Federal and New York Officials Reward Spain’s Iberdrola at the Expense of U.S. Taxpayers, Job Seekers, and Electric Customers

Often it’s hard to tell whether highly questionable actions by federal and state government officials that reward special interests at the expense of U.S. taxpayers, job seekers, and electric customers are due to honest but misguided intentions, skullduggery, malfeasance, incompetence, or simple mistakes.

Consider, for example, the connections between: 

• Spain-based Iberdrola’s recent announcement that its net profit had doubled, and
• Actions affecting Iberdrola during the last few months by members of the New York State Public Service Commission (NYS PSC), NY Senator Charles Schumer, US Energy Secretary Steven Chu, and US Treasury Secretary Timothy Geithner.

Please recognize that “connecting the dots” among the actions of these officials will require careful reading of the following four pages.

Iberdrola (Spain) announces doubled profit on February 24:

“MADRID (AFP) – Spain’s Iberdrola, the world’s biggest wind-power generator, said Wednesday its annual net profit in the fourth quarter more than doubled to 795.3 million euros (1.07 billion US dollars)

“But the company reported that for the full year 2009 net earnings weakened due to weakness in core markets, which was offset by higher renewable energy output and greater income from its US unit.

“The results were boosted by income from its US unit Energy East, which helped make up for lower demand in its two main markets, Spain and Britain.” (emphasis added).

 

There is little doubt that the following actions by New York State and U.S. government officials were significant factors in Iberdrola’s enviable profit picture:

1. NYS PSC, urged by Senator Schumer, approved Iberdrola acquisition of Energy East on Iberdrola’s terms.

Initially, a NYS PSC administrative law judge (ALJ) urged that, as a condition in approval of Iberdrola’s acquisition of Energy East companies, that Iberdrola not be allowed to own “wind farms” in Energy East’s service territories in New York because this would be contrary to the PSC rules against allowing a company to own both electric generation and distribution operations. However, Iberdrola insisted on having the right to own “wind farms” anywhere in New York as a condition of its acquisition of Energy East’s electric and gas distribution companies.

Senator Schumer entered the picture. He was angered by the ALJ’s position, referred to the position as “stone headed,” openly favored Iberdrola, and met with the PSC Chairman to urge approval of the acquisition, with Iberdrola having the right to own “wind farms” in New York.

On September 3, 2008, the PSC approved the acquisition and even insisted that Iberdrola invest at least $200 million in “wind farms” in New York. At that time, Iberdrola indicated that it planned to invest at least $2 billion.

In June 2008, when the Iberdrola acquisition of Energy East was pending before the PSC, Governor Paterson praised Iberdrola’s intention of investing $2 billion in “wind farms” in New York.

2. Owners of “wind farms” enjoy enormous federal and state tax breaks that permit them to shelter profits – including profits from other operations (such as Iberdrola’s Energy East distribution companies) from federal and state corporate income tax.

At the end of 2009, Iberdrola owned 3,591 MW of wind turbine capacity in the U.S, including co-ownership of the 231 MW Maple Ridge “Wind Farm” in upstate NY and smaller projects in western New York. Iberdrola is pursuing development of many other wind farms, including several in New York.

There are many tax federal and state breaks and subsidies for “wind farms.” Particularly important to them are state Renewable Portfolio Standards (RPS) that specify the amount of electricity sold by utilities that should come from “renewable” energy sources. RPS in effect create high priced markets for the benefit of owners of “renewable” facilities, now primarily “wind farms.” High prices paid to “wind farm” owners are, of course, passed along to electric customers in their monthly bills.

The burden of tax liability that is escaped by wind farm owners is, in effect, shifted to ordinary taxpayers who do not enjoy such tax shelters and can’t escape their tax liability. Three tax breaks that are the especially important for companies such as Spain-based Iberdrola are:

a. The federal wind “Production Tax Credit” (PTC). The PTC permits a “wind farm” owner to deduct from its bottom line tax liability $0.021 per kilowatt-hour of electricity produced during the first 10 years of operation. For example, if Iberdrola’s 3,591 MW of wind turbine capacity operated at an average capacity factor of 30%, the annual value of the PTC – the deduction from owners’ tax liability — would be over $198 million per year (1) or nearly $2 billion over 10 years.

b. Accelerated depreciation deductions for federal income tax purposes. Nearly all wind farm capital investment costs qualify for the five-year double declining balance accelerated depreciation for tax purposes. In simple terms, it permits a wind farm owner to “recover” or “write off” the entire capital cost (2) of qualifying equipment and facilities during 6 tax years.

The depreciation allowance is deducted from otherwise taxable income, specifically 20% of capital costs in the 1st tax year, 32% in the 2nd tax year, 19.2% in the 3rd and the remaining 28.8% in the ensuing 3 tax years. (Owners of most electric generating units powered by traditional energy sources are required to use 20-year, 150% declining balance depreciation for tax purposes.) In addition to the exceedingly prompt write off or recovery of all capital costs, the depreciation deductions that reduce taxable income also reduce the owner’s tax liability by an amount equal to 35% (3) of the allowed depreciation deduction. This reduction in tax liability occurs before the tax credit deduction described above. Most “wind farms” are legally owned by single-asset limited liability companies (LLCs).

