APPA Weighs in on Proposed and Temporary Rules for Elective Payment of Energy Tax Credits

August 22, 2023

by Paul Ciampoli
APPA News Director
August 22, 2023

The American Public Power Association recently submitted comments to the Internal Revenue Service in response to the federal agency’s issuance of temporary and proposed regulations for the implementation of elective payment of energy tax credits.

APPA, which submitted the comments on Aug. 14, noted that the Proposed Rule provides the mechanism by which an applicable entity may make an election for elective payment.

“However, there is no indication in the Proposed Rule or other public comments about how and when the Service will act on such an election,” APPA noted.

As an example, it noted that a June 2023 Treasury presentation slide deck provides a hypothetical timetable for an applicable entity to make an elective payment election including when the facility is placed in service, when the entity would complete pre-filing registration with the Service, and the deadline for filing a return to make an elective payment election.

That slide deck, however, only states that payment will be received “after (the) return is processed” with no indication as to when that might occur.

APPA notes that public power utilities typically finance large capital investments with an up-front bond issuance that plays the dual role of covering up-front project costs, but also allowing for the repayment of those costs over time.  Tax credit payments that are not received until after project completion will likely require bridge financing before longer-term financing is secured, it said.

“Uncertainty as to the timeframe in which the payments will be made will hinder the assembly of the financial package because it will create uncertainty in the assurances to financiers that the entity can meet financing, funding, and repayment project requirements. This will drive up project costs, perhaps blocking financing entirely, and will reduce the willingness of some to take advantage of elective payment,” APPA said.

For the elective-payment mechanism to be effective, final regulations should provide a timeline by which Treasury and the IRS intend to make elective payments, APPA said.

For example, this could include providing that elective payment will be made no later than 30 to 60 days after the later of (1) the date the applicable entity timely files its tax return electing to receive the applicable credit payment or (2) the due date (without extensions) for filing the return.

Additionally, under the Internal Revenue Code of 1986 and the Proposed Rule, an applicable entity may make an elective payment election with respect to any applicable credit.

Where elective payment was made available to certain existing credits (i.e., Code sections 45 and 45Q), elective payment is effective for facilities “placed in service after December 31, 2022.”

However, in an uncodified provision, the IRA provides that the elective payment provisions are effective “for taxable years beginning after Dec. 31, 2022.”

The Code provides latitude to taxpayers in determining their applicable taxable year, including calendar year, taxable year, and part year taxable years where needed.

 Neither the IRA, nor the Code as modified by the IRA, specifically defines “taxable year” for a governmental entity that is not otherwise required to file a return. The Code as amended by the IRA does provide that the due date for an elective payment election is generally the due date for the tax return the applicable entity would otherwise file.

However, section 6417 does provide that for a governmental entity for which no return is otherwise required the due date will be “such date as is determined appropriate by the Secretary.”

In response to Treasury’s request for comments, APPA on November 4, 2022, requested that governmental entities not otherwise required to file a return be allowed to seek elective payment on a rolling basis, akin to the process by which a governmental entity seeks reimbursement of federal excise taxes on a Form 8849, Claim for Refund of Excise Taxes.

The Proposed Rule would require governmental entities not otherwise required to file a return to make an elective payment election by filing a Form 990-T.

Service instructions for Form 990-T establish a deadline for filing the return14 and also establish a taxable year for those filing the return by requiring entities to adopt their accounting year as their taxable year.

“In effect, by adopting the Form 990-T as the mechanism by which a governmental entity not otherwise required to pay taxes may make an elective payment election, the Proposed Rule is also imposing a requirement that a governmental entity that is not otherwise required to file a return must adopt its accounting year as its taxable year for purposes of an elective payment election,” APPA said.

This decision creates a transitional issue where an entity (a) placed a credit property into service after December 31, 2022, but before June 14, 2023, when the Proposed Rule was published, and (b) operates on a fiscal year rather than a calendar year, it said.

