The American Recovery and Reinvestment Act of 2009 (ARRA) offers electric utilities considering near-term capital investments in renewable generation, transmission, and technology several benefits – including tax credits, loan guarantees, and grants – that can significantly enhance the return on such investments. Notably, the legislation also encourages a new paradigm for electric utility ratemaking, through its strong encouragement to state utility commissions to "decouple" utility returns from the volume of energy sales in order to reduce financial disincentives for utility support of energy efficiency and demand response. 

DECOUPLING OF UTILITY RETURNS FROM ENERGY SALES

ARRA provides a "carrot" to the states in exchange for a rethinking of fundamental ratemaking policies. Specifically, the legislation offers an additional $3.1 billion for the State Energy Program Grant program established in the Energy Policy and Conservation Act.  

The "stick" is that the Governor of a state wishing to access this additional grant money must notify the Secretary of Energy that the Governor has "obtained necessary assurances" that its state utility commission will seek to implement a general policy for each of its retail electric and gas utilities, ensuring that utility financial incentives are aligned with helping their customers use energy more efficiently, and that provide timely cost recovery and a timely earnings opportunity for utilities associated with cost-effective efficiency savings.1 

This type of policy is known as "decoupling." Under decoupling, a utility's fixed cost of service (plus an agreed-to profit margin or return on equity) is made independent of its retail sales volume. Traditionally, the rate a utility charges is based on its cost of service and return on equity divided by the forecasted amount of energy units the utility is expected to sell. Critics contend that this traditional methodology discourages utilities from implementing effective energy efficiency programs, because the utility can increase its profit by increasing energy sales. By contrast, decoupling could employ, for example, a true-up mechanism under which the profit margin (applied to a utility's next rate adjustment) increases in proportion to the degree of demand reduction. 

TAX CREDITS AND BENEFITS; TAX-CREDIT BONDS

ARRA offers a wide array of tax credits and other benefits to encourage near-term energy investments. ARRA also expands funding for existing tax-credit bond programs for qualifying types of utilities. 

In general, public utilities can now take advantage of the Section 45 renewable energy Production Tax Credit (PTC) and the Section 48 energy Investment Tax Credit (ITC) on the same basis as non-utility developers of renewable energy projects. This includes availing themselves of the option of taking the ITC instead of the PTC, and utilizing the new grant program to be administered by the Treasury Department that electively stands in for the ITC and PTC. For details of these tax credit provisions, click here.

An array of other improved funding instruments and tax mechanisms may be used by public utilities in certain circumstances. For example:

  • New Markets Tax Credit (NMTC). Electric utility investments in low-income communities may qualify for NMTCs. Under current law, an investor may claim an NMTC for qualified equity investments made to acquire stock in a corporation or a capital interest in a partnership that is a qualified community development entity (CDE). A "qualified community development entity" includes any domestic partnership whose primary mission is serving or providing investment capital for low-income communities or low income persons. ARRA increases the cap on NMTCs, for calendar years 2008 and 2009, to $5 billion.2
  • "Bonus depreciation" extension. In 2008, Congress allowed businesses to recover the cost of capital expenditures faster than the ordinary depreciation schedule by permitting those businesses to immediately write-off fifty percent (50%) of the cost of depreciable property. ARRA extends this temporary benefit for capital expenditures incurred in 2009.
  • Exemption of 2009-2010 private activity bonds (PABs) from alternative minimum tax (AMT). Electric utilities can finance certain facilities using tax-exempt PABs.  Under current law, interest on tax-exempt PABs has generally been subject to the AMT, limiting the marketability of these bonds, and increasing the rates paid on these bonds. Last year, Congress excluded one category of PABs (tax-exempt housing bonds) from the AMT. ARRA excludes the remaining categories of PABs from AMT in the case of new money bonds issued in 2009 and 2010, and bonds issued to currently refund bonds issued in 2004 through 2008.
  • Elimination of subsidized financing reduction for ITCs. Under current law, the ITC must be reduced if the property qualifying for the credit is also financed with tax-exempt PABs or through any other federal, state, or local subsidized financing program. ARRA eliminates this limitation.
  • For governments, municipal and cooperative utilities and Indian tribes: expansion of Clean Renewable Energy (New CREBs) and Energy Conservation (ECBs) tax-credit bonds. New CREBs are tax-credit bonds, the proceeds of which are used by governments, municipal and cooperative utilities, and Indian tribes for capital expenditures incurred on one or more qualified renewable energy facilities. ARRA authorizes an additional $1.6 billion of New CREBs, to be allocated one-third (1/3) to state, local and tribal governments, one-third (1/3) to public power providers, and one-third (1/3) for electric cooperatives. New CREBs are allocated by the Treasury, after an application process, starting with the smallest projects and then bigger ones, until available funds are depleted. ARRA also authorizes an additional $2.4 billion of ECBs.  ECBs are another type of tax-credit bond, the proceeds of which are used for "qualified conservation purposes." Eligible entities are states and localities. Qualified conservation purposes include a wide range of capital expenditures, such as those incurred for reducing energy use in public buildings, implementing green community programs, rural development involving the production of electricity from renewable energy resources, and expenditures with respect to research facilities and grants. Capital expenditures to implement green community programs may include grants and loans or other repayment mechanisms distributed to parties including private individuals or businesses. ECBs are allocated by Treasury to states and cities based on population and the specific process is yet to be determined.3