However, for tax purposes, the operations of subsidiary and affiliate companies, including LLCs with their tax breaks, can be consolidated with parent corporations’ financial operations, thus

permitting some large corporations to avoid paying any federal income tax. Quite likely, Iberdrola is in such an enviable position.

Accelerated depreciation has the added advantage of permitting wind farm owners to recover all equity and debt through deductions from taxable income much faster than normal book depreciation would allow.

c. Accelerated depreciation deductions for state income tax purposes. Many states, including New York, conform their corporate income tax rules to the federal IRS rules. In such cases, the accelerated depreciation deductions allowed on federal returns (described above) flow through to state returns and, therefore, reduce state corporate income tax liability. Depending on the size and profitability of the corporation using a consolidated tax return, rapid depreciation deductions may completely eliminate any state corporate income tax liability for several years.

3. The federal stimulus legislation “opened the floodgates” of tax dollars for “wind farm” owners.

“Stimulus” legislation, — i.e., the American Recovery and Reinvestment Act of 2009 (ARRA) — permitted wind farm owners eligible for the Production Tax Credit (PTC) described above to take, instead of the PTC — either (a) a 30% investment tax credit (ITC), or (b) cash grant from the US Treasury equal to 30% of a wind farm’s eligible capital cost. The grant money is not taxed.

4. Secretaries Geithner and Chu have used $577 million in stimulus money to fund Iberdrola’s bonanza, and Iberdrola is expecting another $430 million.

Using tax dollars from the $787 billion stimulus “slush fund,” Secretary of Treasury Geithner and Secretary of Energy Chu enthusiastically passed out cash grants for “renewable” energy projects on September 1 and September 22 2009 that totaled more than $1 billion. Most of these grants were to wind farm owners. Iberdrola received $577 million in cash grants, nearly 60% of the grants distributed during September 2009.

Iberdrola’s CEO has indicted that he expects to receive an additional $430 million in 2010.

A detailed analysis of stimulus grants for wind energy by American University’s Center for Investigative Journalism indicates that Treasury and DOE have continued to dispense cash grants but have stopped publicly announcing the recipients. (So much for stimulus fund “transparency”.)

There appears to be no serious question but that U.S. taxpayers have made a huge and direct contribution to the more than doubling of Iberdrola’s net profits described by the company.

5. Few U.S. jobs are created by “stimulus” grants to “wind farm” owners – especially when they are given for projects (a) already completed, (b) owned by foreign-owned companies and/or (c) using imported turbines, turbine parts, towers, blades, and other equipment.

“Wind farms” create few jobs compared to spending of equal amounts on generating units using traditional energy sources (e.g., natural gas or coal). This is especially the case when wind turbines, towers, blades, and/or other equipment are imported – which is the case for many “wind farms.”

Construction jobs are temporary, with key jobs often filled by traveling workers who spend little time or money in the area where “wind farms” are constructed. Few permanent jobs are created by “wind farms” while many more are created by generating plants using traditional energy sources.

An “economic model” labeled JEDI (Jobs and Economic Development Impact), prepared by a wind industry advocate and funded with tax dollars and promoted by DOE and its National Renewable Energy “Laboratory” (NREL) overstates local and regional “wind farm” job and economic benefits. (4)

The ineffectiveness of the billions in “stimulus” grants in creating jobs in the U.S. is explained in detail in the American University study cited above.

6. Senator Schumer’s inconsistency.

On November 5, 2009, NY Senator Charles Schumer issued a press release and a copy of his letter to President Obama sharply questioning whether “stimulus” grants should be given to the owners of a proposed “wind farm” in Texas because the owner of the proposed “wind farm” planned to obtain its wind turbines from China.

According to the Senator’s letter the project would cost $1.5 billion and the owners were seeking a $450 million grant. Thus far, it appears that Senator Schumer has not questioned the larger $577 million in grants given to Spain-based Iberdrola that have already helped fuel the company’s net profit bonanza – or the additional $430 million stimulus expected in 2010 by Iberdrola’s CEO. It appears that a very large number of the wind turbines that Iberdrola has installed in the U.S. during the past two years have been imported.

Conclusion

It is far from clear how high-level government officials can justify the actions they have taken. Some writers have suggested that at least the huge grants can be explained by political connections with current Administration officials, former employment connections by Administration officials, and campaign contributions.

There is little doubt that the actions by federal and state officials described above have been detrimental to the interests of U.S. taxpayers, jobless, and electric customers (including those in New York who are facing rate increases from Iberdrola distribution companies) and that the actions have resulted in an outflow of dollars from the U.S. economy.

Furthermore, when considering the implications of the actions by federal and state officials who are so eager to force US taxpayers and electric customers to bear the huge costs of tax breaks and subsidies for wind energy, it is useful to keep in mind that electricity from wind is high in cost and low in value. (5)

Footnotes

(1) 93,591,000 kW of capacity times 8760 hrs. per year x . 3 capacity factor x $0.021 per kWh = $198,180,108.

(2) Whether financed with owner’s equity or debt (borrowed money).

(3) 35% is the corporate marginal tax rate in the U.S.

(4) Thirteen reasons why economic models like JEDI overstates local and regional job and economic benefits can be found o pages 2-3 of a paper that can be found here.

(5) See, “The True Cost of Electricity from Wind is always Underestimated and its Value is always Overestimated” (and here).