Specifically, the problem occurs where the credit property was placed in service after December 31, 2022, but before the entity’s accounting year begins in 2023. As a result, while the credit property was placed in service after December 31, 2022, the Proposed Rule would have the effect of treating the credit property as having been placed in service in a tax year beginning before January 1, 2023.

“Had notice of such a decision been provided prior to January 1, 2023, this could arguably be a justified outcome.”

The IRS has an interest in administrability, including not having to change forms after the fact or to process high volumes of amended returns due to a change in law.

Likewise, with prior notice, an applicable entity would have had known to avoid placing a unit into service prior to the beginning of its newly mandated taxable year. However, this requirement was imposed after the fact and without notice, creating an unjust and unintended outcome.

APPA urged Treasury and the IRS to amend the Proposed Rule to provide transition relief to projects falling into the window of time described above for affected public power entities.

“Specifically, we would encourage Treasury to allow on a transitional basis, a part-year taxable year beginning on January 1, 2023, and ending at the usual end of an entity’s usual accounting year. The Code already accommodates such an approach.”

While it would create some additional administrative burden, this would apply only to governmental entities that are not otherwise required to file a return and so would not require consideration of any amended returns, APPA said.

“More importantly, though, this would provide horizontal equity to all governmental entities. The converse – punishing those that rushed to place energy property in service as intended by this historic policy change – would be unfair and contrary to congressional intent of encouraging rapid and robust use of elective payment.”

Alternatively, such an entity could be allowed to adopt a calendar year taxable year. “The usual concerns with such an approach causing conflict between an entity’s accounting books and tax books simply do not apply where the entity would not otherwise be required to file a return. And again, the Code is expansive, not restrictive, in its flexibility in adoption of taxable years, including a calendar year.”

Along with these topics, APPA also weighed in on a number of other elements of the proposed rule.

In related news, APPA Senior Government Relations Director John Godfrey testified on Aug. 21 at the U.S. Department of Treasury and Internal Revenue Service’s “Public Hearing on Proposed Regulations: Section 6417 Elective Payment of Applicable Credits.”

Among other things, he thanked the Treasury and the IRS for making clear that public power entities, including utility districts, joint action agencies and joint powers agencies, qualify for elective payment and that public power utilities in a co-ownership arrangement with other entities (cooperatives and for-profits) can still claim elective payment for their share of the project.

Godfrey also emphasized the need for certainty and streamlining of the elective payment process, including pre-filing registration of tax credit properties.

APPA Offers New Resources Related to Inflation Reduction Act, Infrastructure Law

June 27, 2023

by Paul Ciampoli
APPA News Director
June 27, 2023

The American Public Power Association is offering new resources to its member utilities related to implementation of the Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and other federal funding programs.

APPA members can now search for vendors that provide grant services in its Suppliers Guide. Checking the “grant services” filter along with any other criteria will return the suppliers that have identified themselves as providing services related to grant research, writing, advising, and consulting or grant management, accounting, and compliance services.

Corporate associate members who provide grant support to public power utilities can contact jmiller@publicpower.org to have the filter applied to their listing.

APPA members can also fill out the Federal Funding Assistance Request Form to directly request assistance from APPA corporate members for a specific project or program.

APPA has also refreshed the layout of its federal funding opportunities webpage to better highlight details on the latest funding announcements, key federal resources, and information on past and future federal funding opportunities.

APPA Welcomes Release of Elective Payment of Energy Tax Credit Guidance

June 14, 2023

by Paul Ciampoli
APPA News Director
June 14, 2023

The American Public Power Association on June 14 said that it is glad to see the release of the notice of proposed rulemaking for elective payments made possible by the Inflation Reduction Act.

The guidance was released by the Internal Revenue Service and the Treasury Department.

“We are still reviewing the proposed rules and expect to file comments but appreciate greatly the work that has been done to date to reach this point,” APPA said in a statement.

