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APPA Weighs in on Energy Tax Provisions of Inflation Reduction Act

November 7, 2022

by Paul Ciampoli
APPA News Director
November 7, 2022

In comments filed with the Internal Revenue Service (IRS) and the Treasury Department on Nov. 4 related to the implementation of the Inflation Reduction Act, the American Public Power Association (APPA) weighed in on several key issues tied to the energy tax provisions of the IRA.

Tax-Exempt Bond Financing

A  number of IRA sections include a reduction in the respective credit for tax-exempt bond financing.

APPA addressed the question of what additional guidance would be helpful in determining how to calculate the reduction.

APPA said that further clarification is needed to help in determining how to calculate the reduction.

The first clarification relates to the allocation of bond proceeds to qualifying facility costs for purposes of investment tax credits (ITCs). 

Qualifying facility projects likely will be quite complicated and include elements that qualify as basis for an ITC and elements that will not, APPA said.

“We respectfully request that Treasury allow a project owner to use the same cost allocation rules for purposes of determining what aspects of a project are financed with tax-exempt debt, thereby applying them with regard to the calculation of any reduction under 26 USC 45(b)(3) or other comparable provisions applying to other energy tax credits.”

The second clarification relates to pledges of tax credit direct payments.

In financing a qualifying facility, a project owner may issue debt that pledges direct payment proceeds to the payment of principal and/or interest on that debt. Insofar as that debt meets the requirements of Internal Revenue Code (IRC) section 103, interest paid on that debt would be exempt from federal tax. In turn, IRC section 149(b) provides, in part, that the requirements of IRC section 103 are not met if the debt is “federally guaranteed.”

APPA believes that a decision to pledge direct payment credits to the payment of principal and/or interest should not constitute a federal guarantee. The reduction in credits for tax-exempt bond financing provided under IRC sections 45(b)(3), 48(a)(4), 45Y(g)(8), 48E(d)(2) “clearly indicate Congress’ intent to allow for the tax-exempt financing of tax-creditable facilities.”

The manner in which the owner of the facility and issuer of debt chooses to use the direct payment credit does not change this intent. “As such, Treasury and IRS should make clear that pledging direct payment proceeds to the payment of principal and/or interest on debt does not constitute a federal guarantee of that debt for purposes of IRC section 149,” APPA argued.

Investment Credit Facility

APPA also responded to the question of whether guidance is needed to determine whether an investment credit facility that elects to claim the Section 48 investment tax credit in lieu of the Section 45 production tax credit is subject to all of the requirements of Section 45, including the requirement that electricity generated by the investment credit facility be sold to an unrelated person.

“APPA strongly believes that IRC section 45 should not include a requirement that electricity generated by an investment credit facility be sold to an unrelated person, at least as far as state and local entities, including public power utilities, are concerned.”

One of the key purposes of making tax credits available by direct payment to state and local entities is to encourage ownership of such facilities, APPA said.

“Direct ownership will allow more of the value of these tax credits to be used to reduce project costs – and so result in lower rates to consumers – or used to make further grid investments. Both would be helpful in meeting the IRA’s clean energy and climate goals,” APPA said.

“Direct ownership also means local jobs, for local generation, under local control. One role of these facilities will be to power local facilities, such as town halls, police departments, fire departments, convention centers, traffic lights, rapid transit, and the like.”

Requiring that power be sold to an unrelated person for purposes of an ITC would preclude a governmental entity from owning qualifying facilities, and thus require them to rely on power purchase agreements to serve its own electric power needs, APPA said.

“Likewise, one of the IRA’s goals is to promote energy security by encouraging entities to pair generation with storage and the appropriate switching equipment to create renewably powered microgrids. Each of these investments is encouraged through tax credits under the IRA, and the concept of independent and energy secure microgrids occurred throughout the development of this legislation.”

