On December 18, 2015, President Barack Obama signed into law the Consolidated Appropriations Act, 2016 (H.R. 2029) (the Act), which included welcomed extensions to a number of energy tax incentives. The legislation includes multi-year extensions of the Section 45 Production Tax Credit (the PTC) and the Section 48 Investment Tax Credit (the ITC) for wind and solar projects tempered by a gradual phase out of the total credit available.
On Tuesday, December 16, 2014, the U.S. Senate passed the tax extenders bill by a vote of 76-16, extending a number of energy tax incentives through the end of the year. The Senate’s passage of H.R. 5771 followed the U.S. House of Representatives’ (House) approval earlier this month (see our post on December 8), and the bill is expected to be signed into law by President Obama as early as this week.
The $42 billion bill includes extensions through the end of the year of nearly $10 billion in energy tax incentives, including the New Market Tax Credit in Section 45D, the Production Tax Credit in Section 45 (the PTC), and the bonus depreciation rules in Section 168(k).
Many were disappointed that some of the tax incentives – including the PTC – were extended retroactively only through the end of the year, meaning that tax payers have just a few weeks left to take advantage of them. There would have been far more certainty for companies looking to invest in renewable energy projects if the tax incentives were extended for one or more years beyond the end of 2014. Several lawmakers suggested that the two week extension was better than nothing, but the short extension period means that Congress has merely punted the need for greater tax reform in this area into 2015. As it stands, the energy tax incentives extended by this bill will have expired by the time Congress returns to Washington, D.C., on January 6, 2015, following its winter break. That means that Congress may be in the same place again next year under pressure to pass a year-end bill – instead of focusing on more comprehensive reform and a possible phase-out of the PTC.
Last week, the U.S. House of Representatives (House) overwhelming approved a $42 billion tax extenders bill. The bill, H.R. 5771, includes extensions of nearly $10 billion in energy tax incentives through the end of 2014. But by failing to extend the tax incentives beyond the end of this year, the House bill has been criticized by industry advocates that wanted stability and predictability as to the future availability of the incentives.
The bill extends the New Market Tax Credit in Section 45D, the Production Tax Credit in Section 45, the Research Credit in Section 41, the bonus depreciation rules in Section 168(k), the Energy Property Credit for individuals in Section 25C, the Second Generation Biofuel Producer Credit in Section 40(a)(4), the incentives for biodiesel and renewable diesel in Section 40A, the New Energy Efficient Home Credit in Section 45L, the Energy Efficient Commercial Buildings Deduction in Section 179D, the special rule for sales or dispositions to implement FERC or state electric restructuring policy for qualified electric utilities in Section 451 and the excise tax credits relating to certain fuels in Section 6427.
By extending the Production Tax Credit (PTC) and other incentives retroactively only through the end of this year, the House bill provides little reassurance to companies in the industry who are looking to invest in renewable energy products, given the long lead time required to get projects off the ground. With only three weeks left before the PTC expires again, the extension is unlikely to provide much incentive to invest in new renewables projects. The House Ways and Means Committee expects the extension to cost around $9.6 billion over the next 10 years. But industry insiders argue that the expiration of the PTC last year and the resulting uncertainty has caused a drop off in new renewables (non-solar) projects, and have called for a multi-year extension that would phase out the PTC over three years. This kind of phase-out generated bipartisan support in a Senate bill last month, but the bill ultimately died after the White House threatened to veto it over other matters. Although some in the Senate are still pushing for a two-year extenders bill, it is currently expected that the extenders package will ultimately be passed in the form adopted by the House.
Tax reform has been a hot topic as of late, particularly for the energy sector. On September 17, 2014, the Senate Finance Committee continued the focus on energy tax reform by holding a hearing on “Reforming America’s Outdated Energy Tax Code.” The hearing followed a trio of major proposals released this past year to revise the Internal Revenue Code’s energy tax provisions. Last December, former Senate Finance Committee Chairman Max Baucus (D-MT) released a discussion draft proposal to streamline energy tax incentives to make them more predictable and technology-neutral. The proposal consolidates the various tax incentives for clean electricity into a single production tax credit (PTC) or an investment tax credit for all types of power generation facilities that are placed into service after December 31, 2016. In February, House Ways and Means Committee Chairman Dave Camp (R-MI) released a discussion draft of the Tax Reform Act of 2014, which sets forth a broad framework for general tax reform, including the phase out and repeal of many energy-related tax credits such as the PTC. And in March, the President released his fiscal year 2015 budget proposal, which contained energy-related tax provisions such as a permanent extension of the PTC and a provision making the PTC refundable thereby allowing taxpayers without current taxable income to take advantage of the credit. A detailed review and comparison of these three proposals can be found here.
