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OCR for page 57
Impediments
Urban district heating and cooling systems face a number of
financial, and political problems that impede their ability
a ~ __ ¢~
equal footing with other sources of enerov Particularly oil and cast
economic,
to grow at
rate comparable to that of institutional systems or to compete on an
, - . . - - - ,, , .
These impediments include the lack of data and information that
make district heating and cooling an unfamiliar technology to most
people in the United States. They also include the high cost of
building a new system, the taxes and fees that add to those costs, the
requirements that potential investors place on loans that further
raise costs and complicate planning, the restrictions imposed by
economic regulation, and the complex institutional arrangements that
are required to meet the political needs of local and state
governments as well as labor and public interest groups.
Once again, it is worth noting that the impediments have largely
affected the urban, investor-owned utility systems. Their effects on
the growth of municipal or nonprofit urban systems have been far less
serious. Their effects on institutional systems have been minimal,
which helps explain the greater growth of these systems in recent
decades.
Overcoming or mitigating such impediments will be necessary if
district heating and cooling is to fulfill its potential outlined in
Chapter 3. Without such action, as the Argonne National Laboratory
figures cited earlier show, district heating and cooling will grow,
but very slowly (Figure 3-1~.
Removing the impediments cannot be done by one agency or level of
government alone. Nevertheless, the major focus for governmental
change will rest on the state and, especially, on the local level.
Much of the responsibility will also
cooling ~
manufacturers
lie with the district heating and
community itself--system operators, suppliers, designers, and
and their representatives.
57
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58
DATA AND INFORMATION
District heating and cooling has suffered from a lack of public
interest in the United States. In large part, this is because people
are unaware that the technology exists, works, and has been around for
a long time (CRS, 1983~.
There is a near total lack of adequate data and information on U.S.
systems on which to base public and private decisions about district
heating and cooling. Currently available data in the United States
are incomplete, often biased, and not comparable with international
data. No adequate data exist, for example, on the extent of
institutional systems. No U.S. government agency or private
association systematically collects or disseminates information about
district heating and cooling, although a new trade group has begun to
do so.
As a result, many people are unaware of the extent to which
district heating and cooling is already in place. In part, this
problem stems from the definitional differences between the United
States and Europe and from the many names by which district heating
and cooling is known within this country (see Chapter 1~. Europeans,
in particular, are often unaware of district heating and cooling in
the United States because of the lack of full U.S. participation in
international efforts.
There are three specific areas where credible data and information
are important. First, municipal officials and the public are often
unaware of district heating and cooling systems or consider them to be
a new and untried technology. Second, not recognizing the potential
market, U.S. manufacturers have been slow to advance a research agenda
that would help develop the products necessary to ensure their ability
to compete with foreign equipment suppliers.
Third, similarly lacking awareness of the magnitude of successful
systems in the United States, the financial community imposes high
risk penalties on what it perceives as a new and untested technology.
Unbiased and widely disseminated data about successful systems have
not been available to the financial community or the general public.
In part, information is lacking because the district heating and
cooling industry is fragmented and lacks nationally recognized
leadership. This situation, typical of the construction industry,
results from the large number of small companies involved.
The combination of industry fragmentation and inadequate data has
made new market aggregation and new product development difficult.
The current data, although incomplete and occasionally biased,
indicate the potential for a large domestic and international market.
A credible data base is needed to analyze potential and to develop
appropriate research and development programs. These, in turn, are
necessary if U.S. firms are to compete successfully with foreign
companies.
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59
The industry's outreach and educational efforts with the financial
community and local governments have been insufficient to date. Too
much activity has been geared solely to lobbying and too little to
developing the potential market. More information is needed to
stimulate market growth and product development.
The lack of data and information has contributed to other
impediments. The U.S. tax regulations, for example, are ambiguous
concerning both depreciation rules and the use of tax-exempt
industrial revenue bonds for financing district heating and cooling.
Similarly, district heating and cooling is rarely a specific eligible
activity in major federal grant and loan programs.