However, if an unrelated party rule were imposed and if a municipality wanted to create such a microgrid to service a related governmental entity, it would be required to contract with an outside contractor to own these facilities to qualify for these tax credits. In other words, a municipality would have to privatize such a microgrid for the related grid, generation, and storage to qualify for a tax credit, APPA said.

“This is a perverse outcome that would be contrary to the fundamental purpose of the underlying statute and to the purpose of the direct pay provisions.” 

Congress “had years in which to amend draft legislation to extend the PTC’s unrelated party rule to the ITC, and yet there is no indication Congress ever intended to do so. APPA would strongly urge Treasury and IRS not to extend the unrelated party rules to the ITC.” 

Nuclear Power Production Credit

APPA also addressed a question related to the IRA’s addition of a zero-emission nuclear power production credit.

Section 45U(a)(2) reduces the amount of the Section 45U credit by a “reduction amount” that is calculated, in part, based on the gross receipts from any electricity produced by the facility. Section 45U(b)(2)(B) provides that gross receipts generally include any amount received by a qualified facility that are from a zero-emission credit program unless an exclusion applies.

APPA responded to the question of whether guidance is needed to clarify the meaning of the term “gross receipts,” especially as it applies to taxpayers receiving revenue through cost-of-service regulation or regulated contracts and who do not sell electricity in a manner attributable to individual nuclear reactors such as through sales into organized electricity markets or via power purchase agreements to third parties.

“Any definition of gross receipts should apply equally across entities claiming the new zero-emission nuclear power production credit, regardless of the ownership of such entities,” APPA said.

For example, if taxable entities are allowed to deduct depreciation and other cost against revenue for purposes of calculating gross receipts, tax-exempt entities should be treated the same for purposes of calculating the new credit, APPA said.

“Failing to do this would mean that owners in similar circumstances, or even co-owners of the same facility, could qualify for differing levels of credits or even have one owner qualifying for a credit and another owner qualifying for no credit at all. This would be inequitable and would also work against the purpose of the provision, which is to encourage the continued operation of these facilities,” APPA argued.

Along with these topics, APPA also weighed in on a number of other areas related to the IRA.

In Roundtable with Treasury Secretary Yellen, APPA’s Ditto Asks to Keep IRA Guidance Simple and Certain

October 31, 2022

by Paul Ciampoli
APPA News Director
October 31, 2022

Guidance implementing the energy tax provisions of the Inflation Reduction Act (IRA) should be simple and certain, American Public Power Association (APPA) President and CEO Joy Ditto told Treasury Secretary Janet Yellen and White House Senior Advisor John Podesta.

Ditto’s remarks came as she, other key stakeholders, and Biden Administration officials participated in an Oct. 26 roundtable on clean power generation and the IRA.

In a Statement for the Record for the event, Ditto said APPA has worked for years with other stakeholders to make federal energy investment incentives available to all market participants, and strongly supported the direct pay tax credit provisions in the IRA.

“Now, we look forward to working with the Administration and Congress to ensure that IRA reaches its full potential in implementation,” she said in the Statement for the Record.

Access to energy tax credits “will provide local jobs, under local control, to serve local communities. It also means that all electric power utilities, not just those serving 70 percent of retail customers, can participate in the clean energy transition. Enactment of the IRA was the first step toward realizing that dream. But now comes the hard part, implementing the law in a way that follows the letter of the law while meeting its policy goals,” wrote Ditto.

When it comes to IRA-related guidance, Ditto said that simplicity is critical in ensuring that transactions “are not so beleaguered with paperwork and the need for bespoke legal guidance as to become uneconomic.”

By way of example, she noted that one of APPA’s members that serves roughly 10,000 homes and businesses was quoted a $1,300 per hour rate for an attorney with tax and energy project expertise. “Our members will also have to retain counsel to navigate domestic content rules or forgo receiving direct payments altogether. They may also need and want to secure access to increased and bonus credits for meeting labor requirements or serving low income and/or energy communities.” 

