The Energy Policy Act of 2005 - Ballard Spahr LLP

The Energy Policy Act of 2005: 

Finance & Investment Opportunities 

Ballard Spahr Energy/Project Finance Group 

August 24, 2005 

Copyright © 2005 by Ballard Spahr Andrews & Ingersoll, LLP. (No claim to original U.S. 

government material.) This publication is intended to alert recipients to new developments in the 

law. It does not constitute legal advice or a legal opinion on any specific facts or circumstances. 

The contents are intended as general information only. You are urged to consult your own lawyer 

concerning your situation and specific legal questions you may have.

Agenda 

• Electricity Regulation and Transmission 

• Coal and Alternative Technologies 

• Nuclear 

• Renewable Electricity 

• LNG and Gas 

• Petroleum 

• Renewable Motor Fuels and Ethanol 

• Hydrogen 

2

Electricity Regulation 

and 

Transmission

Electricity and Transmission 

• PUHCA Repeal Facilitates Investment and Mergers 

– PUHCA regulation of holding company structures by the SEC 

discouraged acquisition of utilities and electric facilities 

– Repeal of PUHCA means that many more types of buyers can 

freely invest in the electric industry and that holding companies 

can invest more broadly 

– More utility mergers can occur in absence of PUHCA’s 

“integration” requirement 

– PUHCA replaced with access by FERC and state commissions 

to books and records of holding companies (EWG and FUCO 

determinations will still be of value) 

4


• FERC’s Merger Review Authority Modified 

– FERC will review transactions valued above $10 million, 

including: sales and leases of transmission and generation 

facilities; purchases of portions of utilities; purchases or 

leases of existing generation facilities; merger of holding 

company with another utility 

– Standard of review: transaction must be consistent with the 

public interest and not cross-subsidize non-utility activities 

5


• PURPA Changes Affect New Qualifying Facilities 

– PURPA modified to: 

• Allow exemption of utilities from mandatory purchase of electricity 

from new qualifying facilities (“QFs”) if QFs have nondiscriminatory 

access to meaningful competitive wholesale and retail outlets 

(e.g., RTO/ISO bidding markets) 

• Require FERC to tighten technical requirement for new 

cogeneration QFs 

– Existing contracts and QFs not affected 

– Limitation on ownership of QFs by utilities discontinued 

6


• Support for Investment in New Transmission Facilities 

– New conventional and merchant transmission facilities have 

been stymied by state siting and permitting processes 

– Act permits FERC to issue construction permits for high-priority 

transmission projects if states do not have appropriate authority 

or withhold permits inappropriately 

– Permittees can obtain rights of way through eminent domain 

actions 

7


• Support for Investment in New Transmission Facilities (cont’d) 

– Western Area and Southwestern Power Administrations may enter 

into public-private financial arrangements for new or upgraded 

transmission facilities (but private sector “contribution” limited to 

$100 million over 2006-2015) 

– Within 1 year, FERC must issue rule providing incentive-based 

(including performance-based) transmission rate treatments that 

promote capital investment, provide a return of equity to attract new 

investment, and encourage new transmission technologies 

– Reduces tax depreciation recovery period from 20 years to 15 years 

– Permits transmission owners selling facilities to independent 

transmission providers to amortize gain over 8 years 

8

Coal and Alternative Technologies

Coal and Alternative Technologies 

• DOE Grants for Clean Coal Projects 

Authorizes $200 million per year, for fiscal years 2006 - 2014, 

to commercial scale demonstration projects 

– At least 70% earmarked to coal-based gasification technology 

projects 

– Projects must be likely to generate overall cost reductions and 

improve coal competitiveness. Methods and equipment must be 

applicable to 25% of current coal-fired generators 

– Federal assistance capped at 50% of project cost 

10


• Clean Air Coal Program 

Authorizes grants, loans, cooperative agreements. 

Similar cost sharing provisions as for Clean Coal projects. 

Two types of commercial application projects: 

– Equipment and processes that improve energy efficiency or cut 

emissions. Total of $2.5 billion authorized for fiscal years 2007 

through 2013. 

