Infrastructure. An increasingly meaningless word that you may associate with prosperity and new "free" things for your use. Don't lose sight of the obvious... there's no such thing as a free lunch.
As part of a poorly planned boondoggle-to-be, our federal government wants to throw our money at merchant transmission, however it's ultimately going to be an exercise in futility.
Tax credits for new electric transmission. What is that, exactly? Do you know? The proposal is completely devoid of details or any kind... I've been searching for over a week and I'm coming up empty. Either there is no real and thoughtful plan to accomplish this, or the government is hiding its true intentions. Tax credits for new electric transmission don't make sense, and they certainly don't fit into the reality of how transmission is funded and recovered through the electric rates we pay. It's almost like the government has picked up the only tool at its disposal (money) and is going to try to use it to hammer everything in sight.
An investment tax credit would allow an investor in new transmission to recover 30% of its investment through tax credits. Those tax credits would lower the investor's tax burden so it could pay less taxes. Say an investor plunks $100M into a transmission project... he would receive a credit of $30M against his consolidated tax bill. It's attractive because the investor could end up paying no taxes at all. If he pays no taxes (or $30M less than he would otherwise owe), everyone else would have to pay more taxes to cover the government's income gap. It's money directly out of your pocket given to big corporations who invest in transmission. And it's not like they're not expecting to earn a hefty return on their $100M investment... they certainly are. Nobody invests in something like transmission with the idea that the tax credit is their only reward. To make matters worse, it is proposed that this tax credit can be monetized to create a tax refund for credits not used to reduce the investor's tax bill. In the past, tax credits that could not be used because the investor didn't pay taxes in an amount equal to the credit were sold to other corporations who needed them to reduce their own tax burden. But, like any secondary market for free government cheese, these credits were sold at a discount on their face value. Perhaps a company would pay $10M for a $20M tax credit. The tax credit did not have any cash value. Now, however, a company with a $30M investment tax credit who could only use $10M to reduce its tax burden to zero would actually get paid the balance in the form of a $20M tax refund. And where would that $20M come from? You, Mr. Taxpayer. It would come directly out of your pocket.
Now let's examine this tax credit and how it would work in the world of electric transmission. There are two main types of transmission projects: Cost Allocated projects, and Merchant projects.
A cost allocated project is ordered by a grid operator and its cost is allocated among ratepayers in the region who benefit from the project. A regionally ordered project is reviewed by an independent grid operator to make sure it meets some need, such as reliability, or market efficiency (making the cost of electricity cheaper). This identifies the benefits and beneficiaries of the project, and informs the allocation of costs among ratepayers. The developer assigned to build the project collects its cost to build from captive ratepayers using a "cost of service" rate scheme. Cost of service means the transmission owner can only collect its cost to serve, plus a regulated return (profit, or interest) on its investment. Its transmission rates are dependent upon the true cost of the project. The cheaper the project is to build, the less it costs ratepayers. One example is land acquisition costs, which are a huge line item for new transmission. If a transmission developer acquires eminent domain authority to keep land acquisition at low "market based" prices using the threat of condemnation against landowners who hold out for higher prices, it can hold its land acquisition costs to budget. A lower budget flows through to the ratepayers who pay for the project. If a transmission owner acquires property at a low price, the benefit of that low price flows through to consumers as lower electric prices.
Merchant transmission projects, on the other hand, do not require any independent review by grid operators. A developer would propose a merchant project as a strictly for-profit endeavor. The developer thinks it sees a fat pay day by moving electricity from an area with low electricity prices to an area with high electricity prices. That way the cost differential could be leveraged as profit by selling a cheap product into an expensive market. Because it is not reviewed and its benefits to captive ratepayers identified, a merchant transmission project is not cost allocated to ratepayers. Instead, a merchant project collects its costs to develop and build through negotiated rates with voluntary customers. A merchant proposing a project puts its new transmission capacity out for bid by potential customers, and sells the new capacity it creates to the highest bidders. If a merchant sells its capacity at a price high enough to support the cost to build its project and still make a profit, then the project goes ahead. The amount of profit a merchant can make is not regulated. It can make as big a profit as its negotiated rates provide. Therefore, a merchant's cost to build its project determines its profit. Using eminent domain to lower land acquisition costs does not flow through to its ratepayers... it only increases the merchant's profit. The negotiated rates stay the same whether the merchant acquires land at low "market based" rates, or pays the amount necessary for the landowner to sell without the coercion of eminent domain. The only difference between these two scenarios is the amount of profit a merchant makes between its cost to build and the amount it charges in rates.
