@appanet.org

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