• Between 25% and 75% of projects must be for sole purpose of 

generating electricity, priority given to demonstrated processes and 

equipment that are not yet cost-effective 

– Upgrades to existing coal-fired plants to deploy advanced pollution 

control equipment and processes. Total of $500 million authorized 

for fiscal years 2007 through 2011. 

• Priority on projects with significant air quality improvement, collection 

of more than one pollutant, or that use waste byproducts 

11


• Tax Incentives for Coal and Other Alternative Fuel Facilities 

– Three new investment tax credits 

• Advanced coal credit projects credits 

– 20% credit for IGCC projects 

(maximum credit: $800 million) 

– 15% credit for advanced coal-based generation projects 

(maximum credit: $500 million) 

• Qualifying gasification credit 

– 20% credit for qualified projects (maximum credit: $350 million) 

– Maximum qualified cost per project: $650 million 

– Covers gasification of coal, petroleum residue, biomass, etc. 

– New 84-month amortization for air pollution control facilities 

at coal fired power plants placed in service after 1975 

12


– Revisions to section 29 non-conventional fuel production 

credit 

• Reauthorizes existing credit, which had largely expired 

– General credit amount remains $3 dollars/ per barrel or Btu 

oil barrel equivalent (adjusted for inflation since 1972) 

– Qualified fuels include liquid, gaseous or solid synthetic 

fuels from coal, oil from shale and tar sands, gas from 

biomass, etc. 

• Adds credit for production facilities for coke or coke gas 

– Maximum credit eligible production 4000 barrels per day 

– Facility must be placed in service before 2010 

– Credit available for 4 years from in-service date 

• Makes credit part of general business credit provisions 

13


• Commercial Technology Loan Guarantee Program 

– DOE to provide commercial loan guarantees for “innovative 

energy technologies” that: (1) avoid, reduce or sequester air 

pollutants or greenhouse gases; and (2) employ improved 

technologies. 

• Eligible projects include renewable energy systems; advanced fossil 

energy technologies including coal gasification; advanced nuclear 

energy facilities; carbon capture; electric generation, transmission 

and distribution technology; production facilities for fuel efficient 

vehicles; refineries 

• IGCC electric projects that meet specific emissions limits and have 

an assured revenue stream are also eligible. Includes pet coke 

gasification, industrial gasification, coal-to-oil liquefaction projects. 

14


• DOE Loan Guarantee Guidelines 

– Applicable to all DOE loan guarantees. No cap on number of loan 

guarantees. 

– May not exceed 80% of estimated project cost at time guarantee 

is issued. Interest rate on the guaranteed loan subject to DOE 

approval, taking prevailing rates into account. Loan term: lesser 

of 30 years or 90% of projected useful life of the project. The 

federally guaranteed loan may not be subordinated to other 

financings. DOE may ask for collateral assignment of technology, 

step-in rights, etc. DOE will charge fees “sufficient to cover 

applicable administrative expenses.” 

15

Nuclear Power

Nuclear 

• Administration and Congress recognize that nuclear power is 

essential to reduce greenhouse gas emissions and reliance on 

foreign oil 

• Act encourages new nuclear power plants: 

– Extends Price-Anderson nuclear liability insurance 

– Eliminates NRC antitrust review for new reactors 

– Provides financial incentives 

17

Nuclear 

• Regulatory Delay Risk Protection for New Reactors 

– Title VI provides investment protection for new nuclear plants in 

the form of “Standby Support” from DOE 

– Offsets financial impact of regulatory delays caused by NRC 

hearings/litigation or NRC failure to meet schedules for ITAAC 

(inspections, tests, analyses and acceptance criteria) beyond 

applicant’s control 

– Covers principal and interest on debt for new plant construction 

and replacement power costs 

– Provides 100% coverage of delay costs for first two new plants 

(up to $500 million each), and 50% of delay costs (up to $250 

million each) beyond 180 days for new plants three through six 

– DOE will issue regulations and enter into contracts 

18

Nuclear 

• Loan Guarantees for New Plants 

– Advanced nuclear energy facilities are eligible for Title XVII federal loan 

guarantee program for up to 80% of estimated project cost 

(described above) 