Because cost-allocated projects are ordered by regional grid operators, the transmission developer is isolated from any loss if a project does not get completed. Cost-allocated projects are guaranteed to be reimbursed to their owners even if they are abandoned. The captive ratepayers would be forced to re-pay a cost-allocated transmission developer. However, merchants have no captive ratepayers and therefore no ratepayers to cover its cost in the event of abandonment. If a merchant transmission project is not built or completed, its owners absorb the loss. They are not getting their investment back because they never delivered anything to contracted customers. Therefore, merchant transmission developers are taking a huge risk that their investment may never produce any return, and in fact, may disappear entirely.
That's exactly what happened to the investors in Clean Line Energy. Various investors sunk around $200M into the development of Clean Line projects and lost every last penny. Merchant transmission is inherently more risky because the investment is not guaranteed. Would a 30% investment tax credit encourage investors to take more risks on merchant transmission? For a failed project, the investor would still lose 70% of its investment. I'm not sure that would make a big difference to me if I was investing that kind of money.
And let's look at how an investment tax credit would be applied to cost-allocated projects with regulated rates. Cost of service rates pass on the utility's cost to provide the service. This includes any taxes the utility pays. Taxes are passed through to ratepayers. Therefore, tax credits are also passed through to ratepayers. However, utilities may bank credits and use them over a longer period of time. Turning those credits into tax refunds does nothing for utilities recovering their costs through rates. In addition, big utility conglomerates often pay little to no taxes by leveraging their different businesses into one consolidated tax bill. A recent list of corporations who pay no taxes was flush with utility companies. In fact, utilities were the greatest percentage of non-taxpaying companies.
As part of a poorly planned boondoggle-to-be, our federal government wants to throw our money at merchant transmission, however it's ultimately going to be an exercise in futility.
Tax credits for new electric transmission. What is that, exactly? Do you know? The proposal is completely devoid of details or any kind... I've been searching for over a week and I'm coming up empty. Either there is no real and thoughtful plan to accomplish this, or the government is hiding its true intentions. Tax credits for new electric transmission don't make sense, and they certainly don't fit into the reality of how transmission is funded and recovered through the electric rates we pay. It's almost like the government has picked up the only tool at its disposal (money) and is going to try to use it to hammer everything in sight.
An investment tax credit would allow an investor in new transmission to recover 30% of its investment through tax credits. Those tax credits would lower the investor's tax burden so it could pay less taxes. Say an investor plunks $100M into a transmission project... he would receive a credit of $30M against his consolidated tax bill. It's attractive because the investor could end up paying no taxes at all. If he pays no taxes (or $30M less than he would otherwise owe), everyone else would have to pay more taxes to cover the government's income gap. It's money directly out of your pocket given to big corporations who invest in transmission. And it's not like they're not expecting to earn a hefty return on their $100M investment... they certainly are. Nobody invests in something like transmission with the idea that the tax credit is their only reward. To make matters worse, it is proposed that this tax credit can be monetized to create a tax refund for credits not used to reduce the investor's tax bill. In the past, tax credits that could not be used because the investor didn't pay taxes in an amount equal to the credit were sold to other corporations who needed them to reduce their own tax burden. But, like any secondary market for free government cheese, these credits were sold at a discount on their face value. Perhaps a company would pay $10M for a $20M tax credit. The tax credit did not have any cash value. Now, however, a company with a $30M investment tax credit who could only use $10M to reduce its tax burden to zero would actually get paid the balance in the form of a $20M tax refund. And where would that $20M come from? You, Mr. Taxpayer. It would come directly out of your pocket.
Now let's examine this tax credit and how it would work in the world of electric transmission. There are two main types of transmission projects: Cost Allocated projects, and Merchant projects.