 APPA understands that Congress had specific policy goals in mind “when it drafted each of these provisions. However, it will do no good if a project never gets off the ground,” Ditto said.

“This is particularly important in the context of domestic content rules. While meeting these requirements provides a 10 percent bonus for others, for public power utilities, rural electric cooperatives, and other tax-exempt entities, it is an existential test of whether they qualify for direct payment.”

Similarly, more than two-thirds of public power utilities have been in operation since World War II, and more than half have been in operation for a century or longer. “It is in our genetics to provide reliable and affordable power to our customers. We do not serve the community; we are the community. As a result, our members will not undertake these transactions without certainty as to the amount and timing of any tax credits that might accrue,” Ditto said. 

 With the goals of simplicity and certainty in mind, APPA is seeking clarity in the following areas:

APPA also intends to submit formal comments with the Treasury Department on the implementation of the IRA this week. These comments come in response to an October 5, 2022, notice requesting comments on six areas of IRA implantation including: energy generation incentives; elective payment of energy tax credits; and labor and domestic content requirements for those credits. Treasury is expected issue further notices for additional comments throughout the remainder of the year.

Groups Voice Opposition to Data Reporting Requirements for State, Local Borrowers

October 1, 2022

by Paul Ciampoli
APPA News Director
October 1, 2022

The American Public Power Association (APPA) has joined with 17 other members of the Public Finance Network in writing Senate leaders in opposition to data reporting requirements for state and local borrowers included in the Financial Data Transparency Act of 2022.

The Public Finance Network consists of state and local governments and other tax-exempt bond issuers, borrowers and municipal market professionals.

The bill would require the Municipal Securities Rulemaking Board (MSRB) to require state and local governments to report financial information using uniform reporting categories, or “data standards,” which may require costly updates to financial systems or extensive workarounds.

The changes would take effect no later than two years after final rules implementing the change are promulgated.

The concern is that the provisions of the Financial Data Transparency Act of 2022 (S. 4295) were added as an amendment to H.R. 7900, the National Defense Authorization Act for Fiscal Year 2023 (NDAA). The NDAA passed the House in July, and a companion bill (S. 4534) has passed the Senate Armed Services Committee.

State and local governments “do not oppose transparency and accessibility of information, and in fact, significant financial transparency standards are already in place,” the Sept. 29 letter noted.

“Most issuers of municipal securities (e.g., entities represented by the undersigned groups) adhere to governmental reporting standards established by the Governmental Accounting Standards Board (GASB), while others follow standards as determined under state law. In whole, issuers of municipal securities exhibit transparency to stakeholders through very established and standardized means.”

APPA and the other groups voiced concern about the impact of the Financial Data Transparency Act’s Section 203 on state, county, municipal, public utilities, hospital and education entities required to submit financial information to the MSRB for several reasons.

“Among others, a primary concern is that this provision would result in an unfunded mandate on state and local governments due to the increased costs to ensure systems are able to comply with future standards,” the letter said.

“Further, this provision represents a substantial federal overreach into the content and structure of issuer disclosures, and more broadly the accounting and reporting principles of government entities, contrary to the principles of federalism,” the groups argued.

Also, Section 203 “could create more confusion and ultimately reduce transparency by forcing vastly different kinds of governmental entities to report using a rigidly standardized schema or taxonomy.”

TVA Prices $500 Million Of New 30-Year Bonds

September 9, 2022

by Paul Ciampoli
APPA News Director
September 9, 2022

The Tennessee Valley Authority (TVA) recently priced $500 million of new 30-year maturity global power bonds, with an interest rate of 4.25 percent.

The offering marked TVA’s first 30-year bond since 2012 and the 4.25 percent rate is tied as the second lowest ever for a TVA bond of 30 years or longer in maturity. 

Despite an increase in interest rates in the first half of the year, long-term rates remain at historically low levels, creating an opportunity for TVA to secure long-term funding at attractive levels, TVA noted.

