With winter among us, American households understand the need for affordable, reliable heat and power. Natural gas is instrumental in both, serving as the primary heating source for 46 percent of American households and making up 40 percent of the country’s electricity. Keeping electric and heating prices affordable and reliable will require upgrading critical energy infrastructure, including pipelines and refineries, to keep up with demand. Energy companies and public gas utilities, including the American Public Gas Association which represents more than 730 communities, are leading in this effort but financial barriers in the municipal bond market remain. Through new legislation, Congress is aiming to reduce these restrictions. Lawmakers would be wise to pare down barriers to energy infrastructure investments. Doing so would lower costs and increase reliability for consumers across the country.    

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As communities served by public utilities look to grow their economies, there is a new bill that provides expanded investment opportunities. The American Infrastructure Bond (AIB) Act, a bipartisan bill, introduced by Senators Roger Wicker (R-MS) and Michael Bennet (D-CO), would allow states and localities to issue taxable bonds for infrastructure projects. These powers would be in addition to existing capabilities to issue tax-exempt bonds. 

AIBs would be structured in a direct-pay taxable bond model to allow states and municipalities to directly invest in local communities with investors who are traditionally less inclined to engage with tax-exempt municipal bonds – such as pension funds, endowments, and foreign investors which do not pay federal income taxes, and thus do not benefit from tax exemption. 

Direct payment bonds, like AIBs, were intended to expand the pool of investors for municipal bonds to include investors willing to invest in taxable assets. The credit payment to issuers was intended to avoid any material increase in the cost of financing for the issuer. The AIB legislation refines the Build America Bonds (BABs) program, which was created by the American Recovery and Reinvestment Act (ARRA). BABs meet the same requirements as any other government-purpose municipal bond, but instead of the interest being tax-exempt, the bond issuer receives a credit payment from the Treasury Department equal to 35 percent of the interest paid.

A significant improvement from the BABs program is that AIBs would be exempt from sequestration which was mandated under the Budget Control Act of 2011, and reduced payments to state and local BAB issuers like public utilities. It is estimated that billions of dollars in BAB payments to these issuers will be cut under sequestration, which seems to ignore Congress’s intent to increase the investors for municipal bonds. 

The American Infrastructure Bond legislation will ensure greater financial stability and reliability, and ultimately, would be a tremendous benefit to America’s cities and towns through the needed direct investment in our country’s infrastructure. All the following essential infrastructure projects would benefit from these additional investors and AIBs: construction and maintenance of roads, bridges, canals, and ports, as well as improvements of utility systems, expansion of pipelines, and upgrades to efficiency and safety measures. 

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AIBs will provide a unique opportunity for public gas utilities. As not-for-profit entities, these utilities would now be able to issue tax-exempt bonds to purchase natural gas. This is sometimes referred to as a pre-pay. In a prepaid natural gas transaction, the net proceeds of municipal debt are used to prepay a natural gas supplier for a fixed volume of gas. Public power utilities can do the same to purchase electricity.  

To support this purchase of natural gas and electricity, Joint Action Agencies (JAAs) were formed to issue the bonds on behalf of multiple municipal utility participants. This structure provides economies of scale with larger transactions, which leads to reduced financial risk and increased energy delivery reliability. Participants working with JAAs likely pay a discounted price on energy and only pay if it is delivered. Participants are also not obligated for payment on the bonds and the bond is not a debt on a participant’s balance sheet. Pre-pay bonds do not affect a participant’s credit rating or debt capacity. AIBs would allow municipal utilities to use taxable bonds to purchase natural gas and electricity, including renewable electricity, for their communities, expanding the options to affordably provide energy to America’s cities and towns that have public utilities, many of which are in rural parts of our country.

Upgrading America’s energy infrastructure will reduce costs and improve reliability. Reducing financial barriers to investment, as the American Infrastructure Bond Act intends to do, is a win for consumers and industry.

Stuart Saulters is the Vice President of Government Relations for the American Public Gas Association (APGA). APGA represents more than 730 communities across the U.S. that own and operate their retail natural gas distribution entities. These include not-for-profit gas distribution systems owned by municipalities and other local government entities, all accountable to the citizens they serve.  

The views and opinions expressed are those of the author’s and do not necessarily reflect the official policy or position of C3.