 Prior to the IRA, utilities serving nearly 30 percent of the nation’s customers were excluded from receiving energy incentives delivered through the tax code, meaning the vast majority of wind, solar, and other non-hydropower renewable generation is owned by merchant generators with roughly 60 percent of the value of associated tax credits going to banks, insurance companies, and other financial “owners.”

 “Elective payment of tax credits has the potential to be revolutionary for such investments, unlocking the ability for public power communities to own and control such projects, rather than going hat in hand to Wall Street hoping to find a willing investor. That means local decision-making driving local generation and jobs,” APPA said.

APPA noted that one caveat is that to claim energy tax credits through elective payment, the qualifying project must meet domestic content requirements.

Draft proposed domestic content regulations released by Treasury last month, though, appear quite challenging to meet from a substantive and logistical standpoint, APPA said. That means many entities wishing to claim direct payment may have to rely on waivers from the domestic content requirement for elective payments. 

As a result, APPA “eagerly awaits guidance on these waivers, which if drafted correctly could mean elective payment spurring local clean energy resource development.”

The proposed rules that will be formally published in the Federal Register on June 21, 2023, include:

• Pre-Filing Registration Requirements for Certain Tax Credit Elections
• Section 6417 Elective Payment of Applicable Credits;
• Section 6418 Transfer of Certain Credits

House Committee Passes Bill That Retains Direct Payment of Certain Energy Tax Credits

June 14, 2023

by Paul Ciampoli
APPA News Director
June 14, 2023

The House Committee on Ways and Means on June 13 passed legislation that retains direct payment of certain energy tax credits but repeals some aspects of the energy tax provisions of the Inflation Reduction Act.

H.R. 3938, the Build It in America Act, would repeal the Clean Energy Production Credit, the Clean Energy Investment Credit, the Previously-Owned Clean Vehicle Credit and the Commercial Clean Energy Vehicle Credit.

At this point, it is not clear when the measure might be considered by the House and Senate Finance Committee Chairman Ron Wyden (D-OR) has said the repeal of the energy tax provisions will not be considered in his committee.

Under the bill, in general, there would be no production tax credit for wind, solar, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy facilities construction of which begins after December 31, 202; and

Also, there would be no investment tax credit for solar energy property, fuel cell property, geothermal power property, fiber optic solar and electrochromic glass property, small wind property, waste energy recovery property, energy storage technology property, biogas property, microgrid controller property, combined heat and power system property placed in service after December 31, 2024.

The American Public Power Association strongly supports the use of refundable direct payment tax credits as a way of ensuring access to energy tax credits for projects owned by public power.

As a result, it is glad to see the decision to retain access to refundable direct payment tax credits for other tax credits, including the production tax credit, investment tax credit, carbon capture credit, the storage credit, and the advance nuclear tax credits.

 At the same time, the Association said that by repealing the new “tech-neutral” production and investment tax credits created under IRA and allowing the current ITC and PTC to expire after 2024, the bill would inject needless uncertainty into ongoing federal incentives for these investments, putting in jeopardy public power’s ability to reliably and affordably make the investments needed to transition to a cleaner generation resource mix.

House Bill Would Retain Direct Payment of Certain Energy Tax Credits

June 12, 2023

by Paul Ciampoli
APPA News Director
June 12, 2023

A plan released on June 9 by House Committee on Ways and Means Republicans to repeal some aspects of the energy tax provisions of the Inflation Reduction Act would retain direct payment of certain energy tax credits.

The American Public Power Association strongly supports the use of refundable direct payment tax credits as a way of ensuring access to energy tax credits for projects owned by public power.

The bill, H.R. 3938, the Build It in America Act, is scheduled to be considered by the committee on June 13.

The bill would repeal the Clean Energy Production Credit, the Clean Energy Investment Credit, the Previously-Owned Clean Vehicle Credit and the Commercial Clean Energy Vehicle Credit. It would also modify the Clean Vehicle Credit.