• Production Tax Credits for New Plants 

– Title XIII provides production tax credit of 1.8 cents per kilowatt-hour (with 

national capacity limitation of 6,000 MW) for the first 8 years of operation of 

advanced nuclear facility placed in service before January 1, 2021 

– Allows Secretary of Treasury (in consultation with DOE) to apportion 6,000 

MW allocation if more than 6000 MW of eligible new nuclear generating 

capacity is operating in any given year 

– Annual limit: $125 million per 1,000 MW of allocated capacity 

19

Renewable Electricity

Renewable Electricity 

Extends and Enhances Renewable Energy Production Tax Credit 

and Incentive Payment Programs 

• Renewable Energy Production Tax Credit (RPTC) Extension 

– RPTC is a production tax credit, indexed to inflation, for certain renewable 

energy generation facilities. 

• Limit 10 years (7 for Indian coal) 

• 1.9 cents per kilowatt-hour for electricity producing facilities (reduced to 0.9 

cents for certain facilities – e.g., qualified hydro, open-loop biomass) 

• Specified amount per ton for qualifying fuel production facilities such as Indian 

coal 

– Includes technologies that formerly received tax credit 

(e.g., geothermal, open-loop biomass, landfill gas, refined coal) 

– Extends RPTC to other resources 

(e.g., incremental hydroelectric power and Indian coal production) 

– Credit reduced (up to 50%) to the extent project receives federal grants, 

tax-exempt financing, etc. 

21


• Renewable Energy Production Incentive Extension 

– Provides for extension of incentive payments of 1.5 cents/kwh, 

adjusted for inflation each year, to be made to the owner or 

operator of any “qualified renewable energy facility” 

– Incentive payments only available to generating facilities using 

solar, wind, biomass, landfill gas, livestock methane, ocean 

(including tidal, wave, current and thermal) or geothermal energy 

that are publicly owned or owned by a not-for-profit electrical 

cooperative 

– If appropriations are not available to make all payments, 60% of 

appropriated funds are to be assigned to solar, wind, geothermal, 

and closed-loop biomass generation, with the remaining 40% to all 

other projects 

22


• Clean Renewable Energy Bonds (CREBs) 

– Creates new category of tax credit bonds (like QZABs) for 2006, 

2007 

• Bondholder receives income tax credit in lieu of payment of interest 

• Credit amount included in income, so overall effect is like payment of 

taxable interest 

– Qualified issuers: 

• Governmental bodies (including Indian tribal governments) 

• Mutual or cooperative electric companies 

• A “CREB Lender” (CoBank and National Rural Utilities Cooperative 

Finance Corporation) 

– Qualified borrowers: 

• Governmental body 

• Mutual or cooperative electric companies 

23


– Must spend 95% of proceeds in 5 years on qualified renewable 

energy projects, including: 

• Wind, solar and geothermal energy facilities 

• Closed- and open-loop biomass facilities 

• Small irrigation power facilities 

• Landfill gas and trash combustion facilities 

– Maximum amount of CREBs - $800 million, maximum $500 million 

for governmental units, remainder for cooperatives 

– Other issues: 

• Amount of credit set by Treasury at rate that permits marketing at par 

• Level principal amortization required, maturity set by Treasury 

• Arbitrage rules apply 

24


• Authorizes Incentive Payments for Incremental Improvements 

to Existing Hydroelectric Facilities 

• Hydroelectric Power Incentive Payments 

– Provides for incentive payments of 

• 1.8 cents/ kwh for electricity generated by a new turbine or other 

generating device that generates hydroelectric energy for sale and 

that is added to an existing dam or conduit, and 

• Up to 10% of the cost of improvements resulting in efficiency 

increases of at least 3% 

25


• Distributed Generation (DG) 

The Act promotes DG with regulatory changes and tax credits: 

– Electric utilities must provide interconnection, net metering and “smart 

metering” to onsite power generators 

– State regulatory commissions are given 2 years to act on interconnection 

standards, and 3 years to act on net metering; the interconnection rules 

must promote ‘best practices’ for DG 

– State commissions are given 18 months to study smart metering, and 

must “issue a decision whether or not it is appropriate for electric utilities 

to provide and install time-based meters” 

