Tuesday, December 07, 2010

NRG's Use of Tax Exempt Bonds

As I pointed out last week, the expected reductions from NRG's Indian River Power Plant will result in Delaware's air emissions being reduced by roughly one half in the next three years. So who pays for the cleaner air?

The short answer is NRG and its shareholders. But what about the tax exempt bonds NRG will use to finance the $366 in new controls it is installing? What is the cost to taxpayers of the $57 million in recovery bonds and $190 in state sponsored revenue bonds?

The recovery bonds were created by ARRA, the American Recovery and Reinvestment Act passed last year. Because the bonds are tax exempt, there is some loss of federal tax revenue from investors. But if the recovery bonds create financing where none previously existed, the loss is hypothetical. Remember, investment was down drastically two years ago, and has still not fully recovered. You can't tax nonexistent investment activity.

What about the state revenue bonds, which are also tax exempt? The state is not on the hook to investors, though there is lost tax revenue involved. The state is limited in the amount of revenue bonds it can issue, so the key question in allocating the bonds is a question of judgement: What would be the best use of the bonds? Allocating bonds to one business precludes the availability of financing to another.

Leah Hoenen, writing in the Cape Gazette, caught an important detail in the deal. The Delaware Economic Development Office (DEDO) is charging NRG $950,000 for use of the revenue bonds. Its a good deal for NRG, which gets a hefty chunk of low cost financing, and for DEDO, which gets cash back to replenish its coffers for use on the next economic development agreement.

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