PTC phaseout proposal shakes up tax incentive debate

Source: Nick Juliano, E&E reporter • Posted: Friday, December 14, 2012

The wind industry’s proposal to phase out its most prized federal incentive shook up the ongoing debate over how much support the government should provide to all sectors of the energy industry ahead of a tax reform debate in which a range of benefits are likely to face increased scrutiny from the growing ranks of congressional debt hawks.

The American Wind Energy Association unveiled for the first time a proposal to phase out the production tax credit over a period of six years, fulfilling mounting requests from Capitol Hill to put such a plan on the table (E&E Daily, Dec. 13).

In the immediate future, the proposal provides a boost for efforts to win an extension to the PTC before its scheduled expiration at the end of the year, lawmakers from both parties said yesterday. And over the longer term, it increases pressure on other industries to wean themselves off federal support — both for other renewable sectors that rely on similar temporary tax credits and for traditional sources whose benefits are baked into the tax code.

“Whether it’s wind, whether it’s oil and gas, whether it’s — pick your sector — I think it is important that they look critically at what comes their way and make an evaluation [and] offer some suggestions,” Sen. Lisa Murkowski (R-Alaska) told reporters yesterday.

Murkowski, the ranking member of the Senate Energy and Natural Resources Committee, said she has made the same pitch in meetings with representatives of the oil and natural gas industry, which enjoys a suite of permanent tax deductions and other benefits.

Those conversations have revealed more detail about which preferences are most valuable to the industry, she said. And they provide more insight ahead of an expected debate over a top-to-bottom reform of the tax code in which, she added, “I imagine you’re going to see some changes” to the benefits energy industries enjoy.

Murkowski has previously floated the idea of phasing out the wind PTC over five years; she said yesterday she was still evaluating whether AWEA’s proposed six-year phaseout would be something she could support.

AWEA presented its proposal as an idea to be considered in the context of comprehensive tax reform next year. The group continues to urge an immediate extension of the 2.2-cents-per-kilowatt-hour PTC in line with language approved by the Senate Finance Committee that would allow developers who begin construction before the end of next year to claim the credit. That idea also has support from Democrats on the Hill.

“I think it’s better to take the Senate provision,” said Rep. Sander Levin (D-Mich.), the ranking member of the House Ways and Means Committee. “Because I think the long run needs to be part of tax reform.”

Starting in 2014, developers would receive 90 percent of the PTC’s value, ratcheting down to 60 percent of the value in 2017 and 2018 and ending the following year, according to the proposal, which came about after months of internal debate and economic analysis on what was needed to maintain a “minimally viable” industry.

“I do think six years gives us the certainty the industry needs. There’s still a lot of interest in moving it forward,” said Rep. Earl Blumenauer (D-Ore.), a leading wind champion in the House.

Sen. John Thune (R-S.D.), who for months has been calling on AWEA to present a phaseout plan, said the announcement marked a good first step in negotiations over how to create a glide path for wind to thrive without subsidies, although he acknowledged that the time frame may have to be shortened at least to five years to pass muster with House Republicans.

“I think there’s great value in terms of the politics of that issue if you can demonstrate that you as an industry are willing to start phasing that credit out,” Thune told reporters. “So I think it helps us defend it in the near term, and hopefully convince people that this is an industry that understands that this isn’t going to be around forever.”

Reaction to, impact of proposal

By getting out in front of the phaseout question, AWEA could increase pressure on other industries to think about eventually stepping away from their own tax credits, Thune said.

“My own view is there is not much acceptance or tolerance around here in the budgetary climate we’re facing … for keeping these things, just sustaining them year after year after year at the levels they’re at,” he said. “So they’re going to have to come up with some ways to become eventually self-sufficient.”

Initial reactions to the proposal yesterday indicated an appetite to phase the credit out more quickly. Rep. James Lankford (R-Okla.), who has said a phaseout to the credit would be preferable to letting it end this year, bristled at the time frame AWEA proposed, although he acknowledged he has not studied the plan in detail.

“Six years — that’s the longest phaseout I’ve heard out of any proposal, but I’d have to see what they’re proposing on it,” he said. “But that’s a very, very long phaseout. That’s counting on three Congresses from now doing the same thing we’re doing. ”

Rep. Mike Pompeo (R-Kan.), who has been a leading advocate of eliminating the PTC and has introduced legislation that would strip away tax credits enjoyed by several energy sectors, said AWEA’s opening proposal was “insufficient” but was encouraged that the industry at least put something on the table.

The fate of an immediate PTC extension is expected largely to be decided by whether a deal can be reached on the looming “fiscal cliff” of scheduled tax increases and across-the-board spending cuts; negotiations are ongoing, and the package is expected to have the PTC and other so-called tax extenders tacked onto it.

Pompeo said the presence of a PTC extension would not in itself be enough for him or other members to vote against a larger cliff package that achieved broader Republican goals, such as significant entitlement cuts. That means the long-term future of the credit is likely to remain a prominent fixture in tax reform debate.

“I think it shapes the context of what takes place,” Pompeo said. “Having said that, I mean, I think you see their willingness to talk about a phaseout demonstrates their recognition that this is not an appropriate thing to go on forever. So I’m happy that they’ve at least now recognized that they’re willing to do that. Hopefully, we can find a place and everybody can end up happy.”

The plan also attracted some wholesale detractors yesterday, including many of the same voices that have been lobbying against the credit all year.

“I’m going to do my best to oppose it. The new phaseout is the latest example of how outrageous this spending is,” said Sen. Lamar Alexander (R-Tenn.), one of the credit’s most vocal opponents on Capitol Hill. “The so-called phaseout of this wind subsidy looks like it would cost $50 [billion] to $60 billion that the taxpayer would be committed to. That’s a massive amount. That’s more than the damage from Hurricane Sandy — I mean, that’s a huge amount of money.”

The American Energy Alliance, another leading PTC critic, also cited cost estimates in Alexander’s range, a figure the group said it arrived at by starting with the Joint Committee on Taxation’s estimate that the Finance Committee extension would cost $12 billion over 10 years and reducing that by the same amount AWEA proposes to reduce the credit’s value over six years.

An industry source questioned that assessment and noted that when the Office of Management and Budget scored President Obama’s fiscal 2013 budget proposal — which called for a permanent extension of the PTC — it estimated the PTC’s cost at $14 billion over the next 10 years.

“The PTC doesn’t cost taxpayers a dime. It more than pays for itself in local, state and federal taxes over the life of the credit,” said Peter Kelley, an AWEA spokesman, citing a NextEra Energy Resources analysis.

“Lose the incentive suddenly, and you lose much of the $15.5 billion a year in private investment in U.S. wind farms, and the taxes they pay,” Kelley added.

AWEA did not produce its own cost estimate of the phaseout proposal because the association relies on CBO to provide a budget score, Kelley said.

The phaseout proposal also was quickly slammed by Exelon Corp., which publicly split with AWEA earlier this year over its opposition to extending the credit. Exelon officials have said the PTC distorts prices in competitive electricity markets in the Midwest and allows wind producers to undercut Exelon’s sizable nuclear fleet by offering negative prices during some overnight periods when wind is abundant and demand is low.

In a statement, the company called the proposal “completely unacceptable” because it would last too long and cost too much.

“Even if it is allowed to expire at the end of this year (as called for under current law), wind projects that are eligible for the credit before its expiration will continue to receive it for another 10 years,” the company said. “The wind energy industry has matured and is thriving today; the PTC is simply no longer needed.”