The Qualified Energy Conservation Bond program was enacted by Congress in 2008 to provide state and local governments with low-cost funds for a variety of energy conservation programs. But according to the Energy Programs Consortium, to date only $650 million of the $3.2 billion set‑aside has been used. Issuance of QECBs has been hindered by the uncertainty surrounding two requirements: the 20 percent energy savings test for public buildings and the precise parameters for a “green community program.”

This week, the IRS clarified both of these points with its release of Notice 2012-44. The notice provides flexible and clear standards with respect to most of the questions raised by issuers regarding the interpretation and implementation of the 20 percent test and the green community program, but it leaves other questions unanswered.

The 20 Percent Energy Savings Test

Measurement Unit
Under the new guidance, issuers of QECBs will be permitted to determine energy savings across a single building, multiple buildings, or isolated building system components of publicly owned buildings for components such as heating, ventilation, and air conditioning systems (HVAC); hot water systems; lighting; building envelope; or electricity plug load. For issuers intending to target one or more energy conservation efforts across several buildings, this means that the 20 percent test does not have to be met with respect to each building or each component. In each case, the building must be owned by a state or local government or any of its instrumentalities (as defined under federal tax law).

Measurement for Multiple Energy Sources
The notice provides that an issuer making improvements involving different energy sources, such as gas and electric, may combine the savings to meet the 20 percent test if a common unit of measurement (British thermal units, for example) is used.

Measurement Period
There had been some concern as to whether an issuer would be required to meet the 20 percent savings test for each year the QECB was outstanding. The notice provides comfort in this area by stating specifically that the issuer is not required (but is encouraged) to continue to measure savings throughout the term and by setting a minimum one-year measurement period for base data before the capital expenditures are made and the period for measuring actual savings. An issuer may select a longer period of time, so long as the length of the base period and the period for demonstrating actual savings of 20 percent are the same.

Verifying Savings
The notice states that an issuer must have a reasonable expectation on the issue date of the QECBs that the capital expenditures to be financed with the bond proceeds will result in a 20 percent or greater reduction in energy consumption. The IRS does not require a specific method for calculating the 20 percent, but the notice references tools and software that may be used by the issuer. The issuer may rely on a certification by an independent engineer.

The Green Community Program

Program Purpose Prong
Since the law's passage four years ago, there has been lingering uncertainty over how to define a "Green Community." The notice provides a general description of eligible program purposes, including a program promoting energy conservation, energy efficiency, or environmental conservation initiatives relating to energy consumption. The notice goes on to list more specific permitted program purposes, including energy-saving retrofitting initiatives for heating, cooling, lighting, water-saving, and storm-water reducing; distributed generation initiatives; or transportation initiatives that conserve energy and/or support alternative fuel infrastructure (such as improvements to bicycle paths).

General Public Use/Availability Prong
A program meets the public use prong if it is available for general public use, including individuals and private businesses, or if it involves a loan or grant program that is broadly available to members of the general public, including individuals or businesses. The notice clarifies that the green community program does not need to affect the entire geographic area or all the individuals and businesses in the jurisdiction that implemented the program, but the program should broadly benefit the general public, residents, and businesses in the jurisdiction. It is not really clear whether or not the uncertainties about permissible applications of QECBs have been responsible for the shortfall in utilization. Many other factors come into play at the level of state and local decision-making. What is probable now, however, is a renewed surge in looking at QECBs as an inexpensive finance alternative for local energy programs.

If you have questions on QECBs, please contact Linda B. Schakel at 202.661.2228 or schakel@ballardspahr.com, Kimberly C. Betterton at 401.528.5551 or bettertonk@ballardspahr.com, or the member of the Public Finance Department or Energy and Project Finance Group with whom you work.


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