Legal Perspective

The Energy Policy Act of 2005: The Rest of the Story
By Mark Hanson & Todd Guerrero | October 01, 2005
The Energy Policy Act of 2005 delivered key measures for the biodiesel and renewable fuels industry, including extending the biodiesel tax credit through 2008 and establishing a 7.5 billion gallon renewable fuels standard (RFS). Those successes have been previously described by the National Biodiesel Board (and are outlined in this month's Talking Point column on page 50). But the approximately 1,700-page bill also contains many other provisions affecting the energy industry. A few of the key provisions are summarized here.

Wind Energy Production Tax Credit
The federal tax code currently provides a 1.8-cent-per-kilowatt-hour (adjusted for inflation) tax credit for qualifying facilities that produce electric energy from qualifying renewable resources, including wind. The federal production tax credit (PTC) is the single largest driver in the wind industry and its repeated extension, expiration and extension has created "boom or bust" cycles in U.S. wind energy production. For instance, with a PTC in place in 2003, 1,987 megawatts of wind energy was developed in the United States. In 2004, with no PTC, only 389 megawatts of wind energy was developed. The 2005 Act extends the PTC to Dec. 31, 2007 and marks the first time the PTC has been extended without first expiring. Wind developers now have a continuous 29-month horizon for project development to occur, and the wind industry is predicting record expansion in 2005 and 2006. The PTC extension, along with other renewable energy incentives, carries a cost of approximately $3.1 billion-accounting for the single largest incentive in the 2005 Act. Once eligible, the PTC is good for 10 years.

The 2005 Act also, for the first time, allows application of the PTC to agricultural cooperatives (defined as a co-op that is owned more than 50 percent by agricultural producers). The new law allows cooperatives to pass the PTC through to its members on the basis of patronage.

One criticism of the PTC has been its inapplicability to municipal or cooperative utilities, which operate as non-profits and therefore have no appetite for a tax credit. The Renewable Energy Production Incentive (REPI) was enacted as a PTC counterpart, providing a direct payment of 1.8 cents per kilowatt-hour (adjusted for inflation) to non-profits including municipalities, electric cooperatives and tribes. But REPI has always been subject to annual Congressional appropriation, which creates a great deal of uncertainty in any investment decision. And REPI funding traditionally has been very low, severely limiting the effectiveness of the program. REPI was reauthorized in the new law through 2016. Because it continues to be subject to annual appropriation, however, public and cooperative power groupsare skeptical whether REPI will increase their investment opportunities in renewable energy technologies.

In an attempt to provide an alternative to REPI, the new law creates a new category of bonds, termed "clean renewable energy bond," (CREBs). The bonds allow municipal utilities and electric cooperatives to sell bonds to raise money for renewable energy projects. Bondholders are entitled to a tax credit on their federal income tax. Total financing under the program is $800 million.

Repeal of PUHCA
Considered one of its most significant aspects, the 2005 Act repeals the Public Utility Holding Company Act (PUHCA). Enacted in 1935, PUHCA sought to curb abuses in the utility industry by imposing certain restrictions on who can invest in the utility sector (electric and natural gas), the types of investments that utility holding companies can make, and the geographic scope of holding companies.

Under PUHCA, investments in or acquisitions of utility companies required registration with the Securities and Exchange Commission, which triggered restrictions on the types of business activities within the holding company. Restrictions imposed by PUHCA registration are said to have prevented investment in utility holding companies by foreign companies, financial institutions and other non-utility companies. Repeal of PUHCA eliminates these restrictions, and investment in utility sectors is expected to increase. Likewise, PUHCA currently restricts the types of businesses that a holding company may own or invest in to those which are limited to the utility business or those that are "functionally related" to the utility business. The PUHCA repeal will now allow holding companies to invest in essentially any business, subject to restrictions that apply to all transactions.

PUHCA currently requires that electric utility holding company systems be geographically integrated and capable of integrated operation. This has typically meant that the holding company electric transmission systems be directly connected so that the systems have transmission paths between them to allow the systems to be physically operated as a single system. This has prevented geographically distant utilities from being able to merge or be acquired. PUHCA repeal is expected to eliminate a major obstacle to utility mergers, particularly for smaller utilities in different parts of the country.

Mark Hanson and Todd Guerrero are members of the Agribusiness and Alternative Energy Practice Group of Lindquist & Vennum PLLP, a leading provider of legal assistance on bioenergy projects throughout the country. They can be reached at (612) 371-3211.
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