Increased Regulatory Assets for IOU's

Large Investor Owned Utilities (IOU) are approaching the respective utility commissions across the country. They are seeking approval to use a tax monetization structure for wind and solar investments that is not designed for what they are trying to do. The IOU goals are straight forward. They do not want to write a power purchase agreement. The reason is that there is no shareholder value. They prefer to maximize the amount of assets in their rate base as regulated assets. IOU’s can only do so if the asset delivers the most competitive rate for their retail customers. So IOU’s are using the partnership flip structure. The result is a 10% discount in energy rates. Jupiter Renewables has an alternative. The Jupiter Structure, which is tailor made for power purchasers, creates a 20% discount. This is double the discount, and creates significantly more regulatory assets with lower risk to the IOU..

This is particularly important now. Large Investor Owned Utilities (IOU’s) are racing to increase the share of renewables in their generation portfolio before the federal tax credits expire.  For the most part, utilities have done this through power purchase agreements (PPA’s). These agreements have two drawbacks for utilities. First of all, these agreements are viewed as a fixed obligation that decreases the utilities ability to borrow. Second of all, these agreements do not add to the utility rate base. In other words, utilities are not the main beneficiaries of these agreements. 

Other utilities have added renewables by purchasing the energy facility on the commercial operation date. This is called a Build-Transfer. When an IOU enters into a Build-Transfer, they will require approval from the relevant utility commission. The commission will ensure that the energy produced for the retail customers is at the most competitive rate. The IOU will then be able to place the asset into its rate base and earn its regulated rate of return. This return will include monetization of any tax credits or tax benefits. IOU’s like MidAmerican have used this strategy successfully for years.  

Recently, there have been IOU’s interested in a different path. They want to include the asset in their rate base, but they also want an investor to monetize the tax benefits. NIPSCO, a subsidiary of NiSource, is currently implementing this strategy. They are using a variation of the existing partnership flip. This is a structure used by independent power producers without tax capacity. According to S&P Global, “NiSource executives recently told investors that the company plans to add $1.8 billion to $2 billion in renewable energy investments to rate base by the end of 2023 as the company transitions its generation fleet. The company will pursue about $1 billion in tax equity partnerships through 2023 as it pursues a mix of joint ventures and power purchase agreements to replace retired coal capacity.” NIPSCO is seeking to add $1 billion of financing in the form of these partnerships. S&P treats this as $1 billion in new debt. This is significant for a utility that has fought hard to reduce its debt burden and achieve a BBB+ credit rating. As a utility, NIPSCO will purchase the asset and then enter into a joint venture partnership with a tax investor to monetize the tax benefits. 

In order to make these deals work, the IOU is forced to go through additional “hoops”. This is because they need to ensure that the tax investor receives all of the tax benefits. 

• As the power purchaser, the IOU needs to meet all of the IRS Service Contract rules to ensure that the tax credits are allocated to the tax investor. 

• The partnership needs to ensure that renewable energy facility is not a related party transaction and is not public utility property. In IRS Private Letter Rulings, which take considerable time and expense to prove, we see the IOU’s will purchase the power from the partnership under a long term PPA. Sometimes these purchases have a scheduled payment amount. The IOU then sells the power into a competitive wholesale electricity market where they receive the location based price for the energy at the time it is delivered. The IOU will then buy an equivalent amount of power at a market hub to supply its rate payers.

Jupiter Renewables’ Guaranteed WindPower® solution

The current tax code, enacted in 1986, provides a straight path. Utilities can avoid the utility property question altogether. The code has a section related to alternative energy service contracts, Section 7701(e)(3), which allows a utility to purchase power from a facility while preserving the tax benefits for an investor. There have been over 1,000 MW of wind farms financed using this section of the tax code. These provisions are part of the code, and IOU’s will not require a Private letter Ruling on this issue.

The main criteria are that i) the power purchaser does not operate the facility, ii) the power purchaser is not financially burdened if the facility does not perform, and iii) any option to purchase the facility must not be for a fixed price other than fair market value. Guaranteed WindPowerâ meets these requirements.

Essentially, the Tax Investor Purchases 100% of the project and then enters into a PPA with the IOU. The tax investor then

1. Raises Preferred Equity from the IOU with yields set at the regulatory rate
2. Receives a Put option from the IOU with a price that is not fixed until the exercise date
3. Hires a 3rd Party Asset Manager to manage the facility, the AM can then hire the IOU for daily O&M
4. Uses 3rd party guarantees to ensure scheduled payments

The result is clear – lower energy rates, lower risk, and increased regulatory capital.