The American Public Power Association is urging lawmakers to reconsider limits placed on new clean renewable energy bonds and to maintain tax exemption for municipal bonds.

In a document sent to the Senate Finance Committee’s energy, natural resources and infrastructure panel earlier this month, the APPA said tax incentives for public-power utilities have either ended or been substantially limited. At the same time Congress continues to provide incentives to produce energy from renewable sources on the investor-owned and non-utility generator sectors.

APPA represents more than 2,000 municipal and other state- and locally owned nonprofit electric utilities in the U.S.  It warned that, with federal discretionary aid to state and local governments set to fall to its lowest level since 1976, there appears to be little chance Congress will reinstate incentives for renewable energy investments.

“Tax preferences intended to encourage such investments could be enhanced and improved as part of tax reform, but if changes are made to the tax code, it appears they will be subtractive not additive,” the letter said. “At the very least, Congress should agree to do no harm by leaving intact the current-law exclusion for municipal bonds.”

The APPA said the tax exclusion allows public power utilities to finance nearly $13 billion in new investments, including renewable energy, annually. Over the past five years, $94 billion in munis have financed 1,136 power-related projects. Any changes to the tax exemption would increase the costs of financing energy investments and electric power.

The group also pointed out that Congress has a long-standing interest in providing financial incentives for investments in renewable energy production, the vast majority of which are directed at investor-owned utility and non-utility sectors. However, public power utilities can’t directly benefit from either the investment tax credit or the production tax credit, it said.

Congress created CREBs for public power and cooperative utility investments in renewable energy under the Energy Policy Act of 2005. Interest paid on a CREB is taxable, but the holder receives a tax credit equal to a percentage of interest paid on the bond that is set by the Treasury Department at a level intended to allow the bonds to be issued at the same interest rate as if they were tax-exempt.

In 2008, Congress created New CREBs, with a tax credit set at 70% of the level to allow the bonds to be issued as if they were tax-exempt. In March 2010, issuers were given the option of issuing these as direct-pay rather than tax-credit bonds so the issuer could get federal subsidy payments from the Treasury.

CREBS and New CREBs provide roughly $50 million in tax relief and direct payments to issuers annually, the APPA said.

“We believe these bonds can expand the pool of investors available to issuers, reducing borrowing costs,” the APPA said. “The rate of direct payment can also reduce borrowing costs and encourage the types of renewable power generation Congress is seeking. However, New CREBs have been hamstrung by a burdensome application process, a low cap on bond volume, and an allocation process that provided bond volume allocation of a fraction of the amounts being sought.”

The Treasury and Internal Revenue Service have said they plan to  issue guidance for a new process of allocating unused volume cap authority for New CREBs.

The APPA said that the potential for CREBs has not yet been tapped and that the program could be enhanced as proposed in the Clean Renewable Energy Investment Act of 2010.

If Congress is unwilling to expand the CREB program, the APPA said, it could also consider amending language in the production tax credit law to make the credit “tradable” by nonprofit power generators. About 17% of the nation’s non-federal electric power generation comes from nonprofit entities, so expanding the tax credit to these entities would directly advance the goal of energy security, the APPA said.

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