Further, the United States has not yet participated fully in the
district heating and cooling activities of the International Energy
Agency (IEA). By not participating, the United States has missed
opportunities to share information and facilitate technology transfer.
TAXES AND FEES
District heating and cooling systems are subject to a variety of
federal, state, and local taxes that often place investor-owned
utility systems at a competitive disadvantage relative to other energy
supply systems. AS a result, district heating and cooling has
sometimes lost the price advantage that should be its prime attraction.
For example, district heating and cooling systems are often
required to obtain a "certificate of public convenience and
necessity. " This involves paying a franchise tax, a common way that
state and local governments regulate and tax public utilities (Kier et
al., 1981~. On the other hand, competitors who build, install, or
maintain gas-fired boilers or electrical heat pumps are not required
to obtain certificates or pay franchise taxes. Most of these
competitors are relatively smal1-business electrical, mechanical, or
plumbing contractors rather than large electric or gas utilities.
In addition, utilities are often taxed both on the fuel they buy
and on the energy they produce and sell from burning that fuel
(Hanselman, personal communication). In effect, the utilities are
being taxed for energy as a fuel and as a product. In the worst case,
the tax amounts to 20 percent of the product's cost. In fact, such
multiple taxation of utility-provided gas and electricity appears to
be growing.
To many financially pressed state and municipal governments,
district heating and cooling systems are viewed as a revenue source
rather than as a community resource. As a result, too many
governments charge fees for construction permits, inspections, and
franchises that add to costs and increase the time it takes to build
the systems.
In another area, the federal government and some states have
granted tax credits and a variety of other incentives to encourage the
installation of energy-conserving equipment' including insulation,
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60
multiple glazed windows, and solar energy panels. These incentives
are not available, however, to individual building owners who want to
retrofit their buildings to connect them to an energy-conserving
district heating and cooling system. Tax credits for individual
heating equipment are scheduled to expire in 1985 unless Congress
renews them.
Taxes more generally favor onsite heating, ventilation, and
air-conditioning equipment. Individual heating equipment qualifies
for a one-time tax credit while tax credit for the equipment to
connect a building to a district heating and cooling system must be
determined case by case. Jamestown, New York, for example, had to
apply to the Internal Revenue Service (IRS) to get such a credit for
building owners who connected to its new system (see Appendix A).
In addition, IRS regulations and federal tax laws are unclear as to
whether for-profit systems can depreciate their equipment over 5 or 15
years. Five year depreciation creates a favorable climate for
investors because there is a shorter payback period, thus improving
prospects and terms for financing. The latter affects the costs of
developing a system and, ultimately, the price customers pay for
thermal energy.
The Tax Equity and Fiscal Responsibility Act of 1982 made district
heating and cooling projects eligible for tax-exempt industrial
development bonds (Kier et al., 1981~. In 1984, however, Congress
placed a per state limit of $150 per capita on tax-exempt industrial
development bonds that any municipality or state agency may sell.
Congress exempted certain high-cost, capital-intensive projects,
but did not specifically include district heating and cooling systems
in the exemption. This tax policy has increased the uncertainty for
potential investors in district heating and cooling systems.
Because district heating and cooling projects are costly, they may
have difficulty competing with other nonexempt projects for industrial
development bonds available under the state limit. The first phase of
the St. Paul project, for example, cost $44 .3 million or $165 per
capita (OTA, 1982~. If St. Paul had had to compete for a share of the
Minnesota state allocation, it might not have been funded (see
Appendix A).
Bills introduced in Congress to create tax incentives to encourage
district heating and cooling via tax-exempt financing, investment tax
credits, and residential energy credits, among other incentives, have
so far not been enacted. These bills would have removed the need to
decide depreciation allowances for retrofit equipment on a
case-by-case basis. In Europe, such incentives have often
successfully encouraged consumers to connect to district heating
systems. Attempts to persuade Congress to authorize the Synthetic
Fuels Corporation to fund district heating and cooling systems have
likewise failed (CRS, 1983~.