– Solar energy systems and fuel cell power plants for businesses will 

receive a 30% business tax credit (until 12/31/08) and micro turbines for 

businesses will receive a 10% business tax credit, also until 12/31/08 

26

LNG and Gas

LNG and Gas 

• LNG Terminals: Reducing Obstacles and Delays 

– Grants FERC exclusive authority to approve LNG terminal siting, 

construction, expansion, or operation 

• Requires FERC to consult with the States regarding local safety 

considerations 

• States still likely have substantial control over siting decisions 

(e.g., Coastal Zone Act, Clean Water Act) 

– Designates FERC as lead agency for coordinating all federal 

permitting decisions (e.g., environmental issues) for LNG terminals 

(and interstate pipelines) 

• Each federal and state agency considering an aspect of an application 

for federal authorization shall cooperate with FERC and comply with 

the deadlines established by FERC 

28

LNG and Gas 

• LNG Terminals: Increased Transactional Flexibility 

– Until 2015, allows LNG terminal operations to benefit its affiliates 

• FERC not to deny an LNG terminal application because the applicant proposes to 

use it to store gas owned by the applicant or its affiliates 

• FERC not to require an LNG terminal to offer service to other customers 

– Until 2015, FERC not to condition an order approving an LNG terminal on: 

• Any regulation of the rates, charges, terms, or conditions of service of the LNG 

terminal; or 

• A requirement to file any schedules or contracts related to the rates, charges, 

terms, or conditions of service of the LNG terminal 

• Market-Based Rates for Natural Gas Storage Facilities 

(Including LNG Terminals) 

– Allows FERC to authorize market-based rates for storage and storagerelated 

services for new storage capacity related to facilities placed in 

service after August 8, 2005 

29

LNG and Gas 

• Tax-Exempt Financing of Prepaid Gas Contracts 

– Existing regulations (since August 2003) allow prepaid gas and electric 

energy contracts 

• Avoids arbitrage restrictions on prepayments 

• Avoids private activity bond status 

• Requires actual sale of 90% of prepaid gas by governmental utility to general 

public in service area (including for certain electric power generation 

– Act creates “reasonable expectations” safe harbor for meeting gas sales 

requirement 

• Based on average annual sales over previous 5 calendar year test period 

• Other Tax Incentives 

– Reduces 20 year tax depreciation for distribution recovery period to 15 

years 

30

Petroleum

Petroleum 

• Encourages Development of New Facilities 

– Streamlines permitting by requiring relevant federal agencies to 

work with Bureau of Land Management on all environmental 

permits and land use planning documents in order to coordinate 

and improve federal decision-making with respect to the permits 

– Facilitates siting and construction of new refineries through 

federal and state regulatory coordination and environmental 

permitting assistance 

32

Petroleum 

• Promotes Oil and Gas Production 

– Includes a pilot project to permit a new oil and gas lessee to reclaim and 

close old abandoned sites and be reimbursed through royalty credits 

– Provides royalty incentives and grants to promote oil and gas production 

through injection of carbon dioxide into oil and gas fields 

– Implements $20 million program to remediate, reclaim, and close, 

orphaned, abandoned, or idled wells on federal land 

• Promotes Development of Oil Shale and Tar Sands and 

Other Unconventional Fuels 

– Strategically important resources that could reduce dependence on 

foreign oil 

– Public land to be made available for research and development leasing 

– Directs DOE to establish task force to accelerate commercial development 

33

Petroleum 

• Encourages Upgrades to Existing Refineries 

– Allows expensing of 50% of refinery equipment that increases 

existing refinery capacity by at least 5% or increases 

throughput of qualified fuels by at least 25%. Qualified fuels 

include oil from shale and tar sands. As a condition of 

eligibility, refineries of liquid fuels must report to the IRS on 

refinery operations (e.g., production and output). Does not 

apply to new refineries. 

