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Statement of National Rural Electric Cooperative Association, Arlington,
Virginia
Clean Renewable Energy Bonds
I am pleased to provide testimony today about a program of
great importance to the members of the National Rural Electric Cooperative
Association -- the Clean Renewable Energy Bond. I would like to start by
thanking Congressmen Earl Pomeroy (D-ND) and Ron Lewis (R-KY) for introducing
H.R. 1965, which provides for additional funding and the continuation of the CREBs
program. I would also like to thank Congressmen McDermott (D-WA), Ramstad
(R-MN) and many others on the Committee for their strong leadership on and
support of the Clean Renewable Energy Bond.
Background on Electric Cooperatives
NRECA is the national service organization representing the
interests of cooperative electric utilities and their consumers. In addition
to advocating consensus views on legislative and regulatory issues, NRECA
provides health care, pension, financial investment and many other programs for
its members.
Electric cooperatives are not-for-profit, private businesses
governed by their consumers (known as “member-owners”). Today, 930 electric
cooperatives serve 40 million consumers in 47 states. Cooperatives are a
unique sector of the electric utility industry, serving an average of only 7
consumers per mile compared with the 35 customers per mile served by investor-owned
utilities (IOUs) and 47 customers per mile served by municipal utilities. To
put this in greater perspective, electric cooperatives serve only 12% of the
population -- but maintain 42% of the nation’s electricity distribution lines covering
three quarters of the land mass. Cooperative revenue per mile averages only $10,565,
while it is more than six times higher for investor-owned utilities, at $62,665
and higher still for municipal utilities, at $86,302 per mile. In summation,
cooperatives have far less dollars than the other electricity sectors to
support much more of the distribution infrastructure. In addition, electric
cooperative households generally have less income than the rest of the nation,
with nearly half of the cooperative service territories suffering poverty rates
that are higher than the national average.
These numbers illustrate why bringing power to rural areas
is a costly endeavor, resulting in electricity prices that are often higher in
cooperative service territories than those served by IOUs. The key to success
in bringing the most reliable and affordable power possible to these low
density areas lies in the cooperative business model. The term “cooperative”
has been described by Federal court decisions and IRS rulings and
pronouncements. The IRS requires that businesses adhere to the following
guidelines to qualify for cooperative status:
1) Subordination
of capital. Most benefits of the cooperative must remain with members.
The cooperative is not to be operated for the primary purpose of paying a
return on investment.
2) Democratic control by the members of the
cooperative. Each cooperative is run by a board of directors elected by
the entire cooperative membership. Votes are on a one member, one-vote basis.
3) Operation
at cost. Costs must be fairly allocated to all members. Any revenue that
is collected from members above what it costs to operate the co-op plus retain
a reasonable margin for future needs is returned to all members on an equitable
basis. In the case of electric cooperatives, net margins returned to members
are referred to as “capital credits.”
To sum up these requirements, the cooperative’s benefits
must flow to its member-owners. Any benefits received from the federal
government, therefore, also flow to the cooperative’s consumers. Although most
electric cooperatives are exempt from federal income tax, all electric
cooperatives pay state and local property taxes, sales tax and payroll and
excise taxes -- $1.09 billion in 2003.
Electric Cooperatives and Climate Change
Electric cooperatives increasingly seek to provide safe,
reliable and affordable electricity generation to their consumers. They are
investing in technology such as renewable generation to reduce their
emissions. This generation augments coal, nuclear, hydropower and gas
generation that is necessary to provide output of sufficient scale for the
growing economy. It should also be noted that intermittent generation from
wind or solar energy would cause an unreliable grid if not backed up with these
conventional resources, which unlike wind, are able to provide electricity on
demand 24 hours a day. Renewable energy (not including renewable hydropower)
accounts for only two percent of the current generation mix in the U.S., and the need for that renewable energy is growing along with the need for all other types of
generation as our population, particularly in rural America, grows. The
attached chart (chart 1) displays the current U.S. generation mix.