The bill retains access to refundable direct payment tax credits for other tax credits, including the production tax credit, investment tax credit, carbon capture credit, the storage credit, and the advance nuclear tax credits.

Treasury, IRS Release Additional Details on Applying for Energy Credit Program

June 5, 2023

by Paul Ciampoli
APPA News Director
June 5, 2023

The U.S. Department of the Treasury and the Internal Revenue Service on May 31 released guidance that provides additional information about the application process and technical guidance for the expanded Qualifying Advanced Energy Project Credit program under the Internal Revenue Code.

Treasury and IRS established the expanded program under section 48C of the Internal Revenue Code on February 13, 2023.

The guidance is available on the IRS website.

The Qualifying Advanced Energy Project Credit renews and expands a tax credit created in 2009 through the American Recovery and Reinvestment Act.

It provides incentives for clean energy manufacturing and recycling, industrial decarbonization, and critical materials processing, refining, and recycling.

A broad variety of projects are eligible to apply for an investment tax credit of up to 30 percent, ranging from manufacturing of fuel cells and components for geothermal electricity and hydropower, to producing carbon capture equipment or installing it at an industrial facility, to critical minerals processing.

The Inflation Reduction Act provided $10 billion in new funding for the Qualifying Advanced Energy Project Credit program. Congress required that at least $4 billion be reserved for projects in communities with closed coal mines or retired coal-fired power plants. The initial funding round will include $4 billion, with about $1.6 billion reserved for projects in these designated coal communities.

To apply, taxpayers will submit concept papers describing the proposed project. Taxpayers whose concept papers receive a favorable review will be encouraged to submit a full application.

Concept paper submissions will be accepted starting June 30, 2023, and the deadline for concept papers will be July 31, 2023.  Starting on May 31, taxpayers can access information and materials for preparing their concept papers.

More information for potential applicants, including a 48C mapping tool and an upcoming informational webinar, is available on the Department of Energy’s 48C webpage. 

Treasury and IRS also released a Notice of Proposed Rulemaking for the Low-Income Communities Bonus Credit program under Section 48(e) of the Internal Revenue Code, which was established earlier this year.

The NPRM proposes rules for the application process and technical guidance for this program, which provides up to a 20-percentage point boost to the Investment Tax Credit for up to 1.8 gigawatts annually of solar and wind energy projects (with maximum output of less than 5 megawatts) located in low-income communities or otherwise serving low-income populations.

The NPRM reflects recommendations from a broad array of industry and environmental justice stakeholders to evaluate applications on an expedited basis and provide applicants clarity as quickly as possible.

Treasury and IRS intend to release final guidance related to the 2023 program prior to applications opening later this year.

Bill Would Reinstate Ability of Local, State Governments to Issue Tax-Exempt Advance Refunding Bonds

May 15, 2023

by Paul Ciampoli
APPA News Director
May 15, 2023

Sens. Roger Wicker (R-MS) and Debbie Stabenow (D-MI) last week introduced the Local Infrastructure Act (S. 1453), legislation that would amend the federal tax code to restore state and local governments’ ability to issue tax-exempt advance refunding bonds.

The bill is intended to be identical to S. 479 introduced by the two senators in the 117th Congress.

Advance refunding has saved state and local governments billions of dollars over decades but has been unavailable to state and local governments since 2017.

Additionally, the Wicker-Stabenow bill differs in construction from, but is identical in intent to, H.R. 1837, the Investing in Our Communities Act, introduced in March by Reps. David Kustoff (R-TN) and Dutch Ruppersberger (D-MD).  

Advance refunding is an accounting practice that allows state and local governments to refinance outstanding municipal bonds to more favorable borrowing rates or conditions before the end of the initial bond term.

