1. The Energy Policy Act of 2005 and Tax Incentives for Public Power Presented by Joe Nipper Senior Vice President, Government Relations APPA Seminar: The Energy Policy Act of 2005: How Will It Affect Public Power? Washington, DC November 10, 2005

2. Title XIII—Energy Policy Tax Incentives  $14.8 billion over 10 years  Four categories of incentives: Energy Efficiency and Conservation Measures Renewable and Clean Energy Electric Reliability Oil and Gas Production and Enhanced Refining

3. Incentives Provided for Investor-Owned Utilities  Transmission property treated as fifteen-year property  Sales of electricity transmission property to implement restructuring policy  5-year Net Operating Loss for electric transmission equipment  Extension and modification of renewable electricity production credit (Section 45)  Credit for investment in clean coal facilities  Electric Cooperatives Only: Treatment of Income of Certain Electric Cooperatives (85/15 Test)

4. Incentives for Public Power  Section 1303—Clean renewable energy bonds  Section 1327—Arbitrage rules not to apply to prepayment for natural gas  Incentives provided for public power systems minor in comparison to those given to IOUs

5. Clean Renewable Energy Bonds  New financial incentive for consumer- owned utilities for construction of renewable energy generation  Modeled after the Qualified Zone Academy Bonds (QZAB) program for school construction  Refined product of tradable tax credits that failed in previous Energy Bill debates in 107 th and 108 th Congresses

6. CREBS: How They Work  Allows consumer-owned utilities to issue interest-free bonds to finance construction of renewable generation facilities  Bondholder receives a tax credit in lieu of interest payments  Qualifying entities include: state and local governments, political subdivisions, Indian Tribal governments, rural electric cooperatives (CoBank, CFC)  Issuance of bonds authorized between January 1, 2006 to December 31, 2007

7. Qualified Projects  Qualifying renewable facilities include (Sec. 45): Wind Solar Geothermal Landfill gas Trash combustion Open-loop and closed-loop biomass Incremental hydro

8. Allocation of Volume Cap  Secretary of Treasury responsible for formulating process for allocation of volume cap  No direction to Treasury provided by Congress on allocation process  National allocation limitation of $800 million; $500 million for “government bodies”  APPA supports a project-by-project allocation process in lieu of a state-by-state process  Working with Treasury to get rule in place quickly before first day of issuance--January 1, 2006

9. Maturity Limitation of Bond  Treasury is responsible for determining  Maximum maturity: Term the Secretary estimates will result in the present value of the obligation to repay the principal Principal used is equal to 50% of the face amount of the bond  Interest rate used will be average annual rate for 10-year TE bond  Issuer is required to repay the principal amount in level annual installments  At current rate, APPA estimates average limitation of 11-14 years (most be rounded up to whole number)

10. Example to Determine Maturity Limitation:  Issue $10 million of CREBs and applicable Treasury discount rate is 6%  Maturity limitation: How long it will take $5 million (50% of face amount) invested at 6% (discount rate) to equal $10 million  Maturity Limitation: 13.8 years, rounded to 14 years

11. Additional Requirements of CREBs  Arbitrage Restrictions; similar to tax-exempt bonds  Expenditure Requirements for bond proceeds; 95% must be spent within 5 years, extension possible  Reimbursement and Refinance; Reimbursement and refinancing allowed after effective date and resolutions are adopted in timely manner

12. Section 1327—Prepayment for Natural Gas  Applies to municipal gas and municipal electric systems  Provides safe harbor from arbitrage rules for tax exempt bonds used to finance prepayment of natural gas supplies  Contracts may not exceed the annual average of gas purchased by customers within service territory over past 5-years  Municipal electric system must be within the service territory of a municipal gas system to receive safe harbor

13. QUESTIONS? Joe Nipper, Senior VP Government Relations 202/467-2931 jnipper@appanet.org