34

Renewable Motor Fuels and Ethanol

Ethanol and Motor Fuels 

– EPA to administer a new renewable fuel content requirement 

applicable to all motor fuel 

– Fuel oxygenation requirement eliminated 

– Phased prohibition of MTBE 

– 2003 U.S. gasoline consumption: 139 billion gallons 

– 2003 ethanol consumption: 2.88 billion gallons 

– Current U.S. ethanol capacity: 3.9 billion gallons 

(according to Renewable Fuels Association) 

36


– Renewable fuel requirement rises from 4.0 billion gallons in 

2006 to 7.5 billion gallons in 2012 

– All refiners, blenders and importers of motor fuel are covered 

(with a 5 year exemption for small players) 

– Requirement is a bulk percentage, not a per gallon 

requirement 

– Requirement can be met by direct production or import or by 

obtaining credits from those who exceed the requirement 

(including small players who opt in) 

– Credits must be used in the year generated 

– Can carry forward a deficit for 1 year 

37


– Renewable fuel is 

• Motor fuel that is produced from grain, starch, oilseeds or other 

biomass 

• Includes biodiesel 

• Includes ethanol derived from cellulosic biomass 

• Includes natural gas from a biogas source 

– Renewable fuel must reduce the volume of fossil fuel in 

gasoline 

– Ethanol from cellulosic biomass or waste gets 2.5 gallons 

credit against the requirement for each gallon through 2012 

38


– DOE loan guarantees for the construction of facilities producing fuel ethanol 

from cellulosic biomass or MSW 

– No dollar limits and program runs 10 years 

– To qualify applicant must show: 

• Absent guarantee, credit is not available on reasonable terms 

• Revenue and collateral make repayment likely 

• Reasonable interest rate 

– Applicants receive priority if they: 

• Meet permitting standards 

• Have a high likelihood of success 

• Are located in a local market with either 

– Limited landfill 

– Good supplies of feedstocks 

– High demand for ethanol or byproducts 

– Applicant must provide “collateral such as insurance or a performance 

bond” 

– Separate limited loan guarantee program for demonstration projects 

39

Ethanol and Motor Fuels – Other Provisions 

– DOE to provide production subsidy for cellulosic biofuels 

– Subsidy to apply to first 1 billion gallons produced 

– Program ceiling of $1 billion implies subsidy of $1 per gallon or 

less – initial authorization of $250 million 

– Subsidy initially fixed by DOE but after 3 years (or less) subsidy 

will be allocated by reverse auction 

– Subsidized facilities must begin production in 3 years and subsidy 

lasts for 6 years of production 

– Priority is given to projects that: 

• Have outstanding potential for economic development 

• Include agricultural producers or co-operatives 

• Have a “strategic agreement to fairly reward feedstock suppliers” 

– Over $1 billion in grant programs authorized 

40

Hydrogen

Hydrogen 

• Purposes 

– Build a mature hydrogen economy 

– Decrease dependency on foreign oil 

– Eliminate most emissions 

– Create a sustainable national energy economy 

• DOE to create 5 year plan 

– R&D program 

– Public education 

– Commercial passenger vehicles by 2015 

– Hydrogen infrastructure 

– Demonstration projects 

• 5 year authorization over $3.1 billion 

42


• Ballard Spahr is a full service law firm with more than 435 lawyers in 7 offices. 

• Ballard Spahr’s Energy/Project Finance Group has many years of experience in 

representing project developers, underwriters, issuers and banks, in developing, 

financing, and acquiring or restructuring projects and entities in such fields as energy 

production and transmission, environmental facilities, and transportation. 

• We are also active in energy regulatory matters (including practice before the 

Federal Energy Regulatory Commission, Nuclear Regulatory Commission and state 

utility commissions), and have extensive experience in financial and product 

markets, including securitization, industry funds, and wholesale energy markets. 

• Our expertise includes: • Project Development 

• Energy Regulation 

• Renewable Energy and • Nuclear Power 

Distributed Generation • Finance 

• Electric Industry Restructuring • Energy Markets 

• Mergers, Acquisitions, and 

Reorganizations 

• Transmission 

43

Please Contact Us with Follow–Up Questions 

Baird Brown 215.864.8518 Baird@BallardSpahr.com 

Patrick Gillard 215.864.8536 Gillard@BallardSpahr.com 

Charles Henck 202.661.2209 Henck@BallardSpahr.com 

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44

The Energy Policy Act of 2005: 

Finance & Investment Opportunities 


August 24, 2005

The Energy Policy Act of 2005 - Ballard Spahr LLP

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