District heating and cooling does not require preferential
treatment to succeed. Rather, it needs even-handed and consistent tax
policies. The current situation has led to increased use of
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61
tax-exempt, not-for-profit corporations to build or revitalize
district heating and cooling systems, as in St. Paul. In some cases,
this is a positive development, but it slows the overall growth of
district heating and cooling by not taking advantage of the potential
for growth that investor-owned utility systems represent.
REGULATION
The degree of regulation district heating and cooling systems face
varies from state to state. As a factor encouraging or inhibiting
their growth, regulation ranks second only to financial incentives,
according to Argonne National Laboratory models (see Figure 3-11.
As of 1981, 35 states specifically regulated urban district heating
and cooling systems through state public utility commissions (Kier et
al., 1981~. In addition, New York has recently authorized its cities
to establish municipal public utility commissions. As of October
1984, 18 had done so.
Electric utilities are generally subject to economic regulation as
public monopolies. Most states regulate the sale of thermal energy,
especially when that sale is made by an otherwise regulated,
investor-owned utility. As a result, utilities generally prefer to
supply heat at the boundaries of their generating plants rather than
to potential customers located longer distances away (Kier et al.,
1981).
In some cases, the question of whether a district heating and
cooling system is subject to regulation may be quite complicated. The
Maryland Public Service Commission, for example, decides whether to
regulate or not based on the number and type of customers served. The
Baltimore Resource Energy System Company (RESCO) is not regulated when
it sells thermal energy from its municipal solid waste incinerator to
institutional users, such as the Cherry Hill housing development run
by the Housing Authority of Baltimore County (HABC), but would be if
it sold directly to privately owned residential units (see Appendix A).
Utilities involved in district heating and cooling find not only
their rates but also their returns on investment regulated. Price
regulation is particularly burdensome when it prevents the recovery of
costs that would be acceptable in the marketplace. Such economic
regulation discourages investment and has contributed to the demise of
older systems.
The growth of institutional systems can be explained, in large
part, by the fact that they are not subject to state regulation and
taxes. Similarly, cities such as St. Paul and Jamestown, New York,
have used not-for-profit corporations to avoid regulatory problems.
In Los Angeles, the Southern California Gas Company, a regulated
subsidiary of the Pacific Lighting Corporation, has set up a
nonregulated subsidiary of Pacific Lighting to provide district
heating and cooling to Century City and six other locations in
southern California (see Appendix A).
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62
Economic regulation is an impediment, especially when contrasted
with the lack of such regulation imposed on the owners of individual
boilers or on the suppliers of alternative fuels. Fuel oil
distributors, for example, do not have to appear before state
regulatory commissions or have their rates or profits set for them.
Investor-owned utilities have traditionally been regulated because
they possess an effective monopoly on electrical generation. But no
such monopoly exists when they sell thermal energy as a by-product of
electrical generation. Here, they must compete in the marketplace
with fuel oil, natural gas, and other energy sources.
In certain cases, regulation has been mitigated by state action.
In Missouri, for example, the state legislature specifically exempted
the Bi-State Development Authority in St. Louis in 1983 from public
service commission regulation for the steam-based district heating and
cooling system the authority took over from Union Electric, an
investor-owned utility (RDA, 1983~.
Regulation contributes to the high costs of planning, financing,
installation, and operations, which make economic feasibility
uncertain. District heating and cooling requires a large early
investment, when few if any revenues are generated. Where regulation
limits the return on investment and controls the ability to roll
investment costs into rates, the incentive to develop is removed.
Most successful district heating and cooling systems in the United
States are now operating without state utility regulation because they
are not-for-profit, municipal, or institutional installations. Most
new or revitalized urban systems are not connected with a regulated
public utility. The latter are more often than not abandoning (as in
Chicago) or selling (as in Pittsburgh) their district heating and
cooling systems.