“We were pleased to see a window of stability develop in recent weeks, and an opportunity for TVA to take advantage of still historically low long-term rates,” said TVA’s Treasurer and Chief Risk Officer Tammy Wilson. “With one of the nation’s largest electric power systems, TVA is a natural issuer of longer-maturity bonds, and the success of this transaction shows the confidence investors have in TVA and the strength of the public power model.”

Strong demand for high quality investments of longer duration contributed to the success of the offering, TVA said. The bonds drew interest from a variety of investors including asset managers, pension funds, and insurance companies, among others. 

“The new 30-year bond fits well in TVA’s debt profile, which has a low number of bonds maturing in the early 2050s.  TVA debt levels remain at the lowest levels in over 30 years, and the new bonds will help TVA maintain stable interest costs for decades to come,” added Wilson.

Bank of America, Morgan Stanley, RBC Capital Markets, and TD Securities served as joint book-running managers for the transaction. The proceeds of the bonds will be used to refinance existing debt and for general power system purposes.

The new bonds will mature on September 15, 2052 and are not subject to redemption prior to maturity. Interest will be paid semi-annually each March 15 and September 15. Application has been made to list the bonds on the New York Stock Exchange.

TVA Board Holds Base Rates Steady, Increases Customer Credits for FY23

In other recent news, TVA’s Board of Directors on Aug. 31 maintained a stable course for wholesale base electric rates in fiscal year 2023, consistent with long-range financial plans to keep base rates flat through the end of the decade.

Over the past ten years, TVA’s effective wholesale power rate has maintained an average of about 7 cents per kilowatt-hour, giving families needed relief from the pandemic, and record inflation and fuel prices, TVA said.

In addition, due to strong operational and financial performance, the Board increased a previously approved Pandemic Recovery Credit back to 2.5 percent for all customers, providing about $230 million.

Fitch Affirms Southern Minnesota Municipal Power Agency’s Bond Ratings

July 16, 2022

by Paul Ciampoli
APPA News Director
July 16, 2022

Fitch Ratings affirmed its ratings on Southern Minnesota Municipal Power Agency (SMMPA) power supply system revenue bonds. The rating outlook is Stable.

Fitch affirmed the ratings on approximately $520 million power supply system revenue bonds at “AA-“ and an Issuer Default Rating (IDR) at “AA-.”

The ‘AA-‘ rating and IDR “reflects the agency’s very strong revenue defensibility, which is supported by the intermediate- and long-term wholesale customer contracts and the very strong credit quality of the largest purchasers, strong operating risk profile and trend of stable financial results with very low financial leverage,” Fitch said.

The agency’s “consistently low operating cost burden and diversifying portfolio of mainly owned-generation assets drive its strong operating risk profile.”

Fitch said SMMPA’s resource mix is diverse and includes ownership interest in a large baseload coal plant, Sherbourne County Generating Unit 3 (Sherco 3), which is set to be retired in 2030. “The cost burden is expected to rise in 2022 with higher fuel-related costs and higher MISO market pricing, but the cost burden should remain low,” the rating agency said.

The future retirement of Sherco 3 is expected to coincide with the expiration of the power supply contracts of its two largest members, resulting in a re-balancing of resources with expected future customer load, and no meaningful change in SMMPA’s operating profile, it said.

SMMPA’s leverage ratio, as measured by net adjusted debt to adjusted funds available for debt service, has been on a steady decline over the past five years. In fiscal 2021, the leverage ratio declined to 4.6x, reflecting a trend of declining debt, stable financial margins, and ample liquidity.

The agency will amortize $320 million in existing debt through 2026, allowing leverage to remain very low even through a Fitch’s stress scenario.

SMMPA provides wholesale power supply to 18 participating cities, all of which own and operate municipal electric utility systems.