The September hearing on energy tax reform included industry representatives and academic experts as witnesses. At the beginning of the hearing, Committee Chairman Senator Ron Wyden (D-OR) articulated three principles that he views are important in moving energy tax reform forward. First, “the tax code must take the costs and benefits of energy sources into account.” This would include factors “such as efficiency, affordability, pollution, and sustainability.” Second, he advocates replacing “today’s quilt of more than 40 energy tax incentives with a modern, technology-neutral approach.” Third, “the disparity in how the tax code treats energy sources – and the uncertainty it causes – has to end.”
During the course of the hearing, several topics were addressed. A central focus of the hearing centered on achieving “parity” between fossil fuels and renewable fuels through a technology neutral tax structure. The witnesses debated over various ways to achieve such parity, including the proposal to eliminate expensing for drilling intangible costs. Other topics addressed by the witness panel included how to encourage technology advancements in the transmission and storage of energy, allowing renewable energy production to be financed through master limited partnerships, and the carbon tax.
At the end of the hearing, Wyden again reiterated his focus for energy tax reform: a technology-neutral approach focused on performance not fuel type. Although it is unlikely that any broad tax reform will be accomplished in the near future, it appears that there is continued interest in structuring the energy tax provisions in a way that is technology neutral and that achieves parity between fossil and renewable fuels.
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President Obama’s recently released budget proposal for the 2015 fiscal year contains energy-related tax provisions that include a permanent extension of the production tax credit (PTC) and a provision making it refundable. The recently released discussion draft of the Tax Reform Act of 2014 from House Ways and Means Committee Chairman Dave Camp also contains numerous energy-related tax provisions, but would phase out and repeal the PTC, along with many other energy-related tax credits. In late 2013, former Senate Finance Committee Chairman Max Baucus also released discussion drafts regarding energy-related tax provisions, including a proposal to consolidate the various tax incentives into a PTC or an investment tax credit. This Special Report provides a comparison of the key energy-related tax provisions in each proposal.
The Senate Finance Committee passed the Expiring Provisions Improvement Reform and Efficiency Act (EXPIRE Act) on April 3, 2014. The legislation would renew through 2015 more than 50 tax incentives that either have lapsed or will lapse at the end of 2014. The EXPIRE Act is not yet scheduled for consideration by the full Senate. The legislation includes a number of energy-related tax credits, including extensions for the renewable electricity production tax credit (PTC) and the new markets tax credit (NMTC). The legislation also modifies the bonus depreciation rules under Section 168(k).
The EXPIRE ACT extends the PTC and the election to claim the energy investment tax credit (ITC) in lieu of the electricity production credit for two years, through December 31, 2015. The PTC expired for qualifying renewable energy facilities at the end of 2013 if construction of such facilities did not begin before January 1, 2014. The PTC provided a credit that ranged from 1.1 cents to 2.3 cents per kilowatt-hour of renewable electricity produced, depending on the type of renewable energy. If passed, the proposal would be effective as of January 1, 2014.
The legislation also includes an extension for bonus depreciation under Section 168(k).
The EXPIRE Act also extends the NMTC (which expired at the end of 2013) for two years, through 2015, permitting up to $3.5 billion in qualified equity investments for each of the 2014 and 2015 calendar years. The proposal extends for two years, through 2020, the carryover period for unused NMTCs. The proposal applies to calendar years beginning after December 31, 2013.
The EXPIRE Act also contains a variety of other energy extenders, including:
The D.C. Circuit last week denied the Department of Energy’s (DOE) petition for en banc review of the court’s November decision holding that the DOE could not continue to collect nuclear waste fees from utilities. The Nuclear Energy Institute (NEI) and National Association of Regulatory Utility Commissioners (NARUC) filed suit after the DOE’s termination of the Yucca Mountain repository program in 2010. The organizations argued that the DOE could not continue to collect the fee from utilities if it did not have a waste management plan in place. Last fall, the D.C. Circuit agreed and held that the DOE could not continue to collect the nuclear waste fee of one-tenth of a cent per kilowatt-hour.