A number of urban systems, such as that in St. Paul (see Appendix
A), have been established under Section SO1 of the Internal Revenue
Tax Code to escape state regulation as tax-exempt, nonprofit
entities. As a short-term measure, nonprofit status has enabled a
number of systems to proceed. However, this use of Section 501 by
corporations other than municipally owned utilities could provoke
congressional review.
Current national policy aims at increasing energy production by
deregulating oil and gas prices. The profit from district heating and
cooling systems hinges on pricing energy services, allocating benefits
and costs among customers and investors, and initially limiting
services to areas of high energy demand.
The uncertainty about regulatory treatment of these issues
significantly affects both actual and perceived financial risks of
district heating and cooling compared with those of more conventional
systems. Risk directly translates into higher costs, for example,
from the imposition of "risk premiums" in the form of long-term
customer contracts, full faith and credit guarantees by
municipalities, and special insurance coverages.
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63
More consistent state regulations are needed before district
heating and cooling can develop nationally. A better understanding of
the highly competitive environment in which these systems must operate
might lead state governments to reduce their economic regulation of
utility-owned district heating and cooling systems. The development
of a model regulatory approach would aid in the broadest
implementation of district heating and cooling in the future.
District heating and cooling depends on the flexibility of using
low-cost, locally abundant fuels, including coal and municipal solid
waste. State and local environmental regulations often restrict the
use of coal and municipal solid wastes as fuels. Such fuels typically
require large central plants or storage facilities located near urban
centers, so that they may raise environmental or esthetic concerns.
Fuel flexibility represents a major source of price advantage for
district heating and cooling systems, which can substitute
lower-priced fuels such as coal or municipal solid wastes for higher-
priced gas or oil. When fuel choice is restricted, systems cannot
compete successfully because their other costs are too high. New York
City, for example, restricts the burning of coal. It only allows
public schools to burn coal, but not public utilities or other central
power plants.
Nationally, the U.S. Environmental Protection Agency (EPA), acting
under the authority of the Clean Air Act, sets air quality standards
that state governments must adopt plans to meet. The current
standards allow the use of the so-called "bubble policy," which
permits power plants to make trade-offs among fuels and pollution
control equipment. The bubble policy, as now implemented, does not
adequately consider the many untreated, individual boilers that one
treated, central power plant will replace in a district heating and
cooling system.
Computer studies of district heating and cooling system scenarios
for Boston and Minneapolis-St. Paul, for example, showed that
overall air quality levels were greatly improved by conversion
to district heating and cooling, even though net emissions
increased slightly (Levine and Santini, 1984~. Where existing
power plants (mostly using residual oil) are used to generate the
added electrical and thermal requirements, those plants showed a
21-percent increase in total emissions (Figures 4-1, 4-2, and 4-3~.
For Boston, the computer scenario showed that sulfur dioxide emissions
were increased by 5.9 percent and particulates by 2.2 percent, but
nitrogen oxide emissions declined by 2.9 percent.
EPA's bubble policy may need some modification to allow trade-offs
between a single treated source and multiple untreated sources of air
pollution. Such modifications are necessary if cogenerating and urban
district heating and cooling systems are to succeed. In fact, EPA is
considering modifying the bubble policy to give pollution "credits" to
cities and companies for actions that reduce overall emissions. Such
actions might include, for example, replacing a fleet of
gasoline-powered cars with methane-powered cars. In such a case, a
OCR for page 64
64
28
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20
0 16
en
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cow
8
4
Emissions Power Plants
0~\\\~] District Htg. Service Area
12
7.1
o
3.3
5.9
TWIN CITIES
BOSTO N
FIGURE 4-1 Annual average increase in SO2 emissions due to district
heating (Levine and Santini, 1981~.
OCR for page 65
65
24
22
20
-
12
10
8
6
4
2
o
Before District Htg.
///~ After District Htg.
