[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3927 Introduced in House (IH)]







105th CONGRESS
  2d Session
                                H. R. 3927

 To amend the Internal Revenue Code of 1986 to restrict the use of tax-
  exempt financing by governmentally owned electric utilities and to 
      subject certain activities of such utilities to income tax.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                              May 21, 1998

Mr. English of Pennsylvania (for himself, Mr. Jefferson, and Mr. Crane) 
 introduced the following bill; which was referred to the Committee on 
                             Ways and Means

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to restrict the use of tax-
  exempt financing by governmentally owned electric utilities and to 
      subject certain activities of such utilities to income tax.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. BONDS ISSUED TO FINANCE CERTAIN GOVERNMENTAL ELECTRIC OUTPUT 
              FACILITIES TREATED AS PRIVATE ACTIVITY BONDS.

    (a) Governmental Units No Longer Eligible for Exception From 
Termination of Local Furnishing Provisions.--Paragraph (3) of section 
142(f) of the Internal Revenue Code of 1986 is amended by adding at the 
end the following flush sentence:
        ``For purposes of applying this paragraph to bonds issued after 
        the date of the enactment of this sentence, the term `person' 
        shall not include a governmental unit.''
    (b) Certain Issues for Governmental Electric Output Facilities 
Treated as Private Activity Bonds.--Section 141 of such Code (relating 
to private activity bonds) is amended by adding at the end the 
following new subsection:
    ``(f) Issues for Governmental Electric Output Facilities.--
            ``(1) In general.--The term `private activity bond' 
        includes any bond issued as part of an issue if any proceeds of 
        the issue are to be used (directly or indirectly) for the 
        construction or acquisition of any governmental electric output 
        facility.
            ``(2) Governmental electric output facility; electric 
        energy services.--For purposes of this subsection--
                    ``(A) Governmental electric output facility.--
                            ``(i) In general.--The term `governmental 
                        electric output facility' means any facility 
                        (including any generation, transmission, or 
                        distribution facility) used or to be used in 
                        connection with the furnishing for sale of 
                        electric energy services by any governmental 
                        utility.
                            ``(ii) Exception for property converted to 
                        nonoutput use.--The term `governmental electric 
                        output facility' shall not include any property 
                        described in subsection (d)(4).
                    ``(B) Electric energy services.--The term `electric 
                energy services' includes the furnishing of electric 
                energy.
            ``(3) Exception for local governmental utilities.--
                    ``(A) In general.--Paragraph (1) shall be applied 
                by not taking into account any facility owned by a 
                local governmental utility.
                    ``(B) Local governmental utility.--For purposes of 
                this subsection, the term `local governmental utility' 
                means any governmental utility if--
                            ``(i) all governmental electric output 
                        facilities (other than generation facilities) 
                        which--
                                    ``(I) are owned by such utility, 
                                and
                                    ``(II) are placed in service after 
                                the date of the enactment of this 
                                subsection,
                        are located within the qualified governmental 
                        service area of such utility,
                            ``(ii) electric energy services furnished 
                        by such utility are sold only to ultimate 
                        consumers located within such area, and
                            ``(iii) no governmental electric output 
                        facility owned by such utility is designed 
                        differently, sized larger, built sooner, or 
                        constructed in a more costly manner than is 
                        reasonably necessary for ultimate consumers 
                        located within such area.
                    ``(C) Joint action power agencies.--For purposes of 
                determining whether a participant in a joint action 
                power agency meets the requirements of subparagraph 
                (B)--
                            ``(i) such participant shall be treated as 
                        owning its share of the governmental electric 
                        output facilities owned by such agency, and
                            ``(ii) the determination of whether the 
                        requirements of clause (i) or (iii) of 
                        subparagraph (B) are met shall be made by 
                        treating the qualified governmental service 
                        area of such participant as including such area 
                        of all participants in such agency.
            ``(4) Exception for small governmental utilities.--
                    ``(A) In general.--Paragraph (1) shall be applied 
                by not taking into account any facility owned by a 
                small governmental utility.
                    ``(B) Small governmental utility.--For purposes of 
                ths subsection, the term `small governmental utility' 
                means any governmental utility if--
                            ``(i) as of the issuance date of the issue, 
                        it is reasonably expected that such utility 
                        will furnish electric energy services for sale 
                        to less than 5,000 consumers, and
                            ``(ii) at least 30 percent of its average 
                        gross income during any 3-calendar year period 
                        is from sales to residential consumers.
            ``(5) Exception for local distribution facilities.--
        Paragraph (1) shall be applied by not taking into account any 
        distribution facility if--
                    ``(A) such facility is located within the qualified 
                governmental service area of such utility, and
                    ``(B) such facility meets the requirements of 
                paragraph (3)(B)(iii).
            ``(6) Exceptions to rules requiring that ultimate consumers 
        be located within qualified governmental service area.--
                    ``(A) In general.--For purposes of clauses (ii) and 
                (iii) of paragraph (3)(B), a sale shall be treated as 
                being to an ultimate consumer located within a 
                governmental utility's qualified governmental service 
                area if such sale meets--
                            ``(i) the governmental utility exception of 
                        subparagraph (B),
                            ``(ii) the pooling exception of 
                        subparagraph (C),
                            ``(iii) the existing contract exception of 
                        subparagraph (D),
                            ``(iv) the de minimis exception of 
                        subparagraph (E), or
                            ``(v) the transmission exception of 
                        subparagraph (F).
                    ``(B) Governmental utility exception.--A sale of 
                electric energy services meets the governmental utility 