A cost allocated project is ordered by a grid operator and its cost is allocated among ratepayers in the region who benefit from the project. A regionally ordered project is reviewed by an independent grid operator to make sure it meets some need, such as reliability, or market efficiency (making the cost of electricity cheaper). This identifies the benefits and beneficiaries of the project, and informs the allocation of costs among ratepayers. The developer assigned to build the project collects its cost to build from captive ratepayers using a "cost of service" rate scheme. Cost of service means the transmission owner can only collect its cost to serve, plus a regulated return (profit, or interest) on its investment. Its transmission rates are dependent upon the true cost of the project. The cheaper the project is to build, the less it costs ratepayers. One example is land acquisition costs, which are a huge line item for new transmission. If a transmission developer acquires eminent domain authority to keep land acquisition at low "market based" prices using the threat of condemnation against landowners who hold out for higher prices, it can hold its land acquisition costs to budget. A lower budget flows through to the ratepayers who pay for the project. If a transmission owner acquires property at a low price, the benefit of that low price flows through to consumers as lower electric prices.
Merchant transmission projects, on the other hand, do not require any independent review by grid operators. A developer would propose a merchant project as a strictly for-profit endeavor. The developer thinks it sees a fat pay day by moving electricity from an area with low electricity prices to an area with high electricity prices. That way the cost differential could be leveraged as profit by selling a cheap product into an expensive market. Because it is not reviewed and its benefits to captive ratepayers identified, a merchant transmission project is not cost allocated to ratepayers. Instead, a merchant project collects its costs to develop and build through negotiated rates with voluntary customers. A merchant proposing a project puts its new transmission capacity out for bid by potential customers, and sells the new capacity it creates to the highest bidders. If a merchant sells its capacity at a price high enough to support the cost to build its project and still make a profit, then the project goes ahead. The amount of profit a merchant can make is not regulated. It can make as big a profit as its negotiated rates provide. Therefore, a merchant's cost to build its project determines its profit. Using eminent domain to lower land acquisition costs does not flow through to its ratepayers... it only increases the merchant's profit. The negotiated rates stay the same whether the merchant acquires land at low "market based" rates, or pays the amount necessary for the landowner to sell without the coercion of eminent domain. The only difference between these two scenarios is the amount of profit a merchant makes between its cost to build and the amount it charges in rates.
Because cost-allocated projects are ordered by regional grid operators, the transmission developer is isolated from any loss if a project does not get completed. Cost-allocated projects are guaranteed to be reimbursed to their owners even if they are abandoned. The captive ratepayers would be forced to re-pay a cost-allocated transmission developer. However, merchants have no captive ratepayers and therefore no ratepayers to cover its cost in the event of abandonment. If a merchant transmission project is not built or completed, its owners absorb the loss. They are not getting their investment back because they never delivered anything to contracted customers. Therefore, merchant transmission developers are taking a huge risk that their investment may never produce any return, and in fact, may disappear entirely.
That's exactly what happened to the investors in Clean Line Energy. Various investors sunk around $200M into the development of Clean Line projects and lost every last penny. Merchant transmission is inherently more risky because the investment is not guaranteed. Would a 30% investment tax credit encourage investors to take more risks on merchant transmission? For a failed project, the investor would still lose 70% of its investment. I'm not sure that would make a big difference to me if I was investing that kind of money.
And let's look at how an investment tax credit would be applied to cost-allocated projects with regulated rates. Cost of service rates pass on the utility's cost to provide the service. This includes any taxes the utility pays. Taxes are passed through to ratepayers. Therefore, tax credits are also passed through to ratepayers. However, utilities may bank credits and use them over a longer period of time. Turning those credits into tax refunds does nothing for utilities recovering their costs through rates. In addition, big utility conglomerates often pay little to no taxes by leveraging their different businesses into one consolidated tax bill. A recent list of corporations who pay no taxes was flush with utility companies. In fact, utilities were the greatest percentage of non-taxpaying companies.
What use do corporations who already don't pay taxes have for more tax credits? I guess they could sell them at a discount... but that doesn't necessarily encourage them to invest in more transmission.
Who is this investment tax credit for, exactly? Seems more geared toward merchant transmission projects, but the reality is that tax credits will do little to ameliorate the investment risk of merchant transmission.