4.7
12.3
,. ~
4.7
6.1
Downtown City City Fringe
B OSTO N
FIGURE 4-2 Ambient SO2 levels in Boston from the heating sector
(Levine and Santini, 1981~.
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66
70
^
~ 60
O c^
~on
o
o
O 40
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Before Di~ricl Ha.
After District Htg.
47
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~inneapolk
.Paul
TWIN CITIES
Cay Cay Fringe
FIGURE 4-3 Ambient SO2 levels in the Twin Cities from heating and
other large point sources (Levine and Santini, 1981) e
OCR for page 67
67
company might be given credits for use against the emission levels of
its manufacturing or generating plant.
No such credits have yet been given, however. Moreover, while
district heating and cooling systems might qualify, there are no
indications that EPA specifically intends to include them. If EPA
does not specifically include district heating and cooling, then each
system will have to be judged case by case.
Regulation can significantly increase a system's cost. In Boston,
the cost of a new cogenerating and district heating plant for the
Harvard medical facilities and five other Boston hospitals ran almost
five times the original estimate. In part, this was due to more than
three years of hearings on the project's environmental impacts. The
first round of state reviews alone included 186 hours of oral
testimony and produced 7,300 pages of transcripts and documents (OTA,
19821. The prospect of such a long, drawn-out process would certainly
discourage many potential investors.
Even though regulation inappropriately applied can impede district
heating and cooling, not all regulation serves to discourage the
technology. Regulation can be used to advance district heating and
cooling in several ways. A state's regulatory powers can, for
example, be used to obtain property or easement rights for
distribution pipes, to build investor and public confidence, and to
ensure reasonable standards of safety, service, and reliability (Kier
et al., 1981~.
Moreover, the committee is primarily concerned with economic
regulations that make district heating and cooling less competitive.
District heating and cooling does not require regulatory favoritism or
incentives to succeed, merely a regulatory approach that allows it to
compete on an even basis with other forms of energy supply and
generation.
COSTS
District heating and cooling systems are highly capital-intensive.
effect, they substitute the cost of capital for fuel (RDA, 1981~.
the average, district heating operates with 80-percent fixed costs
20-percent variable costs, exactly the opposite of the cost ratios
its gas competitors. This shows that district heating and cooling
extremely sensitive to interest rates and financing methods.
Two-thirds or more of the capital costs are represented by the
distribution and transmission network (Figure 4-4~. Costs can be
minimized by keeping the number and length of pipes to a minimum.
Thus, most systems serve high-use customers within specified areas.
None of the existing U.S. steam systems, for example, serves more than
3,500 customers and most have less than 1,000 (OTA, 1982~.
The high cost of the distribution network derives in part from the
large number and size of utility and service delivery lines found in
the streets (gas, electricity, water, sewer, etc). The larger size of
In
On
and
for
IS
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68
40
35
30
25
20
15
10
s
o
-
NORTHEASTERN CITIES
~ r_~
I _ _ _
r-Ji (MIDWESTERN CITIES
L_J
l
J
PLANT TRANS- DISTRI- BLDG. REPLACEMENT
CHARGES MISSION BUTION RETROFIT CAPACITY
FIGURE 4-4 Components of system cost as a percentage of total costs
(Argonne National Laboratory).
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69
district heating and cooling pipes also increases their installation
costs over those for a conventional gas utility.
In addition, building owners commonly incorporate the cost of an
onsite heating plant in the mortgage financing for the entire
structure. This makes part of the true cost of the competing system
invisible compared with the cost of a stand-alone district heating and
cooling system.
The real and perceived cost differences between conventional and
district heating and cooling systems are heightened by the
difficulties in financing the latter, as discussed below.
FINANCING
Financing for a new or revitalized district heating and cooling system
should be similar to that for any other large-scale, long-term
municipal utility project (Table 4-1~. In this sense, the project
should be able to generate sufficient revenue to pay back its costs
over its useful life.
District heating and cooling systems, however, face financing
problems that other major utility projects do not (Karnitz, 1983~.
