WASHINGTON — A proposal for energy tax reform unveiled by Senate Finance Committee Chairman Max Baucus would not allow new clean renewable energy bonds and qualified energy conservation bonds to be issued after Dec. 31, 2016.
New CREBs and QECBs can be issued as traditional tax credit bonds or direct-pay bonds. New CREBs can be used to finance qualified renewable energy facilities owned by state and local governments, cooperative electric companies and public power utilities. Proceeds from the sale of QECBs can be used for a greater variety of energy conservation purposes, including public education campaigns about energy efficiency and expenditures relating to facilities or grants that support energy conservation research.
In 2009, the national volume cap for New CREBs was increased to $2.4 billion and the cap for QECBs was increased to $3.2 billion. The Internal Revenue Service is working on a project to issue guidance regarding new applications for the unused New CREB volume cap. Under current law, there is no date by which all of the volume of CREBs and QECBs has to be issued.
But the finance committee staff energy tax reform discussion draft released last month would prohibit New CREBs and QECBs from being issued after 2016. If the bonds are not issued, the allocation would be canceled and could not be reallocated by the Treasury Department to other projects.
Bond lawyers do not see the provisions as a major problem for the market.
"All this does is put a deadline on getting the bonds issued," said Charles Henck, a partner in Ballard Spahr's Washington office. "I don't view this as a big deal," he added.
Kim Betterton, a partner at Ballard Spahr in Baltimore and chair of the National Association of Bond Lawyers' tax law committee, noted that other types of bonds, such as private-activity bonds and qualified zone academy bonds, have volume caps that expire after a certain period of time.
Rich Moore, a partner in the San Francisco office of Orrick, Harrington & Sutcliffe, said that the provisions are "a minor blip" considering that the end date to issue the bonds would be close to a decade after the latest volume caps were released.
He also said that the New CREB and QECB programs "haven't really taken off," with fewer bonds issued than the amounts of the caps provided.
However, the bond provisions in the discussion draft are troubling for public power utilities and could be the type of change Congress might propose when tax reform efforts become more serious, experts in the market said.
The discussion draft consolidates most existing energy tax incentives into two new credits for clean electricity and clean transportation fuel that can be claimed by businesses.
John Godfrey, senior government relations representative for the American Public Power Association, said that a concern with the discussion draft is that "it shows the [finance] committee staff is interested in extending incentives for renewable energy for investor-owned utilities, but not for public-power utilities."
It's possible the staff decided to set the end date because they haven't determined a good way to incentivize clean renewable power generation by not-for-profit utilities through the tax code, he added.
Also, it appears that the new credits created by the energy tax reform proposal could not be used for some of the things that QECBs can be used for, said Bill Daly, director of governmental affairs for NABL.
"It doesn't really replace the functions that the bonds do perform," he said.
Daly said that when Congress really gets into tax reform, it will look at all the details about bonds and all the different categories and requirements and restrictions for them. Market participants will have to once again explain the rationale behind existing provisions.
The bond provisions in the discussion draft are "an example of what the process holds for bonds going forward as we move toward tax reform," Daly said.
The energy tax reform discussion draft is one of four staff proposals that Baucus, D-Mont., has released in the past several weeks. The others have been about international taxation, tax administration and cost recovery and tax accounting rules. Baucus is also expected to release a discussion draft about infrastructure tax reform that could include bond-related provisions.
Baucus won't be chairman of the Senate Finance Committee for much longer because he is Obama's pick to become U.S. Ambassador to China. Godfrey said that the discussion drafts are "very unlikely" to be enacted as written.