This Committee has been considering how tax policy fits with
meeting the goals of addressing climate change. I submit that tax incentives that
drive energy technology are among the most important programs Congress will
establish to meet climate change goals. Electric cooperatives support the goal
of reducing carbon emissions if it is an economy-wide goal, maintains fuel
diversity, protects the economy from significant negative impacts and does not
result in regressive income impacts on lower and middle-income households. In
addition, any climate change plan should recognize that new technologies,
including the capture and sequestration of carbon dioxide from power plants,
will be critical to addressing this issue. But cost-effective,
commercially-available technologies are still more than a decade away from
large-scale commercial applications. This is where tax policy can play a role
to accelerate the research, development, demonstration, and commercialization
of new technologies. Tax incentives should be available to all segments of the
utility industry -- including incentives tailored to cooperatives -- for advanced
electric generation, transmission, and distribution technologies.
With respect to potential climate goals, the Electric Power
Research Institute, which provides technological research to the electric
utility sector, has identified the need to bring all potential energy resources,
efficiency measures and technologies to bear as they each hold only a part of
the potential needed to reduce U.S. carbon emission intensity (CO2 emissions
per MWh). Note that the utility sector is responsible for just over a third of
all of the nation’s CO2 emissions. Using the Energy Information Agency’s
Annual Energy Outlook 2007 as a base case for carbon emissions over the next 25
years, EPRI calculated the CO2 reductions that would result from
reasonable but aggressive deployment programs in seven specific areas.
The attached chart (chart
2) shows the role that renewable energy, efficiency, advanced coal, nuclear and
other technologies could play if certain technological advances are
assumed. Note that an economic analysis of the costs of pursuing these is not
included in the chart and has not yet been produced by EPRI, but as utilities,
it is mandatory that we balance the need for new technologies against
affordable rates for our member owners.
There are many details of a carbon reduction program that
will need to be addressed as Congress develops a bill, and cooperatives will be
actively engaged in the debate over how to structure a program to reduce
greenhouse gas emissions.
Electric Cooperatives and Alternative Energy
One of the details of a climate proposal will be the development
of tax incentives for alternative energy. With respect to renewable energy,
twenty-two states have approved renewable portfolio standard mandates that
require most utilities to offer a certain percentage of renewable energy.
Coupled with the need to avoid carbon emissions when possible, the need to for
utilities to develop all available renewable resources is urgent. Currently, renewable
energy makes up almost 11 percent of the electricity provided by electric
cooperatives. The majority of that 11 percent is from large scale federal
hydropower, although more than 500,000 megawatts come from non-hydroelectric
renewable capacity.
More than 750 coops (80% of the cooperative industry) offer
“green power” programs that enable consumers to buy renewable output from the
marketplace. Almost all of this power is currently purchased from federal
hydropower facilities, the market or through contracts with developers. Yet,
electric cooperatives are ideally situated to develop renewable projects in
their back yards. Those projects have not yet been fully realized because of a
historic market barrier: given their not-for-profit business model, electric
cooperatives have not been able to directly utilize traditional tax incentives
like the Production Tax Credit. The capital costs for renewable generation
remain much higher – two to ten times more expensive – than conventional
resources. Such incentives remain necessary, therefore, to bring renewable
generation on line at a cost that is affordable for consumers and to push
technology to make the resources more efficient and effective.
Incentives enable utilities to bring alternative generation
resources on line despite their higher capital costs. Small in size with few
consumers per mile, electric cooperatives can’t hide high prices for generation
or push costs off onto shareholders. Electric cooperatives return revenues in
excess of what is needed for generation and electricity delivery back to their
consumers. By the same token, electric cooperatives must flow the costs of any
generation to consumers through rates, and every member bears those costs.
Keeping rates affordable and the delivery of energy reliable is our key
mission, and locally-elected boards of consumer directors hold electric
cooperatives accountable to that mission.
The Energy Policy Act of 2005 recognized that incentives,
particularly tax incentives, take center stage among federal polices that
foster technology development. For example, EPACT extended the Production Tax
Credit (PTC) that provides up to a 1.9 cent per kWh incentive for development
of wind, geothermal, hydropower, biomass and other renewable resources. Electric
cooperative consumers indirectly benefit from the PTC by purchasing renewable
power from IOUs and developers to the extent that they can negotiate with the
producers to pass along some of the PTC benefits in lower power costs. The PTC
does not, however, provide electric cooperatives with an incentive or subsidy
needed to develop resources in their back yard.
To address this concern, Congressmen Pomeroy and Lewis
sponsored legislation in 2005 that was attached to EPACT and created an equally
important new program, the Clean Renewable Energy Bond. The bill had 80
bipartisan cosponsors in the House, and the program was also strongly supported
by then-Finance Committee Chairman Charles Grassley and Ranking Member Max
Baucus. The program recognizes that not-for-profit electric cooperatives,
generally exempt from tax at the federal level, should receive an incentive
similar to those available to investor-owned utilities and for-profit developers.
