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Utilities secure top priorities in final tax proposal from Congress

Investor-owned electric utilities secured their main priorities for tax reform in a final compromise package from Congress, but the U.S. power sector could still face hurdles.

A bicameral conference committee released a tax reform report Dec. 15 that reconciled separate tax bills from the U.S. House of Representatives and U.S. Senate. Both chambers are set to vote on the measure the week of Dec. 18, with Republicans hoping to send the bill to President Donald Trump's desk for signing before Christmas.

Investor-owned utilities held onto deductions for state and local taxes, as well as deductions on interest payments for regulated utilities. Keeping those two deductions were the top priorities for the Edison Electric Institute, or EEI, which represents U.S. investor-owned electric utilities.

"Our industry fared fairly well and we're pleased with the outcome," EEI Director of Government Relations Eric Grey told S&P Global Market Intelligence.

EEI also welcomed the GOP's call to lower the corporate tax rate, which Grey said will be a "huge windfall for our customers." The final compromise bill would cut the corporate rate to 21%, up from 20% in the House's and Senate's respective bills but well below the current statutory rate of 35%. Grey said the lower rate should spur economic growth and potentially lift power demand from industrial customers.

In addition, the reduced corporate rate "should make operating projects more valuable because the owners will be able to keep more of the revenue from electricity sales after taxes," said Keith Martin, a tax and project finance attorney with law firm Norton Rose Fulbright.

But Martin said the lower tax rate could cut the amount of tax equity that can be raised to help finance wind, solar and other renewable energy projects. The depreciation of those projects is worth less with a lower corporate rate, meaning tax equity could make up a smaller portion of the capital stack for a typical wind or solar project in the future.

"Developers may try to fill in the gap with more debt," Martin said.

Borrowing could also become more expensive for some energy project developers. Although regulated public utilities can still deduct interest from their incomes, most other entities with gross receipts of about $25 million or more must limit their net interest deductions to 30% of adjusted taxable income.

The conference report was a mixed bag for public power producers as well. Tax exemptions were maintained for municipal bonds that public power entities use to fund infrastructure projects, but the report prohibits issuance of tax-exempt advance refunding bonds and tax credit bonds after Dec. 31. Public utilities use advance refunding bonds to reduce their borrowing costs.

"Retaining the tax-exemption for municipal bonds has been the American Public Power Association's top legislative priority and its retention is a significant victory for public power," said John Godfrey, American Public Power Association's senior director of government relations. "We are disappointed that the conference agreement prohibits tax-exempt advance refunding bonds, but issuers can still issue tax-exempt current refunding bonds and make use of other tools to reduce the cost of financing existing debt."

Renewable energy developers were spared proposals in the House bill that would have weakened the federal wind production tax credit and ended the solar investment tax credit after 2027. Conferees also softened the Senate's proposal for the new base erosion and anti-base tax, or BEAT, in order to protect tax equity investment in renewable projects.

But the final BEAT language still poses risks for wind and solar projects. Banks and other multinational companies subject to the tax can use wind and solar credits to offset up to 80% of their BEAT obligations, but only until 2025. After that year, only research and development credits can offset BEAT liabilities, potentially hurting returns for investors who counted on using the federal wind production tax credit for up to 10 years after those projects entered service.

Investment tax credits for wind, solar and other resources are claimed entirely in the year the tax equity deal funds, making them less vulnerable to the BEAT, Martin said.

The nuclear industry had hoped lawmakers would extend a tax credit for new nuclear facilities but came up short in the final bill. The House tax legislation removed a 2020 in-service deadline for new nuclear plants to claim a 1.8 cents per kWh production tax credit, but both the Senate bill and the final conference report maintained the current deadline.

The extension could have benefited two nuclear reactors being built at Southern Co.'s Vogtle site in Georgia, as well as a small modular reactor that NuScale Power LLC plans to build at the U.S. Department of Energy's Idaho National Laboratory. But tax credit extensions for new nuclear plants, as well as for carbon capture projects and other smaller-scale renewable technologies, could be attached to a tax extenders bill the Senate Finance Committee may introduce down the road.

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