Update on Recent Energy and Resource Conservation Tax Credit Bond Proposals

On Thursday, December 6, 2007, the House passed a bill entitled the Clean Renewable Energy and Conservation Tax Act of 2007 (“CRECTA”) containing several new categories of tax credit bonds. On Friday, December 7, 2007, the Senate denied a motion that would have allowed CRECTA to proceed to a Senate vote. By the time the Senate acted, the White House already had announced its opposition to CRECTA for several reasons articulated in a policy statement.

Nonetheless, CRECTA is significant because it continues a recent trend of proposing new tax credit bond programs that would accompany other initiatives and tax incentives aimed at renewable energy production and energy conservation.

Picking up on the Clean Renewable Energy Bond program created in the Energy Policy Act of 2005 and bills introduced since its passage, CRECTA proposed to create a new category of clean renewable energy bonds (“New CREBs”). Under CRECTA, New CREBs are intended to finance qualified renewable energy facilities that (a) qualify under Section 45 (other than refined coal or Indian coal facilities and without regard to placed-in-service dates), and (b) are owned by public power providers (“PPPs”), governmental bodies or cooperative electric companies (“CECs”). The bond limitation for the New CREBs was listed at $2 billion, of which not more than one-third of the total was to be allocated to each category of PPP, CEC and governmental body projects. Allocations to PPP projects would be made pro rata to each project compared to the total amount requested. As an example, if $1.5 billion is requested in allocation of New CREBs for PPP projects, each PPP project would receive 44 percent of its requested allocation. On the other hand, allocations of CEC and governmental body projects were to be made in a manner determined by Treasury.

Under the New CREBs program, 100 percent of the proceeds of New CREBs (less issuance costs of no more than 2 percent of the bond) and any investment earnings on such proceeds would have been required to be used on capital expenditures for the project within three years of the date of issuance (with limited exceptions). CRECTA additionally proposed that the tax credit rate for New CREBs would have been a rate that is 70 percent of the rate that would permit issuance of a New CREB without discount and interest cost to the issuer; the credit would be claimed against both regular and AMT tax liability; any unused credit could be carried forward; and credits could be “stripped” from the ownership of the bond, similar to the “stripping” of interest coupons for tax-exempt bonds. Interestingly, under CRECTA, a New CREB would also have required the issuer to certify that applicable conflicts of interests laws are satisfied in regard to the New CREB issuance.

The New CREBs provisions in this bill are similar to those found in H.R. 2776 offered earlier this year. In that case, we note that there were dissenting remarks from Ways & Means Ranking Member McCrery and other Members in the House Report to H.R. 2776. The remarks noted a concern regarding the expansion of tax credit bonds. The Members were also opposed to the “stripping” of tax credits from ownership of the underlying bonds which they dubbed an “unprecedented expansion of tax credit bonds that will permit the tax credit portion of the debt to be separated from the principal and sold off to taxpayers with no connection to the bond itself. We have substantial concerns about the ability to track the holders of these stripped credits….”

The other new tax credit bond programs included in CRECTA were the “qualified energy conservation bonds” (“QECBs”) and “qualified forestry conservation bonds” (“QFCBs”). Similar forms of the programs have been in included in prior bills. The rules for these programs are similar to those for New CREBs.

Set forth below are the significant highlights of the QECB program under CRECTA. Due to the possible limited interest in QFCBs, we have not discussed it. 

  • QECB Purposes – projects related to reducing energy consumption in public buildings by at least 20 percent; implementing green community programs; rural development involving renewable energy production; certain research facilities generally involving increasing energy efficiency and reducing fossil fuel consumption; commuting facilities that reduce energy consumption (and pollution); certain demonstration projects; and energy efficiency public education campaigns. 
  • QECB Allocation – $3 billion to be distributed among the States and further subdivided among large local governments (i.e. population of 100,000 or more), all proportionately based on population. Indian tribal governments are to be treated in the same manner as large local governments.