The agency’s load center is concentrated in the southern portion of the state, with the largest member, Rochester Public Utilities representing roughly 40% of energy sales.

Collectively, the participating systems serve approximately 129,000 largely residential and commercial customers and a total population of over 250,000. Power is supplied to the members primarily through a mix of agency and member-owned generation resources and a growing renewable portfolio.

Groups Urge Congress To Prevent The Potential Elimination Of Bond Payments

June 27, 2022

by Paul Ciampoli
APPA News Director
June 27, 2022

The American Public Power Association (APPA) and 13 other members of the Public Finance Network recently urged leaders of the House and Senate Budget Committees to prevent the potential elimination of direct payment bond payments starting in 2023.

The June 21 letter stems from concern that unless Congress acts to waive the Pay As You Go Act (PAYGO) in relation to the American Rescue Plan Act (ARPA) enacted last year, payments to issuers of direct pay bonds will be eliminated in 2023 through 2026.

At the end of 2021, Congress moved to prevent PAYGO from applying to ARPA in 2022. However, Congress failed to provide a permanent fix to the problem. Based on Office of Management and Budget data, unless Congress acts, direct payment bond payments will be cut by $14 billion — roughly eight percent of which would fall on public power issuers.

“As we collectively worked to emerge from the Great Recession over a decade ago, state and local governments utilized options made available to stimulate the economy and undertook several hundred billion dollars in critical, long-term infrastructure obligations through the issuance of direct subsidy bonds,” the letter noted.

At the time, the understanding was that federal payments related to these bonds would not be subject to the appropriation process and would not be subject to sequestration. “To our dismay, the federal government appears on the brink of completely reneging on this deal by eliminating $14 billion in payments to state and local entities,” APPA and the other groups said.

Specifically, unless new legislation is enacted that will waive PAYGO) as it relates to the budgetary effects of ARPA, thousands of state and local entities will not receive any Build America Bond (BAB), Qualified School Construction Bonds (QSCB), Qualified Zone Academy Bonds (QZAB), New Clean Renewable Energy Bonds (New CREB), or Qualified Energy Conservation Bonds (QECB) payments otherwise guaranteed to them under the law. 

The letter notes that entities that issued these bonds — generally in 2009, 2010, and 2011 — did so in partnership with the federal government.

Payments to issuers of the special purpose bonds “are already laboring under a steady stream of cuts triggered by the Budget Control Act of 2011 due to the failure of the Joint Select Committee on Deficit Reduction,” APPA and the other groups said.

These “Joint Committee Reductions” began in 2013 and are now expected to continue through 2031. Joint Select Committee reductions will have cut payments by nearly $3 billion by the end of Fiscal Year 2022 and will cut payments by another $1.6 billion by the end of Fiscal Year 2031.

“Allowing Joint Committee Reductions to continue is a travesty,” the groups argued. Allowing PAYGO to eliminate these payments entirely “would be catastrophic: to communities that stepped up during the Great Recession to try to create jobs when job creation was desperately needed; to students in schools that are already underserved; and to renters and homeowners that are already struggling to pay utilities, taxes, and other bills.”

As a result, the groups said that they hope that Congress “will overcome its differences and fix this problem for all Americans.”

Those also signing the letter include, among others, the Large Public Power Council, American Public Gas Association, U.S. Conference of Mayors, National League of Cities, National Association of Counties, and Government Finance Officers Association.

Fitch Affirms Connecticut Municipal Electric Energy Cooperative, Transmission Entity Ratings

May 23, 2022

by Paul Ciampoli
APPA News Director
May 23, 2022

Fitch Ratings has affirmed ratings for Connecticut Municipal Electric Energy Cooperative (CMEEC) and Connecticut Transmission Municipal Electric Energy Cooperative at “AA-.” The rating agency cited, among other things, ample liquidity, very low leverage and a strong operating risk profile.

The Rating Outlook is Stable.