I would note that EPACT also provided an investment tax
credit for advanced pulverized and IGCC coal, and a Production Tax Credit for
advanced nuclear resources. Unfortunately, federally tax-exempt electric
cooperatives do not have an opportunity to put those incentives to use. At the
same time, because their significant generating capacity is sized to keep pace
with our growing communities, applying advanced coal technologies and nuclear
generation resources stands to make the biggest impact on reducing carbon
emissions. Today, electric cooperatives do not have the opportunity that other
sectors do to invest in these technologies. We would like your help to ensure
that any future energy tax bill will include financing mechanisms that electric
cooperatives can use for advanced clean coal and nuclear generation in addition
to renewable energy.
The Clean Renewable Energy Bond Program
I want to now focus my testimony on our experience with the
Clean Renewable Energy Bond (CREB) program. Although the program is in its
infancy, it has proven to be a highly effective way to bring new renewable
projects on line. The CREB program is as successful as the PTC in getting new
renewable resources in the ground, as electric cooperatives alone flooded
Treasury with more than $550 million in applications for 83 projects in 22
states. In addition, electric cooperatives have proven that given the
necessary incentives, they will tap available renewable resources.
The program in its first year funded 78 electric cooperative
projects and was well balanced across many technologies, including wind,
biomass, landfill gas, hydropower and solar. The award size of cooperative
projects ranged from $120,548 to $31 million.
The attached map shows the distribution of these projects
across the country (chart 4), and the bar charts show the numbers of
applications by technology (chart 5) The electric cooperative set aside
worked well to ensure that cooperatives could build utility scale projects and
the program would be balanced between electric cooperatives and government
applications.
The only significant “complaint” co-ops have with the
program is that the volume cap is not sufficient to fully fund all of the worthy
applications. $800 million was provided to last for two years, with $300
million set aside for electric cooperatives. Yet Treasury received $2.5
billion in applications in the first year overall. Electric cooperatives
submitted more than $550 million of those applications, but received only $300
in bond allocations due to a program size that was too small overall. An
additional $400 million, with $150 million set aside for electric cooperatives,
was provided under the Tax Relief and Health Care Act of 2006, but this still does
not fully fund the program. In contrast, there is no volume cap for the PTC.
In order to address this problem, Congressmen Lewis (R-KY) and
Pomeroy (D-ND) have introduced a bill, H.R. 1965, to make the program annual
and provide an increase to $1 billion in funding each year. The same
proportionate set aside, $375 million, is available for electric cooperatives.
While applications may still exceed this mark, annual certainty about funding at
a $1 billion level will help to ensure that more projects, including larger utility
scale projects, can be financed. The bill makes a few additional technical
improvements to the existing program.
I urge this committee to include the Pomeroy-Lewis bill in
any energy tax bill. The provision fits hand in hand with the Production Tax
Credit, ensuring that electric co-ops, which are ideally situated to develop
renewable generation, can also help tap this nation’s renewable potential for
electricity production. I also urge the committee to extend the Production Tax
Credit as it provides the option for our members to purchase renewable energy
affordably from other providers, wherever it is necessary.
CREBs are an Important Part of Cleaner Generation in the
Future
In conclusion, I commend this Committee for its past and
current support of the Clean Renewable Energy Bond and Production Tax Credit
programs. Incentives are the key to cooperatives realizing their goal to
provide clean, affordable generation to their member-owners. Tax policy, including
incentives available to all utility sectors, will play a central role in
ensuring that all available renewable resources are developed and all consumers
can access advanced coal and nuclear technologies. Ultimately, tax policy can help
to make feasible new technologies that address carbon emission but are not
currently commercially accessible. We are pleased that the Committee has
recognize the important role that not-for-profit electric cooperatives and
their consumers will play in our energy future with the CREB program, and look
forward to working with you on future proposals that will shape the nation’s
energy policy.
CHART 1
US Generation Mix
CHART 2
CCS – Carbon Capture and
Sequestration
PHEV – Plug-in Hybrid Electric
Vehicles
DER – Distributed Energy
Resources
CHART 3
Note that grey icons are applications not awarded.
CHART 4
Number of Projects Approved, By Technology
Government Projects Co-op
Projects
 
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