the energy policy act of 2005 and tax incentives for public power presented by joe nipper senior...
TRANSCRIPT
The Energy Policy Act of 2005 and Tax Incentives for Public Power
Presented byJoe NipperSenior 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
$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
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)
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
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
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
Qualified Projects
Qualifying renewable facilities include (Sec. 45): Wind Solar Geothermal Landfill gas Trash combustion Open-loop and closed-loop biomass Incremental hydro
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
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)
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
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
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