Fitch affirmed the following ratings at AA- for CMEEC:

It also affirmed the AA- rating for $16.3 million 2021 series A, transmission system revenue bonds for Connecticut Transmission Municipal Electric Energy Cooperative.

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.

Fitch said that the ‘AA-‘ long-term bond ratings and IDR for CMEEC and the Connecticut Transmission Municipal Electric Energy Cooperative “reflect very strong revenue defensibility, a stable consolidated financial profile, with ample liquidity and very low leverage, and a strong operating risk profile.” The rating “also incorporates limited capital spending needs and a declining debt burden, which should allow leverage ratios to remain very low,” Fitch said.

Revenue defensibility is based on the long-term, all-requirements contracts and strong member credit quality that supports CMEEC’s revenue base, Fitch said.

“Operating costs are low, although energy supply is concentrated in near-to-medium term market power purchases, subjecting CMEEC to potential variability in market pricing. A comprehensive hedging policy helps mitigate this risk, although costs are still expected to rise. Capital plans are limited to minor maintenance with no new debt requirements projected through 2026,” it said.

“We are pleased by this rating affirmation,” said CMEEC Chief Executive Officer Dave Meisinger. “We believe Fitch recognized our strong overall financial profile and metrics, combined with appropriate long-term decisions such as the recent divestiture of our largest generation asset and a renewed focus on mapping out a path toward cost-effective reduction of our carbon footprint.”

Meisinger concluded that, “our stable ratings outlook helps ensure that CMEEC and its member municipal electric utilities will have competitive access to financial markets, which further positions the CMEEC members to maintain their reasonable retail electric rates.”

CMEEC’s member municipal electric utilities include Norwich Public Utilities, Jewett City Department of Public Utilities, Groton Utilities, Bozrah Light & Power, Third Taxing District of the City of Norwalk and South Norwalk Electric and Water.

Fitch Affirms AA- Rating On Bonds Issued To Finance First Phase Of MMWEC-Operated Wind Farm

May 14, 2022

by Paul Ciampoli
APPA News Director
May 14, 2022

Fitch Ratings has affirmed the AA- rating on bonds issued by the Berkshire Wind Power Cooperative Corporation (BWPCC) to finance the 15-megawatt Phase 1 portion of the Berkshire Wind Power Project. 

The 19.6-megawatt project is located atop Brodie Mountain in the towns of Hancock and Lanesborough, Mass.

The AA- rating applies to $34.4 million in wind project revenue Green Bonds, series 2.  Green bonds are earmarked to be used exclusively for climate and environmental projects. 

Fitch has also issued a rating outlook of stable.  Fitch originally upgraded the rating and rating outlook to their current levels in 2019. 

The AA- rating largely reflects the credit quality of the utilities participating in Phase 1 of the project.  Phase 1 participating Massachusetts municipal light plants (MLPs) include Ashburnham, Boylston, Groton, Holden, Hull, Ipswich, Marblehead, Paxton, Peabody, Shrewsbury, Sterling, Templeton, Wakefield and West Boylston. 

Payments from the project participants are made pursuant to identical take-or-pay power purchase agreements with the Massachusetts Municipal Wholesale Electric Company (MMWEC), the state’s designated joint action agency for municipal utilities. 

MMWEC is a member of the BWPCC and operates the wind farm. 

In its rating report, Fitch identified several key drivers, including a strong contractual framework.  The assessment also factors in the terms of the contract that provide for unconditional payments from the 14 project participants. 

The power purchase agreements require MMWEC to sell, and each participant to purchase, the project capacity and energy based on their allocated share of the project. 

Payments are imposed on a take-or-pay basis, whether or not the wind project is operating.  Each of the participants is required to maintain rates sufficient to repay their obligations under the respective agreements. 

Fitch cited very strong rate flexibility in its rating report, as rates charged by each of the project participants are determined by each utility’s governing board.  Autonomous ratemaking authority and retail rates that are highly affordable and well below the state average all led to this positive rating. 

