A group of 11 electric cooperatives across the nation have asked the Treasury Department to modify its regulations on clean renewable energy bonds, which they say increases their cost of borrowing and diminishes the value of the CREB program.

Tax-credit bonds provide the holder with an income tax credit in lieu of tax-exempt interest payments. But in separate but similar letters, the unrated co-ops complained that current statutory language and rules establish a double-A rate for determining the rates at which bondholders receive tax credits. This is a higher rate than the co-ops assume for these projects. While the co-ops are unrated, they typically assume their projects are single-A rated.

Because the ratings for the co-op projects do not rise to the level of the ratings used to establish the tax credit rate, banks and other institutions buying the bonds are either demanding higher interest rates on the CREBs from the co-ops, refusing to purchase the entire amount of bonds, or demanding additional collateral for the bonds.

"Given what we have recently observed with the program, we are concerned that the project economics will be eroded, diminishing the value of the CREB program and the ability of this program to promote renewable energy development as intended," the letters stated.

"When some bank or purchaser of the bond looks at what their security is, what they're chances are of getting the principle paid back, they may say, 'I'm not going to be able to give you the whole principle amount,' " said Linda Schakel, a partner at Ballard Spahr Andrews & Ingersoll LLP here.

The co-ops argue that because of the ratings discrepancy, CREBs are failing to live up to lawmakers' intended purpose for the program, that is, to provide "close to zero interest costs to the borrower." The statutory language of the law authorizing CREBs states that the bonds should be issued without an interest cost or a discount.

The co-ops are requesting the Treasury and Internal Revenue Service "remedy" the situation to better reflect the "true ratings" of electric coops and municipal utilities, which typically range from triple-B to single-A, but stopped short of providing a suggestion of how to do so.

Many of these co-ops are selling such relatively small amounts of CREBs, that having to pay additional costs or receiving less than the full allocation due to subpar credit could have a significant impact, Schakel said.

For example, the Alaska Village Electric Cooperative Inc., which wrote one of the letters, has asked the IRS for just over $5 million in CREBs for four wind power projects. The allocation requests often exceed what's need for project financing, and includes various costs associated with the bonds. But for one of the projects the co-op is requesting $310,000 of CREBs , the same amount it needs for the project, leaving no room for additional unexpected costs..

The Treasury and IRS previously had to tangle over issues surrounding how credit rates were determined for qualified zone academy bonds, another relatively recent tax-credit bond program.

The statutory language authorizing that program stated the credit rate would be determined by the applicable federal long-term rate for the month the bonds were issued. However, issuers complained that the market fluctuated far too much in a month for the rate to accurately reflect conditions.

As a result, the IRS modified the program requirements in 1999, establishing a daily qualified zone academy bond rate based on federal rates.

Nonetheless, Schakel said the federal government's insistence on setting the credit rate for tax-credit bonds remains a problem, with CREBs serving as the latest example.

"A consistent problem with tax credit bonds is that [the federal government doesn't] let the market set what the tax credit should be," she said. "They set it and somehow expect that it will be appropriate for all issuers."

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