Reining In the BETC: Recommendations to the Governor

On November 20, 2009, the Oregon Department of Energy and Business Oregon (which, until recently, was called the Oregon Economic and Community Development Department) (together, the "Agencies") submitted a report containing joint initial recommendations for reform of the Oregon Business Energy Tax Credit ("BETC") program. This review and assessment was performed at the direction of Governor Kulongoski, and these recommendations are expected to inform the Governor's legislative agenda in the February 2010 session. A more complete analysis of the BETC program, as required by House Bill 2180, remains underway.

The report identifies the BETC program as one of the few effective tools the state has to grow the economy, describing the program as "an integral part of providing Oregonians with reliable and affordable energy today and into the future while also providing needed jobs and economic benefits." The Agencies urge that the recommendations described below be adopted before any other significant changes to the BETC program are made.

According to the report, the conclusions reached after review of the BETC program are intended to align the BETC incentives more accurately with the program's goals of supporting conservation and energy efficiency and renewable energy projects, and attracting manufacturing operations to Oregon, which bring with them family-wage jobs and represent a long-term investment in the state. To that end, the report includes seven recommendations to "increase accountability, cap the renewable program growth and maintain our ability to attract manufacturing jobs and implement conservation measures." Also presented is a new funding model to be applied specifically to large-scale wind projects, which have come under attack in recent months for purportedly absorbing a disproportionate aggregate amount of tax credits certified under the BETC program. The seven recommendations, each described in brief in this article, are broken down into the following headings:

1. Program Distinction (Conservation, Manufacturing, and Renewables)
2. Increased Accountability in All Programs
3. Cost-Control Measures in the Renewables Program
4. Pass-Through Program
5. Manufacturing Program
6. Conservation Program
7. Retroactivity

Program Distinction

In the report, the Agencies suggest that the BETC program be considered in three separate program areas (conservation, manufacturing, and renewables), and assert that each of these areas has programmatic differences and requires independent policy analysis. It is recommended that the conservation and manufacturing programs be extended to 2016 (past the current sunset date for the BETC program of 2012), that the renewables program be capped to control costs and growth, and that large-scale development projects that, in effect "don't need" the BETC, be offered an alternative incentive model.

Increased Accountability

The Agencies offer six suggestions that would afford the Department of Energy more tools to hold BETC applicants accountable:

• Void tax credits if the facility ceases to operate within five years of final certification or the project owner fails to meet performance standards or conditions of the application.
• Deny any project owner, applicant, or corporation/person connected to a project that is involved in a discontinued project, has a revoked or suspended application, or owes money to the state, from participation in any future application until all debts or conditions have been met.
• Provide the Department with authority to collect additional project cost data, including ongoing operations and maintenance information.
• Add "clawback" provisions for all program areas.
• Increase the Department's ability to suspend, deny, or revoke applications and make conditions.
• Establish an application expiration date of three years with the ability to extend two additional years if the applicant reapplies.

Cost-Control Measures--Renewables Program

Because it is identified as the largest and most unpredictable of the programs, the renewables program attracted unique cost-control recommendations not recommended ifor other program areas.

Program Cap. For the current biennium, a maximum program cap of 1 to 4 percent of total gross energy supplier gross operating revenue (or, for 2008, approximately $7.3 billion, resulting in a cap of approximately $73 million at the low end and $292 million at the high end). This gross revenue index includes all sales of all energy generated, distributed, transmitted or supplied in Oregon.

Eligible Cost Adjustment. Department authority to reduce eligible costs for purposes of determining the BETC for a project by any other public money received by the owner for the project (an expansion on the current approach, in which only federal grants reduce eligible costs).

Alternative Incentive Cap. A 5 percent tax credit up to a $200 million cap for "mature and/or ‘stand alone' markets," decreasing by 1 percent per year until eliminated for that particular market. Projects with eligible costs of less than $100,000 would still be eligible for a 50 percent BETC as described in current law.

Priority Setting. Once an overall renewables program cap is in place, prioritize projects based on "jobs created, levels of production/generation, amount of tax credit requested and market readiness, etc."

Pass-Through Program

The Agencies suggest that a purchaser of the BETC not be permitted to amend a prior year's return in order to realize immediate benefit from the BETC because "this practice allows an entity with a tax liability to obtain an ‘instant' payment from the state and shortens the tax credit payment schedule to less than the current five year schedule."

Manufacturing Program

The report recommends that the manufacturing program be extended to 2016, and that a preliminary certification issued before January 1, 2016, be honored. In addition, the report recommends that separate rules be formulated relating to phased projects and project expansion in recognition of the relationship between manufacturing and job creation.

Conservation Program

It is recommended that the conservation program also be extended to 2016.

Retroactivity

Several recommendations relate to timing and application of the measures described in the report:

• The renewables cap for the current biennium applies to all projects receiving a preliminary certification after (at least) July 1, 2009.
• The accountability recommendations apply to all projects that have not received a final certification.
• At a minimum, the alternative incentive model applies to wind projects beginning July 1, 2009.

Though the new pass-through formula for the pass-through partner transfer price is not discussed in this report, the Agencies request guidance from the Legislature about whether the new formula should apply to preliminary certificates or final applications, and suggest that it apply to preliminary certifications beginning July 1, 2009, "consistent with other program recommendations."

Finally, the Agencies, while not including a current recommendation on it, note that the BETC program should shift to a competitive grant model: "‘We suggest a "cap and competition" model is the best long-term solution to address the natural changes as markets shift and grow."