MMWEC is a non-profit, public corporation and political subdivision of the Commonwealth of Massachusetts, created by an Act of the General Assembly in 1975 and authorized to issue debt to finance a wide range of energy facilities. 

MMWEC provides a variety of power supply, financial, risk management and other services to the state’s consumer-owned municipal utilities.

Public Power Groups Weigh In On Bond Private Use Rules

May 11, 2022

by Paul Ciampoli
APPA News Director
May 11, 2022

The American Public Power Association (APPA) and the Large Public Power Council (LPPC) recently sent a letter to Tom West, Deputy Assistant Secretary for Tax Policy at the U.S. Treasury Department, related to bond private use rules.

The May 3 letter follows a meeting in April with West, his staff, and personnel from the Internal Revenue Service to discuss the issue. The letter was signed by LPPC President John Di Stasio and APPA President and CEO Joy Ditto.

It has been over 30 years since the enactment of private use rules for public power in the Tax Reform Act of 1986 and nearly 20 years since the related regulations in Section 141 for output facilities were updated, the letter noted.

“The changes to the regulations that were made in 2002 were, in part, made in response to significant changes that had occurred in the electric industry. Given the changes that have occurred in the electric industry since 2002, the private use rules need to be modified again,” wrote Ditto and Di Stasio.

APPA and LPPC are focused on the two most significant issues affecting public power: the impact of output contracts with large retail customers and the issues created by the section 141(d) “Rostenkowski Rule” on the ability of the members of the groups to use tax-exempt bonds to acquire existing electric resources needed to serve their customers.    

Contracts With Retail Customers

A growing trend in the industry is that large retail electric customers — both existing customers and new customers — are seeking to negotiate customized contracts for electric service with public power and other utilities. Private use rules limit the ability of public power utilities to enter into customized contracts and put them at the risk of losing these important customers.

“These customers can be extremely important to their communities and the inability provide them with satisfactory electric service arrangements could be devastating for both the utility and the local community. At the same time, if these customers are not obligated to remain as customers for a significant enough period, the utility and its other customers are at risk that they will bear the cost of the improvements required to serve these customers if they go out of business or relocate,” the letter said.

Under current regulations, the only approach that can be used by public power utilities with large, retail customers is to enter into contracts with terms of not more than three years, which is not sufficient for the public power utility to ensure that its other customers will end up bearing the cost of any necessary improvements and often does not provide a long enough contract term for the customer.

“Oddly, the regulations contain a more generous rule for contracts with wholesale customers that permits contracts, subject to certain conditions, with terms of up to five years,” Ditto and Di Stasio said.

APPA and LPPC proposed the adoption of an exception to the private use rules for contracts with retail customers that tracks the requirements for short-term contracts in section 1.141-7(f)(3) and that would apply if:      

“We believe that an expansion of the short-term use rule as described above as not giving rise to private use is consistent with both the underlying regulatory framework of the output regulations (i.e., such a contract does not shift the ‘benefits and burdens of ownership’ to the taker), and Treasury’s economic policy of accommodating certain industry changes to foster competition,” Ditto and Di Stasio said.

Acquiring Existing Output Facilities

The letter notes that Section 141(d) (the “Rostenkowski Rule”) was enacted in 1987 and regulatory guidance on this provision has yet to be provided.

Although designed to prevent tax-exempt bonds from being used to “municipalize” privately owned facilities, the rule contains an exception designed to permit the acquisition of existing facilities by a public power utility to serve its existing customers — the “Existing Service Area Exception.”

“This exception is very difficult and burdensome for utilities to apply: it requires that the utility use virtually all of the electricity from the acquired facility to serve customers in its historic service area throughout the term of the bond issue and monitor compliance with this rule,” wrote Ditto and Di Stasio.

The Existing Service Area Exception was meant to permit public power utilities to use tax-exempt bonds to acquire electric facilities that were to be used to serve the existing customers of the acquiring utility.