District heating and cooling systems are often required to obtain
20-year "take or pay" contracts from 80 percent of their potential
customers before a commitment for construction financing can be
obtained. No similar requirement applies to (or is included in the
mortgage for) competitive heating, ventilating, and air-conditioning
systems installed in individual buildings. Obviously, this places
district heating and cooling systems at a distinct competitive
disadvantage.
The requirement that systems get their customers to sign 20-year
take or pay commitments is difficult to meet because the commitments
may be considered a lien against property. While the legal validity
of these commitments has not been tested, the requirement
unnecessarily complicates already difficult institutional arrangements
and extends the long development time further.
Finally, the recently established federal limits on tax-exempt
financing discussed above fail to include specific exceptions for
district heating and cooling and for solid waste disposal projects.
Thus, these projects must compete with other projects in obtaining
tax-exempt financing under each state's $150 per capita limit.
Since 1981, a number of cities have relied for financing on various
government grant programs, such as the urban development action grant
(UDAG) and community development block grant (CDBG) programs of the
U.S. Department of Housing and Urban Development (HUD), and U.S.
Department of Energy (DOE) demonstration funds, to help pay for new or
revitalized district heating and cooling systems. The number of
financing mechanisms has become more severely limited since 1980
because of shifts in government policies, the great competition for
nongovernment funding, and high interest rates.
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70
TABLE 4-1 Construction and Permanent Financing for Alternative Energy
Projects: Key Risk Assessment and Containment Strategies
Key Project Cons ider ations
-Well-contained risks
-Existing and identified markets for the energy produced
-Long-term sales contracts
-Proven technologies
-A favorable regulatory environment
Financing Techniques
-Internal corporate cash flow
-Borrowing with full faith and credit of the corporate sponsor
-Project financing, when the project generates sufficient cash
flows to meet debt service or lease payments
Major Components of Project Financing
-For construction financing, short-term, floating-rate loan
-For permanent financing, single-vnvestor lease, leveraged
lease, limited partnership, or joint venture
Basic Economic Factors
-Current and future fuel prices
-Current and future electricity rates
-Utility avoided cost rates
-Proj ect
-Cost of
costs
capital
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71
TABLE 4-1 Construction and Permanent Financing for Alternative Energy
Projects: Key Risk Assessment and Containment Strategies (continued)
. . . . . . . . . . .
Regulatory Considerations
-Environmental, land use and building permits
-Public Utilities Regulatory Policies Act of 1978 (PURPA)
-Geographic considerations (state implementation of PURPA,
utilities' fuel and capacity costs, difficulty of adding
generating capacity): Best environments in California,
Gulf Coast, New England, and Middle Atlantic states
Summary of Alternative Energy Projects Risks
-Design risk:
Can facility be built?
-Completion risk: Will construction delays disrupt financing term,
tax benefits or repayment schedules?
-Construction cost risk
-Force majeure risk: weather, strikes
-Operating performance risk
-Price risks: inputs and outputs, avoided costs
-Regulatory r isk
-Money cost r isk
-Tax r isk: legal changes
SOURCE: GE Credit.
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72
During the period of recession and high interest rates in the early
1980s, the financial community sought short-term returns on its
investments. This fostered increased competition for limited capital,
further constraining the growth of district heating and cooling
systems.
As capital markets have tightened in the face of escalating
interest rates and recessionary cycles, lenders have sought more
protection for projects deemed risky. The situation has usually led
to higher financing costs and requirements forcing communities to
commit their full faith and credit to a district heating and cooling
or cogeneration project.
District heating and cooling's ability to compete for financing is
also affected by the price of fuels and the system's flexibility to
choose among several fuel sources, such as coal and municipal solid
waste. If a clear economic advantage is gained over competing energy
systems, investment capital will become available. However, because
the use of solid fuels is heavily regulated and restricted by
environmental laws, investment capital might not be forthcoming. Some
European countries, such as Sweden, have relaxed their regulation of
solid fuels and treatment facilities to promote the development of
district heating.
