Public Utilities Group Seeks Greater Diversity in CREB Allocation Process

On behalf of the American Public Power Association (APPA), we would like to offer our comments on the recently-completed allocation process under the Clean Renewable Energy Bond (CREB) program, and the pending allocation of additional CREB authority recently approved by Congress and the President. APPA is the national service organization representing the interests of the over 2,000 state and municipally owned electric utilities collectively serving over 43 million consumers.

The public power sector of the electric utility industry is extremely interested in the CREB program authorized by Section 1303 of the Energy Policy Act of 2005 (P.L. 109-58). APPA and its members worked with Congress and the Administration for over five years during development of what became the Energy Policy Act of 2005 to establish a tax-based incentive for increased renewable energy production by not-for-profit electric utilities that is comparable to the Section 45 production tax credit available to investor-owned electric utilities. Congress ultimately enacted the CREB program precisely to provide such parity. We appreciate the effort and attention the Treasury Department and the Internal Revenue Sendee have given this program, particularly in light of the increased administrative burden it has necessitated.

On November 20, 2006, the Internal Revenue Service (IRS) announced a total of $800 million in allocations to authorize state and local governmental borrowers and electrical cooperative borrowers to issue tax credit bonds to fund projects that generate clean renewable energy. The IRS announcement stated that $500 million of the total was allocated to state and local governmental borrowers, with the remaining $300 million allocated to cooperatives. Unfortunately, the IRS declined to provide a list of entities receiving allocations, citing confidentiality limitations under Internal Revenue Code Section 6103. We are surprised that this list is not available to the general public as neither the CREBs statute nor its legislative history indicate that the specific allocations are to be treated as taxpayer information. Accordingly, we respectfully request that you reconsider this determination.

Because the identities of the recipients have not been made public, it has been nearly impossible for us to analyze the results of the allocation process and to advise policymakers regarding the future direction of the program. Nevertheless, anecdotal information received from APPA members and others, as well as the aggregate numbers regarding allocations provided by the IRS, reveals that the program so far has not met our initial expectations or, in our view, those of the program's congressional sponsors.

From this information it appears, for example, that by choosing to fund projects in order of dollar amount, starting from the lowest amount and proceeding upward until the allocations are exhausted, public power systems received a relatively small portion of the overall allocations made to governmental issuers. This result is especially discouraging given that, as noted earlier in this letter, the legislative policy behind the CREBs program was to provide a comparable incentive to public power systems (along the lines of the Section 45 production tax credit) to invest in renewable energy facilities. Public power systems - governmental entities that own and operate their own electric utilities - are distinct from other governmental issuers of CREBs in that public power systems have a legal obligation to serve their customers. This means they must plan for the resources necessary to meet that obligation, including investments in new facilities. In addition, a number of states now require electric utilities to provide a certain percentage of their electricity from renewable sources. In some of these states, public power systems are directly included in this requirement, and in others they are nevertheless expected to meet similar standards. Non-public power governmental entities are under no similar requirement.

Moreover, it appears that the great majority of the allocations were made to governmental entities applying to develop very small, dispersed solar projects. While solar technologies are quite deserving of support and clearly included in Congress' goals for the CREB program, the apparent hugely disproportionate allocadons to solar projects raises significant concerns. First, the relatively very small output of each of these scores of solar installations, coupled with their geographic dispersion, creates substantial inefficiency, particularly when measured on a kilowatt hour-per- dollar-invested basis. Second, so many small dollar issuances of CREBs (e.g., bond issues with a par amount of $1 million or less) may threaten the ability to create a market that is attractive, particularly to institutional investors, and at the same time create a situation where the transaction costs of individual issuances cancel out the incentive provided by the CREB program in the first place.

Thus, from what we are able to discern, the results of the allocation process for governmental issuers clearly indicate to us the need for further modification of the allocation process to: 1) increase the amount and efficiency of renewable electricity generation resources; 2) better meet Congress' goal of comparability among sectors of the electric utility industry with regard to incentives for increased renewable energy production; and 3) create a stable, efficient and long-term program that is attractive to investors.

In addition, we understand that the CREB program has placed a substantial additional burden on the IRS staff. We believe there may be ways to achieve the goals of this program while at the same time reducing the associated administrative burden. We would welcome an opportunity to discuss those alternatives with you and others at Treasury and the IRS. We note that the authorizing statute grants you broad discretion in making the allocations. As a reminder, we do not represent the views of cooperative issuers, so if they, for example, are pleased with the allocation process as it relates to those issuers, you have the discretion to continue the current methodology with respect to cooperative issuers and at the same time modify the methodology with respect to governmental issuers.

As mentioned at the beginning of this letter, the CREB program has just been extended through 2008 with an additional $400 million authorized for allocation, of which $250 million is to be allocated to governmental issuers. It is our view that this signals broad support for the long-term existence and success of the CREB program as part of our nation's goal of energy independence. We note also that the Technical Explanation of the legislation (H.R. 6408) prepared by the Joint Committee on Taxation states in part, "It is expected that the additional authority will be allocated through a new application process. . .". In addition, it is certain that some of the original $500 million of CREBs authority allocated to state and local governmental borrowers will not be utilized due to unforeseen circumstances and that some recipients will be contacting your offices to return such amounts for reallocation to other eligible issuers. Thus, we suggest that you consider including these returned allocations in the application process for the new authorization.In either event, we strongly hope you will address our concerns regarding allocations as part of the new application process.

We look forward to continuing to work with you to refine and improve the program and we will be contacting your staff to follow up on our suggestions. In the meantime, please do not hesitate to call me at 202-467-2901 if there is anything we can do to assist you.