The requirement that 95 percent of the electricity from the acquired facility be used to serve those existing customers subject only to the ability to make non-service area sales with terms of up to 30 days has significantly limited the use of this exception and prevented public power utilities from using tax-exempt bonds to acquire facilities despite the underlying rationale for the Existing Service Area Exception.

The Existing Service Area Exception presents practical and economic issues that make it difficult and costly to comply with, the letter said.

The public power groups said that many public power utilities that have short-term excess energy to sell make those sales on a “system” basis, meaning that the electricity being sold does not come from any particular generating unit. 

As a result, even with on-going monitoring, it is difficult to prevent the electricity from a facility that is subject to 141(d) from being sold outside the utility’s service area without restricting the entire system. 

A second, related difficulty is that in making system sales, all of a utility’s electricity derived from other bond-financed generating facilities can be sold for up to three years, but the facility that is subject to section 141(d) prevents the utility from making system sales of more than 30 days because of the need to comply with section 141(d).  

The existing three-year short-term sale exception that applies for other output sales for purposes of section 141 was included in the regulations so that private use rules did not impact the typical, day-to-day functioning of public power utilities. 

This private use exception is consistent with the “benefits and burdens” framework of the output regulations.  

As an example of the problem with a 30-day exception under Section 141(d), short-term sales of electricity are often made on a seasonal basis to reflect situations, such as a utility that has its peak load during warm months may have excess electricity in the winter.

Ditto and Di Stasio suggested two possible approaches that can be used to address these issues. The first is to simply provide that the existing short-term sale exception to private use of output facilities applies to section 141(d).

Alternatively, a safe harbor could be adopted that permits public power utilities to base compliance on either reasonable expectations or based on historical use of electric generation to satisfy customers in their historic service areas, the groups said.

This approach would be modeled after section 148(b)(4)(B), related to bonds issued to finance natural gas prepayments.

“The rule based on historical use has proven to be very workable. Under this approach, a new safe harbor would permit public power utilities to use their historic sales of electricity in their service areas to determine compliance with the existing service area exception of the Rostenkowski Rule,” the letter said.

NYPA Sells More Than $608 Million In Green Bonds To Support Grid Expansion

April 29, 2022

by Paul Ciampoli
APPA News Director
April 29, 2022

The New York Power Authority (NYPA) has sold more than $608 million in green bonds to finance capital expenditures related to its development of electricity transmission in New York State.

NYPA said that the bond sale supports its VISION2030 strategy to expand the transmission of renewable energy throughout New York and the creation of the future digital grid while meeting the objectives of the state’s Climate Leadership and Community Protection Act and Governor Kathleen Hochul’s State of the State initiative to issue green bonds to benefit the transformation of the state’s electric grid.

The green bonds, which are specifically earmarked for the development of transmission assets, will accelerate NYPA’s progress toward the state’s clean energy and climate goals, including the mandate to obtain 70% of the state’s electricity from renewable sources, as identified in the Climate Act.

The bond sale marks the first time in NYPA history that it has issued a 100% green bond to only support revenues derived from specific projects and not NYPA itself.

Sustainalytics, a company that rates the sustainability of companies based on their environmental, social and corporate governance performance, has also provided a second party opinion on the green bond designation.

 The increase in capital will directly support the development of two ongoing large transmission projects:

The bond sale included approximately $600 million of tax-exempt Series 2022A Bonds and was completed on April 14. The interest rate that NYPA priced is 3.62 percent, which is the lowest rate of any bond ever issued by NYPA.

As a result of the NYPA’s retail marketing efforts, 50 percent — more than $300 million — of the bonds were sold to retail investors. The rating on the bonds was affirmed in March with an A1 from Moody’s, AA from S&P and AA- from Fitch.

NYPA owns approximately one-third percent of the high voltage transmission lines in the state.