Treasury Offers Guidance to Help Jump-Start QECB Deals

WASHINGTON — Attempting to jump-start issuance of taxable qualified energy conservation bonds, the Treasury Department issued guidance Monday on what type of projects qualify for the financing.

The Treasury sought to clarify what constitutes a “green community program” and how QECB issuers can calculate a 20% energy savings.

Analysts expressed skepticism that the guidelines would do much to popularize the program with issuers and investors.

“It is always better to have improvements in clarification of how bond programs work, but this does not appear likely to affect the supply, the demand, or the efficiency of the market significantly,” said Chris Mier, managing director at Loop Capital.

The 12-page guidance, in the form of a question-and-answer model, comes months after the administration and lawmakers highlighted several challenges to the program and requested clarification to encourage more use.

A QECB is taxable security and can be issued either as a bond for which an investor gets a tax credit or as a direct-pay bond in which the issuer would receive subsidy payments from the federal government equal to 70% of interest costs.

A Treasury official said the guidance addresses the definition of a “green community program” and how to measure whether the financing would result in a reduction of energy consumption in publicly-owned buildings by at least 20%.

It does not, however, address how resources are allocated. Current law says states with local government populations greater than 100,000 must divide up the total resources into many pieces. Some market experts said this has been a significant challenge to the program.

To clarify the 20% energy savings rules, the Treasury Department said issuers may measure the reduction by using measurement units such as single publicly-owned building, one or more building system components of one or more publicly-owned buildings, or a combination.

A building system includes a system that serves one of the following functions: heating, ventilation and air conditioning, a hot water system, a building envelope, or items plugged into electric outlets, the guidance said.

The guidance was “an effort to provide user friendly ways to meet the criteria for the 20% energy savings on publicly-owned buildings,” said John Cross 3d, the Treasury Department’s associate tax legislative counsel.

For a green community program, eligible purposes include promotion of energy savings through retrofitting initiatives for heating, cooling, lighting, water-savings, storm-water reducing or other efficiency measures. The second requirement for a green community program must involve property that is available for general public use, the rules said.

A good example of implementation of a green community program with proceeds from QECBs would be if a city replaced existing public street lights with more energy-efficient lights within a three-year period, according to Treasury.

The QECB program was designed to help state and local governments provide low-interest financing for renewable energy and energy-efficient projects. However, of the $3.2 billion total authorized by Congress in 2008 and 2009  only about $670 million has been spent as of May, according to the Energy Programs Consortium, which represents state and local groups and environmental advocates.

The total allocation was divided among issuers based on population. The authority to issue these bonds does not sunset under current federal law.

“This at least gives you some clarification on how they are thinking about these rules,” said Linda Schakel, partner with Ballard Spahr LLP. “It definitely puts everyone in a better position to access the market.”

Prior to the guidance, an issuer had to take the risk that their anaylsis might be wrong and a bond holder might be concerned about that risk and that they would lose their credit, Schakel said.

John Hallacy, head of municipal research at Bank of America Merrill Lynch, said investors might buy QECBs to diversify their portfolios.


(1) Comment


Comments (1)
So, the Gov't sold some of there cheese at a 70% discount and only a few showed up?
Posted by christopher1.hall@bmo.com | Tuesday, June 26 2012 at 7:06AM ET
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