The biggest risks for merchant transmission are finding customers and getting their projects permitted. Investment tax credits do nothing to solve these problems. It's just a giveaway; a government boondoggle that's going to increase your own tax burden. The government is lying to you by asserting that investment tax credits for transmission are going to spur new investment in transmission. There's plenty of new transmission investment happening already. Major U.S. electric utilities spending increased to $40 billion in 2019 from $9.1 billion in 2000, according to federal officials.
Is transmission investment really a "problem" that needs to be solved? The Federal Energy Regulatory Commission already provides financial transmission "incentives" designed to increase transmission investment. In fact, FERC has put new transmission incentives on its monthly agenda for next week. How would FERC's incentives work with investment tax credits? Do we really need two different systems of financial incentives? The issue may be that FERC's incentives are paid by captive ratepayers. They don't work for merchant projects. Is the government trying to create handouts for merchant projects? Perhaps one of the most distinguishing characteristics of merchant projects is that they cover their own costs and recover them through negotiated rates with voluntary customers. Nobody is "on the hook" to pay for merchant projects, therefore they escape scrutiny and regulation. If we're going to start handing taxpayer funding to merchant transmission, perhaps it's time they become regulated to rein in their profits?
There ain't no such thing as a free lunch.
And there is no way siting and permitting issues will be ameliorated by increasing corporate welfare. Tax credits also will not compel utilities to become voluntary customers of merchant transmission. Lack of customers was the biggest reason Clean Line Energy Partners failed. You can build it, but they may not come. Merchant transmission looks to distribution utilities for a customer base. However, many local distribution companies are owned by large utility conglomerates that also build and own transmission. Why would they want to pay for merchant milk when they could own their own cow? If a distribution company needs new transmission, it's more likely to favor new transmission built by affiliates. Because transmission is such a cash cow, utilities would rather build it themselves than pay someone else to build it.
But wait... there's another shoe that is in the process of dropping. Our government also wants to create a new "Grid Deployment Authority" at the Department of Energy that will enable lots of new transmission. Another bright idea without much description. But that's a topic for another day...
Who is this investment tax credit for, exactly? Seems more geared toward merchant transmission projects, but the reality is that tax credits will do little to ameliorate the investment risk of merchant transmission.
The biggest risks for merchant transmission are finding customers and getting their projects permitted. Investment tax credits do nothing to solve these problems. It's just a giveaway; a government boondoggle that's going to increase your own tax burden. The government is lying to you by asserting that investment tax credits for transmission are going to spur new investment in transmission. There's plenty of new transmission investment happening already. Major U.S. electric utilities spending increased to $40 billion in 2019 from $9.1 billion in 2000, according to federal officials.
Is transmission investment really a "problem" that needs to be solved? The Federal Energy Regulatory Commission already provides financial transmission "incentives" designed to increase transmission investment. In fact, FERC has put new transmission incentives on its monthly agenda for next week. How would FERC's incentives work with investment tax credits? Do we really need two different systems of financial incentives? The issue may be that FERC's incentives are paid by captive ratepayers. They don't work for merchant projects. Is the government trying to create handouts for merchant projects? Perhaps one of the most distinguishing characteristics of merchant projects is that they cover their own costs and recover them through negotiated rates with voluntary customers. Nobody is "on the hook" to pay for merchant projects, therefore they escape scrutiny and regulation. If we're going to start handing taxpayer funding to merchant transmission, perhaps it's time they become regulated to rein in their profits?
There ain't no such thing as a free lunch.
And there is no way siting and permitting issues will be ameliorated by increasing corporate welfare. Tax credits also will not compel utilities to become voluntary customers of merchant transmission. Lack of customers was the biggest reason Clean Line Energy Partners failed. You can build it, but they may not come. Merchant transmission looks to distribution utilities for a customer base. However, many local distribution companies are owned by large utility conglomerates that also build and own transmission. Why would they want to pay for merchant milk when they could own their own cow? If a distribution company needs new transmission, it's more likely to favor new transmission built by affiliates. Because transmission is such a cash cow, utilities would rather build it themselves than pay someone else to build it.
But wait... there's another shoe that is in the process of dropping. Our government also wants to create a new "Grid Deployment Authority" at the Department of Energy that will enable lots of new transmission. Another bright idea without much description. But that's a topic for another day...
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