Clean Renewable Energy Bonds – Application Filing Deadline

The Internal Revenue Service (IRS) recently issued Notice 2007-26 (Notice) soliciting applications from qualified issuers (including political subdivisions) for allocations of volume cap to issue clean renewable energy bonds (CREBs) for eligible clean renewable energy projects. Applications must be filed with the IRS by July 13, 2007.

What are CREBs?

CREBs are "tax-credit" bonds authorized in an initial amount of $800 million by Congress in the Energy Incentives Act of 2005. In 2006, Congress increased the authorized amount of CREBs from $800 million to $1.2 billion and also extended the last date for the issuance of CREBs to December 31, 2008. Before a qualified issuer can issue CREBs, it must first obtain an allocation of volume cap from the IRS. Last year, the IRS allocated the initial $800 million of volume cap to a total of 610 projects.

What is the benefit of CREBs?

CREBs provide a bondholder with an income tax credit (rather than an exemption from taxation on interest). Since an income tax credit is a significant benefit to a bondholder, an issuer of CREBs should be able to reduce or eliminate interest payments on those CREBs and thereby may achieve lower borrowing costs versus a traditional tax-exempt financing.

Who can apply for the volume cap?

A governmental body, including any State or political subdivision thereof, the District of Columbia, territories and possessions of the United States, or an Indian tribal government can apply for an allocation of the volume cap, as well as cooperative electric companies. A governmental body need not own and operate a public power system, unless required by state law; for example, a city installing a wind turbine to provide power to city hall could apply for an allocation of volume cap for that project.

What projects qualify for CREBs?

A wind facility, closed-loop or open-loop biomass facility, geothermal or solar energy facility, small irrigation power facility, landfill gas facility, trash combustion facility, refined coal production facility, or a qualified hydropower facility owned by either a governmental body or a cooperative electric company, qualifies for CREBs.

How will the volume cap be awarded?

The Notice provides that the volume cap will be allocated to qualified projects for which applications meeting the requirements of the Notice have been filed with the IRS by the July 13, 2007 deadline, beginning with the project for which the smallest dollar amount of volume cap has been requested and continuing with the project for which the next-smallest dollar amount has been requested until the total amount of volume cap has been exhausted. It is expected that at least $250 million of the volume cap will be allocated to qualifying projects of governmental bodies and the rest to qualifying projects of cooperative electric companies.

How long can CREBs be outstanding?

The maximum term for CREBs fluctuates based on a formula and the date of sale of the CREBs; that maximum term is to be published daily by the Bureau of Public Debt on its website. That maximum term currently is expected to be in the range of 11 to 12 years. An issuer must pay and amortize an equal amount of the principal of an issue of CREBs during each calendar year that the issue is outstanding.

Will arbitrage investment restrictions apply to CREBs?

The IRS expects that, except as otherwise provided in Section 12 of the Notice, the arbitrage investment restrictions and any exceptions thereto will apply to CREBs to the same extent as they apply to traditional tax-exempt issues of governmental bodies. The IRS expects that temporary and proposed regulations dealing with those restrictions and other issues related to CREBs will be issued soon and apply to CREBs sold on or after June 13, 2007.