In January, Secretary Moniz sent a letter to the Senate requesting that the fee be reduced to zero, in accordance with the court’s mandate. The Secretary expressed his discontent with the court’s decision stating that “this proposal, mandated by the Court of Appeals, is not consistent with the process established in the [Nuclear Waste Policy Act] for adjusting the fee charged to utilities.” On the same day the DOE filed a petition for en banc review of the D.C. Circuit’s decision.
The D.C. Circuit denied the rehearing request on March 18. Both the NEI and NARUC issued statements declaring the move a win for consumers. NEI stressed that despite the reduction of the fee, the government has a continuing obligation to remove spent nuclear fuel to a disposal facility. Secretary Moniz’s fee reduction request is subject to a 90-day congressional review period. If Congress does not act on it within that time period, the Secretary’s proposal will become effective and the fee will be reduced to zero.
Primary regulators of energy transactions, the Federal Energy Regulatory and Commodity Futures Trading Commissions (FERC, CFTC or jointly Participating Agencies) began the new year by entering on January 2 two overdue Memoranda of Understanding (MOU), one on overlapping jurisdictions, the other on sharing of information generated in connection with market surveillance and investigations into suspected market manipulation, fraud or abuse. Both MOUs became effective immediately.
FERC, with jurisdiction over physical natural gas and power transactions, and the CFTC, with jurisdiction over financially settled products such as energy futures and swaps, had battled in recent years over the reach of each other’s jurisdiction, culminating in a March 2013 decision of the U.S. Court of Appeals for the D.C. Circuit finding that FERC improperly invaded CFTC’s jurisdiction when, under authority of the Energy Policy Act of 2005, it sought to fine Amaranth Advisors trader Brian Hunter for allegedly manipulating natural gas futures in order to increase the profitability of corresponding physical natural gas transactions. When the Participating Agencies failed to meet the 2011 deadline of the Dodd-Frank Wall Street Reform Act for reaching the jurisdictional understanding, a troika of western-state senators with energy committee portfolios – Dianne Feinstein (D-CA), Ron Wyden (D-OR) and Lisa Murkowski (R-AK) – expressed concern and called on the two commissions to expedite action on an MOU.
The MOUs put in place procedures that replace a reactive status quo ante in which the two agencies collaborated and shared information, if at all, only upon the request of one or the other, with a proactive framework that obliges the staffs of both agencies to notify each other of requests from within their regulated community for authorizations or exemptions from authorization requirements that may implicate the other’s regulatory responsibilities. Once so notified, the Notified Agency must promptly inform the Notifying Agency that it (1) has no interest, (2) has an interest, triggering a consultative process between the staffs of the Participating Agencies, or (3) wants to revisit the issue once a regulated company has filed request for an authorization or exemption or the Notifying Agency has instigated sua sponte an authorization or exemption. If (2) is selected, then the triggered consultative process will seek to determine whether the CFTC has jurisdiction under the Commodity Exchange Act or FERC has jurisdiction under the Federal Power, Natural Gas or Natural Gas Policy Acts, with disputes elevated from staff to directors and ultimately to the respective commissioners. While the jurisdictional MOU imposes these obligations on the Participating Agencies, it expressly creates no private right of action that could be enforced by a regulated company or other third party.
The MOU on information sharing obligates the Participating Agencies to share information needed in connection with each other’s market surveillance or investigations into suspected manipulation, fraud or market power abuse in markets that the requesting Participating Agency regulates. FERC is authorized to seek from the CFTC information from (1) designated contract markets, (2) registered swap execution facilities, (3) registered derivatives clearing organizations, [...]