As a result, district heating and cooling projects have often had
to seek alternative financing means. Table 4-2 summarizes and
compares several such financing means.
Until the 1984 tax law established a per state limit of $150 per
capita on industrial development bonds, tax-exempt financing appeared
to provide an attractive alternative to private investors. This type
of financing usually involves two steps: issuing tax-exempt bonds
through state or local governments and loaning the bond proceeds to
the private developer, who agrees to install a district heating and
cooling system and related improvements. Tax-exempt bonds provide
loans for a longer term (up to 40 years) than traditional bank
financing, which usually is for 10 to 15 years. Traditional bank
financing is normally available only to finance feasibility studies.
While subject to variations depending on the current market rate,
tax-exempt financing usually carries a lower interest rate than
conventional financing. The current market rate for tax-exempt
development bonds ranges from 10 to 14 percent. Similar bank loans
since 1980 have had a rate of 17 to 18 percent.
Tax-exempt financing is an often-used third-party technique.*
Various studies conducted over the past four years suggest that
third-party financing techniques may account for from 45 to almost 70
*A third party is an individual, partnership, corporation, or
institution that agrees to provide financing for a project that is not
charged to the project's sponsors. The third party assumes the risks
of the investment, but gains its benefits. These include tax credits,
sales, and interest payments. The sponsor gains an energy-efficient
system financed by independent sources of capital.
OCR for page 73
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percent of successful district heating and cooling projects by 1990.
Third-party financing also poses a unique opportunity to address and
avoid a number of regulatory constraints that are imposed on projects
when an investor-owned electric utility is involved.
Both general obligation bonds and revenue bonds are used to finance
district heating and cooling projects. The general obligation bond is
secured by the pledge of the municipality's full faith and credit and
is supported by the municipality's authority to tax and collect
sufficient money to meet its obligations.
Several factors limit the amount of general obligation bonds that a
municipality can issue, restricting the availability of such
tax-exempt bond financing. The city's revenue base limits the number
of bonds on which it can afford to pay interest while also providing
necessary services to its citizens. ALSO, many states limit the
amount of bonds that can be issued by a municipality, thus forcing
projects to compete with each other for financing. Finally, some
municipalities are limited in their taxing authority, which restricts
the issuance of general obligation bonds.
For these and other reasons, few if any municipalities are likely
to use general obligation bonds to finance district heating and
cooling systems. Instead, municipalities are likely to view revenue
bonds as the preferred alternative.
A revenue bond embodies a promise to repay the bondholder's
principal and interest from the revenue derived from a specific
project. In effect, the bondholders are making a loan through the
local municipality to the district heating and cooling developer. The
encouragement of economic development and the revitalization of
communities are valid public goals that district heating and cooling
can help promote.
Tax-exempt bonds are desirable for district heating and cooling
projects for several reasons:
o Bonds may promote the revitalization of basic urban
infrastructures and increase economic development associated with
district heating and cooling within the community. Such investments
could create or retain employment and increase the economic vitality
of industrial, commercial, and residential communities.
0 Such financing will enhance energy self-sufficiency by using
domestic energy resources.
0 Revitalization of existing urban infrastructures and
development of more efficient delivery systems would also increase the
value of other long-term property investments within the community,
which should increase the community's property tax revenues without
increasing its rates.
o Energy self-sufficiency and the ability to mitigate pr ice
increases in the future would also help attract new business and
industry to the city.
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The complexity of municipal financing requirements coupled with the
requirements of third-party techniques have together moved district
heating and cooling toward smaller-scale projects for limited numbers
of customers.
Two tax bills before Congress in the 1983-1984 session either
sought special recognition for district heating and cooling projects
or proposed specific incentives to use tax-exempt financing for these
projects. The proposals focused on federal energy tax credits (H.R.
2105) and a government loan guarantee program (H.R. 2489~. Neither
bill passed.
Representative terms from entire chapter:
cooling projects
