Tax-Exempt Financing

Tax-Exempt Financing

June 01, 2004

Tax-Exempt Financing will be harder to arrange for power plants under new regulations the Internal Revenue Service proposed in May.

Access to the tax-exempt bond markets in the United States is supposed to be restricted to financing for schools, roads, hospitals and other public facilities. However, the US tax laws make an exception for 13 types of “exempt facilities.” One exception covers “solid waste disposal facilities.” These produce public benefits even if they are privately owned.

Power companies have used this exception to issue tax-exempt debt in two situations. One is for power plants that burn waste fuels; taxpayers argue the plants dispose of waste by turning it into electricity. The other is for pollution control equipment that traps ash and other solid particles at the back end of power plants that burn regular coal and other solid fuels. Such equipment can account for as much as 25% of the total cost of a power project.

New regulations the IRS issued in May would rule out tax-exempt financing in at least one of these situations. The rules are merely proposed. They will not take effect until 60 days after final rules are published in the Federal Register.

Tax-exempt financing is only available for equipment that disposes of “solid waste.” In the past,“solid waste” was defined as solid material with no value at the place where it is located. The IRS proposes to drop value as a factor in whether material is waste. In the future, one must show the material has been discarded. Fossil fuels used at power plants would never qualify.

The IRS said ash caught at the back end can only qualify if it is transformed into something else usable. The IRS has reserved on what “transformation processes” it is willing to accept; it is looking for suggestions from industry by August 4. It said an example of what it has in mind is shredding waste tires to harvest material that can be used for road paving.

The agency said it may publish a list of the specific “transformation processes” it will accept after reviewing whatever comments it receives.

Keith Martin