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Senate Finance Committee Chairman Max Baucus (D-MT) released a proposal on December 18 that would streamline energy tax incentives to make them more predictable and technology-neutral. The proposal consolidates several different energy tax incentives into just two tax credits: one for electricity and one for transportation fuels. The proposed provisions would allow facilities placed in service after 2016 to choose between a 10-year production tax credit and an investment tax credit of up to 20 percent. The amount of the credit is dependent on the greenhouse gas emissions of the facility or fuel, as determined by the Environmental Protection Agency (EPA); the cleaner the facility the larger the credit. Any facility producing electricity that is 25 percent cleaner than the average for all electric production facilities will receive the credit. The credit would be open to all resources. The credit phases out over four years once the greenhouse gas intensity in the market has declined by 25 percent. The package of reforms is based on proposals previously offered by both Republicans and Democrats. The package calls for extending current clean energy incentives through 2016 to provide for a smooth transition period.
Earlier in the week, over 30 Congressmen sent letters to the House Ways and Means Committee and Senate Finance Committee urging their fellow Congressmen to extend numerous clean-energy tax credits set to expire at the end of the year. The letters supported a comprehensive reform of the tax code but urged immediate action to renew specific clean energy incentives facing expiration.
Among the tax incentives slated to expire are the production and investment tax credits for wind, biomass and other renewable technologies other than solar, and the advanced energy manufacturing tax credit. Also set to expire are tax credits for efficient commercial buildings, new homes, appliances and home energy efficiency upgrades; transportation fringe benefits which provide parity between parking and transit benefits; and tax credits for biofuel production, hybrid medium- and heavy-duty trucks, and the installation of refueling equipment for alternative fuel vehicles.
The coalition of Congressmen urged long-term extension of the tax credits in order to accommodate the long planning horizon of renewable projects, such as offshore wind farms. However, another group of Senators urged the Senate Finance Committee on December 17 to allow for the expiration of the production tax credit for wind energy, arguing that it is time to let the technology stand on its own.
Jessica Bayles, associate in McDermott’s Energy Advisory practice, contributed to this article.
Congressman Ed Whitfield (R-KY.), the chairman of the House Energy and Commerce Committee’s Energy and Power Subcommittee, introduced a bill on October 28, 2013 that would void the U.S. Environmental Protection Agency’s (EPA) pending proposed rulemaking, regulating emissions of carbon dioxide from new coal-fired and natural gas-fired power plants. Representative Whitfield worked closely with Senator Joe Manchin (D-WV), who will introduce the same bill in the Senate. The legislation, if enacted, would impose restrictions on EPA’s issuance of any new proposal to regulate greenhouse gas (GHG) emissions from new and existing power plants, and could hinder EPA’s ability to comply with President Obama’s directive to regulate carbon emissions from existing power plants by June 1, 2015. In connection with the legislation, coal miners and coal companies rallied on Capitol Hill in protest of EPA’s current proposed regulation limiting carbon emissions at new power plants, and the House Energy and Commerce Committee oversight panel held a hearing, entitled “EPA’s Regulatory Threat to Affordable, Reliable Energy: The Perspective of Coal Communities.”
The bill states that EPA may not issue, implement or enforce any proposed or final rule pursuant to Section 111 of the Clean Air Act that establishes a standard of performance for GHG (defined as carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons and perfluorocarbons) emissions from a new source that is a fossil fuel-fired electric utility generating unit (EGU) unless EPA: (1) establishes separate standards for coal and natural gas EGUs; (2) for the coal category, sets a standard that has been achieved for at least one continuous 12-month period by at least six EGUs at different plants in the U.S.; and (3) establishes a separate subcategory for new EGUs that use coal with an average heat content of 8300 or less British Thermal Units per pound (i.e., lignite coal) and sets a standard for such EGUs that has been achieved for at least one continuous 12-month period by at least three EGUs at different plants in the U.S.
The bill specifies that the EGUs used as the basis for the coal and lignite coal categories must collectively represent the operating characteristics of electric generation at different U.S. locations and EPA may not use results obtained from “a project to test or demonstrate the feasibility of carbon capture and storage technologies that has received government funding or financial assistance”).
The legislation states that any rule or guidelines addressing GHG emissions from existing, modified or reconstructed fossil fuel-fired EGUs will not be effective unless a federal law is first enacted specifying the effective date, and EPA has submitted a report to Congress containing the text of the rule, a description of its economic impacts, and the rule’s projected effects on global GHG emissions. Finally, the legislation expressly repeals EPA’s prior proposed rulemakings establishing carbon dioxide limits for new EGUs.
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