Akin Gump is pleased to announce our winter 2014 edition of the Project Perspectives Newsletter. Please click here to read Project Perspectives.

Contents

The Office of the Comptroller of the Currency (OCC) at the end of October published a fact sheet to clarify the eligibility of wind tax equity investments as public welfare investments for national banks and federal savings associations (federal thrifts).  Qualifying as such permits the investment to be held in the bank, rather than a bank holding company.  Further, it qualifies the investment for favorable capital weighting under Basel III and qualifies the investment for exceptions to the Volker and Dodd-Frank and real estate limitation rules. 

The OCC’s fact sheet is available here.

Here are some key excerpts:

More information about this topic is available in my article here.

America’s Power Plan describes itself as a “toolkit” for policymakers.  The information that constitutes the toolkit is available here.  Its energy finance paper was just published.  The paper is available here.  Below are key quotations about tax equity and tax policy.

• [T]oday’s electricity markets do not adequately compensate investors for the value provided by two critical services in a high renewables future – avoided pollution and system-wide grid flexibility services.
• At present, compensation for pollution reduction benefits is primarily addressed by federal tax incentives (including production and investment tax credits) and indirectly through state renewable portfolio standards. The tax incentives also compensate investors for bearing risks associated with the scale-up and deployment of a new technology. They have played a critical role in enabling the scale-up of renewable technologies across the country. Along with global technology improvements and economies of scale, they have helped to drive steep cost reductions over the last few years, making wind and solar increasingly competitive. Many investors expect that with sustained policy to drive continued deployment and cost reductions, wind and solar generation will be cost competitive with traditional fossil fuel resources without federal support by the end of this decade.
• [I]ncreasing [economics] rewards [for renewable energy] through temporary tax incentives creates additional risk associated with uncertainty regarding the future of the policy, and leads to financing barriers associated with the relatively small market of investors who can use them.
• [F]inancing for renewable generation relies on tax equity – investors who have enough tax liability to make use of federal tax incentives. However, in part due to the lack of political certainty associated with temporary renewable tax incentives, only 20 tax equity investors actively finance renewable projects in the U.S. today. The transactions are generally bilateral agreements that do not have as much transparency on prices or conditions as larger public debt or equity markets. Further, IRS rules require five years of continuous ownership to “vest” the investment tax credit, which restricts the liquidity of these investments.
• The additional costs of bringing tax equity into a project consume some value of the tax incentives available to a project. The government can get a better “bang for its buck” by instead offering taxable cash or refundable incentives, as described by the Climate Policy Initiative and the Bipartisan Policy Center.
• To provide investors with more certainty …, these tax credits should be extended for a significant length of time, rather than being allowed to expire every few years.
• Though important to the success of renewable energy development, private equity is both expensive and relatively rare. Independent power producers would benefit from having better access to public markets as well. One way to do this would be by allowing renewables companies to organize as MLPs or REITs, both of which are currently off-limits to clean energy. These instruments are publicly traded and have a tax benefit, since MLPs don’t pay corporate taxes and REIT dividends are tax-deductible.

Today, Judge Bruggnick of the Court of Federal Claims denied the Department of Justice’s (DOJ) motion to dismiss the complaint filed by two special purpose entities affiliated with SolarCity regarding the Treasury’s calculation of the 1603 cash grant awards for solar projects.  The judge’s order is available here. Unfortunately, the order is quite short and does not contain any legal discussion but rather references reasons stated during oral argument. 

Although, surviving a motion to dismiss is a far cry from winning the case, the judge’s determination is a positive indication for this case and for similarly situated Cash Grant applicants that are considering bringing actions to contest how Treasury has administered the 1603 Cash Grant program. The outcome of this litigation has implication both for 1603 Cash Grant applicants and for the tone of future IRS audits of investment tax credit transactions because Treasury was supposed to be following the investment tax credit rules for calculating the amount of the Cash Grant award. Thus, principles decided in this litigation in theory will also apply to investment tax credit transactions.

The judge gave DOJ until October 21 to prepare answer to the complaint. Prior blog posts about this case are available [Aug. 14 post], [July 9 post], [June 2 post] and [May 21 post].