APPA Voices Appreciation for Treasury Department’s Proposed Domestic Content Rule

May 12, 2023

by Paul Ciampoli
APPA News Director
May 12, 2023

The American Public Power Association on May 12 said it appreciates the Treasury Department’s release of guidance on domestic content rules for energy tax credits as modified under the Inflation Reduction Act.

“APPA continues to review the guidance with a particular eye to ensuring that cost of compliance is not overly burdensome. However, we believe this is a step toward the clear and reliable rules that will be needed to ensure that the legislation works as intended while allowing projects to get underway,” it said.

APPA noted that the IRA was important to public power because, in addition to extending and expanding a variety of critical energy tax incentives, it created a refundable direct pay mechanism to ensure that all utilities can benefit from these incentives.

Without such a mechanism, public power utilities and electric cooperative utilities — which are non-profit, tax-exempt entities — would be effectively blocked from owning tax creditable energy projects.

These utilities collectively serve nearly 30 percent of U.S. customers, so allowing them to benefit from energy tax provisions for projects they own makes these tax incentives more effective, while also ensuring that no communities are left behind, APPA said.

The IRA also included provisions to incentivize the use of domestic content in these projects. These provisions are the focus of Treasury’s guidance.

Generally, any project meeting the domestic content requirements receives a bonus credit for a project that would otherwise qualify for an energy tax credit. Conversely, these domestic content requirements must be met for any project for which refundable direct payment is sought.

“As such, getting these rules right is important for projects relying on the bonus credit, but they are existential for projects relying on direct payment,” APPA said.

Since the IRA’s enactment, APPA has asked that implementing guidance be clear, simple, and certain. As with past guidance, Treasury’ domestic content guidance “provides a measure of certainty by allowing owners to rely on this guidance until otherwise modified by a notice of proposed rulemaking or final rules.”

Likewise, owners can begin to assess how and whether they will meet the domestic content requirements by including today guidance identifying and categorizing components common to wind, solar, and battery storage projects.

“These are steps in the right direction, which APPA appreciates.”

APPA said it will continue to review the guidance released on May 12 “and look forward to continuing to work with the Treasury Department, the Internal Revenue Service, and the Department of Energy to ensure that these provisions work as intended.”

Fitch Assigns A- Rating to Bonds issued by the Lower Colorado River Authority on behalf of Transmission Entity

May 8, 2023

by Paul Ciampoli
APPA News Director
May 8, 2023

Fitch Ratings has assigned an ‘A+’ rating to bonds issued by Texas-based Lower Colorado River Authority on behalf of the Lower Colorado River Authority Transmission Services Corp.

Specifically, Fitch assigned the A- rating to approximately $481.5 million transmission contract refunding revenue bonds, series 2023A.

Proceeds will be used to refinance approximately $62 million in outstanding series 2013A bonds, refinance approximately $420 million in commercial paper into long-term debt, fund a debt service reserve fund and pay costs of issuance.

In addition, Fitch affirmed the ‘A+’ rating on approximately $3.2 billion in outstanding transmission contract refunding revenue bonds.

The rating outlook is Stable.

LCRA is the largest public power wholesale provider in Texas and provides energy services in a 55-county service area. LCRA provides wholesale power to municipal electric utilities and electric distribution cooperatives in Texas. It also manages and distributes water supply and provides flood control along the lower Colorado River in Texas.

Fitch said that the ‘A+’ rating reflects the strong financial profile of the Lower Colorado River Authority Transmission Services Corp. in the context of its very low operating risk profile and the strength of its regulated revenue framework in the Electric Reliability Council of Texas market, in which it operates.

Transmission revenues are regulated by the Public Utility Commission of Texas and collected from all retail customers within ERCOT, Fitch noted. The rating agency said that the largest utilities contributing to the Lower Colorado River Authority Transmission Services Corp.’s transmission revenues have a collective midrange purchaser credit quality and primarily consist of the largest electric utilities operating within the state.