LOAN GUARANTEES, GRANT PROGRAMS, AND APPROPRIATIONS

ARRA offers expanded loan guarantee programs in support of a variety of renewable energy, transmission, and advanced energy and energy efficiency technologies. Most of these programs will be administered by DOE, which has faced substantial criticism for failing to issue any guarantees so far under authorization legislation enacted in 2005. New DOE Secretary Steve Chu has vowed to streamline the guarantee process. 

A variety of grants to private entities are also funded through ARRA in addition to those discussed above in connection with "decoupling." Energy and energy efficiency appropriations made to DOE under ARRA may also be expended through public/private partnership and grant programs.

  • Department of Energy "rapid deployment" renewable energy and transmission loan guarantees. ARRA   includes $6 billion in "rapid deployment" loan guarantees for both renewable energy power generation and electric transmission projects. Recipients must be entities borrowing to develop/construct projects using current commercial technology, including: (i) incremental hydropower facilities that generate electricity or thermal energy, and facilities that manufacture related components; (ii) electric power transmission systems, including upgrading and re-conductoring projects; and (iii) leading-edge biofuel projects that will use technologies performing at the pilot or demonstration scale that the Secretary of DOE determines are likely to become commercial technologies and will produce transportation fuels that substantially reduce life-cycle greenhouse gas emissions compared to other transportation fuels. Construction on such systems must commence not later than Sept. 30, 2011. The $6 billion in appropriated funds is expected to support more than $60 billion in loans for these projects. Loan guarantees for leading edge biofuel projects are limited to $500 million.4
  • Grants 5 for smart grid investments. ARRA provides $4.5 billion to DOE's Office of Electricity Delivery and Energy Reliability for activities to modernize the electric grid, including a program to provide matching grants up to fifty percent (50%) of the costs of qualifying smart grid investments in urban, suburban, tribal, and rural areas, including areas where electric system assets are controlled by nonprofit entities and areas where electric system assets are controlled by investor-owned utilities. DOE is required to initiate the matching grant program within sixty (60) days of the enactment of ARRA.
  • Fossil energy research and development appropriations. ARRA provides $3.4 billion for the Fossil Energy Research and Development program, including: (i) $800 million for selections under DOE’s clean coal round III (in which DOE is required to consider applications that include petroleum coke for some or all of the project’s fuel input) and ; (ii) $1.52 billion in competitive solicitation for a range of industrial carbon capture and energy efficiency improvement projects, including a small allocation for innovative concepts for beneficial CO2 reuse.

If you have any questions or would like to know more about how to apply for grants or how to qualify for credits or loan guarantees, please contact Howard H. Shafferman (hhs@ballardspahr.com; 202.661.2205), Daniel R. Simon (simond@ballardspahr.com; 202.661.2212), Robert C. Gerlach (gerlach@ballardspahr.com, 215.864.8526), Charles S. Henck (henck@ballardspahr.com; 202-661-2209); R. Thomas Hoffmann (hoffmannrt@ballardspahr.com; 202.661.2215) or Patrick R. Gillard (gillard@ballardspahr.com; 215.864.8536). 

This indirect approach (since few, if any, governors can "assure" that a particular action will be taken by state regulatory commissions) means a state could obtain some of the additional energy grant funding simply by virtue of the Governor making some effort to support decoupling even if the commission ultimately does not   implement that concept. The Governor must also make similar notifications that the state will adopt building energy-saving codes, and prioritize the grants toward expanding existing state energy efficiency and renewable energy programs. 

The bill requires that the additional amount for 2008 be allocated to qualified CDEs that submitted an allocation application for 2008 and (1) did not receive the allocation or (2) received an allocation less than what they requested.

ARRA makes the Davis-Bacon labor standards, requiring generally that prevailing wages must be paid on public works projects, applicable to projects financed by New CREBs and ECBs.

ARRA makes the Davis-Bacon labor standards, requiring generally that prevailing wages must be paid on public works projects, applicable to projects supported by these loan guarantees. 

ARRA makes the Davis-Bacon labor standards, requiring generally that prevailing wages must be paid on public works projects, applicable to projects funded directly by or assisted in whole or in part by and through the Federal Government under ARRA. 


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