Leverage (measured by net adjusted debt to adjusted funds available for debt service) was below 9.0x over the last decade, despite large additional capex investments in new and existing transmission assets, primarily funded from new debt. The regulatory process in ERCOT allows capex additions to be included in the transmission tariff in a timely manner, allowing revenues to keep pace with the increased debt costs. The planned increase in capital spending at TSC over the next five years should be accompanied by supporting revenues and not result in a material dilution of the utility’s key financial ratios.

In addition, Fitch views the revenue consistency and low operating risk of transmission-only utilities as enabling these utilities to accommodate slightly higher leverage levels than utility peers with generation and retail electric business lines.

LCRA created the Lower Colorado River Authority Transmission Services Corp. as a nonprofit corporation for transmission operations after a 1999 state law changed how electric utilities manage and operate electric transmission facilities.

The law required utilities to separate electric generation and transmission operations as part of preparations for a deregulated retail electric market. The law also allowed LCRA to expand its transmission facilities and operations beyond its traditional Central Texas service area.

On Jan. 1, 2002, LCRA transferred ownership of its transmission facilities to the Lower Colorado River Authority Transmission Services Corp. to satisfy the state’s requirements.

Since its creation, the Lower Colorado River Authority Transmission Services Corp.  has invested more than $3.9 billion in transmission projects to meet the growing demand for electricity, improve reliability, connect new generating capacity, address congestion problems that affect the competitive market and help move renewable energy to the market.

Fitch Affirms Bond Ratings for CMEEC, Connecticut Transmission Municipal Electric Energy Cooperative

May 6, 2023

by Paul Ciampoli
APPA News Director
May 6, 2023

Fitch Ratings recently affirmed bond ratings for Connecticut Municipal Electric Energy Cooperative and Connecticut Transmission Municipal Electric Energy Cooperative at ‘AA-‘. The Rating Outlook is Stable.

Specifically, the rating agency affirmed the following ratings for Connecticut Municipal Electric Energy Cooperative: $11.4 million 2021 series A, transmission services revenue bonds; $19.3 million 2022 series A, power supply system revenue bonds; and Issuer Default Rating. Fitch also affirmed the AA- rating for Connecticut Transmission Municipal Electric Energy Cooperative’s $16.3 million 2021 series A, transmission system revenue bonds.

The Connecticut Transmission Municipal Electric Energy Cooperative was created by CMEEC in 2009. As a separate joint action agency, it acquired local transmission assets in order to provide transmission services required by CMEEC for its members and customers. It is governed by the same body as CMEEC. The management and staff of CMEEC operate Connecticut Transmission Municipal Electric Energy Cooperative and oversee its operations.

The ‘AA-‘ long-term bond ratings and IDR for CMEEC and Connecticut Transmission Municipal Electric Energy Cooperative “reflect very strong revenue defensibility, which is based on the long-term, all-requirements contracts and strong member credit quality that supports CMEEC’s consolidated revenue base, as well as CMEEC’s strong consolidated operating risk profile, and historically very low financial leverage,” Fitch said.

While operating income declined in fiscal 2022, resulting in an increase in leverage ratio for the year, Fitch noted that the weaker results stemmed from several non-recurring items including a restatement of the debt amortization associated with the refunded 2013 power supply bonds, a transmission revenue-true up credit for the year, and legal fees.

“Going forward, Fitch expects operating income and overall financial performance to return to pre-2022 levels, which should stabilize the leverage ratio at roughly 6.0x, a level supportive of the current rating.”

Operating costs are low, “although energy supply is concentrated in near-to-medium term market power purchases, subjecting CMEEC to variability in market pricing. In 2022, higher fuel costs and market energy prices led to a higher cost burden, but CMEEC’s comprehensive hedging policy helps mitigate this risk, and costs have decreased in 2023,” Fitch said.

Capital plans are limited to minor maintenance with no new debt requirements projected through 2027.