                exception of this subparagraph if the sale is by a 
                governmental utility with a qualified governmental 
                service area to another governmental utility for resale 
                solely to ultimate consumers located within the 
                qualified governmental service area of the purchasing 
                governmental utility.
                    ``(C) Pooling exception.--A sale of electric energy 
                services meets the pooling exception of this 
                subparagraph if--
                            ``(i) the sale is by a governmental utility 
                        with a qualified governmental service area to a 
                        person for the resale of the electric energy 
                        services,
                            ``(ii) such sale is--
                                    ``(I) pursuant to a pooling or swap 
                                arrangement to a person that owns 
                                distribution facilities for 
                                distribution through those facilities,
                                    ``(II) pursuant to a regional 
                                transmission group or other similar 
                                arrangement to a person that owns 
                                distribution facilities for 
                                distribution through those facilities, 
                                or
                                    ``(III) for the emergency transfer 
                                of electric energy services, and
                            ``(iii) the dollar amount of the pooling 
                        sales by the governmental utility during a 
                        calendar year does not exceed the dollar amount 
                        of the pooling purchases by such utility during 
                        such year.
                    ``(D) Existing contract exception.--A sale of 
                electric energy services meets the existing contract 
                exception of this subparagraph if the sale is pursuant 
                to--
                            ``(i) a binding contract in effect on the 
                        date of the enactment of this subsection, or
                            ``(ii) a renewal of such a contract but 
                        only if such renewal is at the sole option of 
                        the purchaser.
                    ``(E) De minimis exception.--A sale of electric 
                energy services meets the de minimis exception of this 
                subparagraph if--
                            ``(i) the sale is by a governmental utility 
                        with a qualified governmental service area to a 
                        person who owns any electric energy 
                        distribution facility for distribution and 
                        resale by such person through such facility, 
                        and
                            ``(ii) all of the governmental electric 
                        output facilities of such utility meet the 
                        requirements of paragraph (3)(B)(iii), and
                            ``(iii) the aggregate dollar amount of the 
                        sales described in clause (i) during any 
                        calendar year (other than sales which meet the 
                        requirements of any other subparagraph of this 
                        paragraph) does not exceed 10 percent of the 
                        average of the dollar amounts of the 
                        governmental utility's sales of electric energy 
                        services during the 3 preceding calendar years.
                    ``(F) Transmission exception.--A sale of electric 
                energy services meets the transmission exception of 
                this subparagraph if the only electric energy services 
                provided by the governmental utility with respect to 
                such sale are provided by--
                            ``(i) any transmission or distribution 
                        facility placed in service before the date of 
                        the enactment of this subsection,
                            ``(ii) any distribution facility which 
                        meets the requirements of paragraph (5), or
                            ``(iii) any transmission or distribution 
                        facility which meets the requirements of 
                        clauses (i) and (iii) of paragraph (3)(B).
                If electric energy is sold in connection with the sale 
                of any transmission or distribution service, the sale 
                of such service meets the requirements of this 
                subparagraph only if the sale of the electric energy is 
                to ultimate consumers located within the qualified 
                governmental service area of such utility.
            ``(7) Qualified governmental service area.--For purposes of 
        this subsection--
                    ``(A) In general.--The term `qualified governmental 
                service area' means, with respect to any governmental 
                utility, the area--
                            ``(i)(I) in which such utility has the 
                        obligation to supply electric energy services 
                        to ultimate consumers, or
                            ``(II) if such utility has no such 
                        obligation, which is coincident to an electric 
                        distribution system of such utility and 
                        immediately adjacent thereto, and
                            ``(ii) which is claimed openly as a service 
                        area by such utility without a competing claim 
                        or dispute.
                    ``(B) Obligation to supply.-- For purposes of 
                subparagraph (A)(i), a governmental utility shall be 
                considered to have an obligation to provide service 
                only if an explicit requirement of law imposes on such 
                utility the obligation to provide retail electric 
                service to any person within the area who requests such 
                service and who meets the terms and conditions 
                applicable to all other similarly situated consumers.
            ``(8) Other definitions.--For purposes of this subsection--
                    ``(A) Governmental utility.--
                            ``(i) In general.--The term `governmental 
                        utility' means any governmental unit which is 
                        engaged in the activity or business of the 
selling, generating, transmitting, or distributing electric energy.
                            ``(ii) Controlled groups.--A governmental 
                        unit and all related persons of such unit shall 
                        be treated as 1 person which is a governmental 
                        utility if such unit, or any such person, is 
                        engaged in any activity or business referred to 
                        in clause (i).
                    ``(B) Related person.--The term `related person' 
                means a group of related persons (within the meaning of 
                section 144(a)(3)), which includes a governmental unit, 
                and shall include a taxable person, owned or 
                controlled, in whole or in part, by a governmental 
                unit.
                    ``(C) Pooling sales and purchases.--
                            ``(i) Pooling sales.--The term `pooling 
                        sales' means sales by the utility which are 
                        treated as described in subparagraph (A) of 
                        section 141(f)(6) solely by reason of 
                        subparagraph (C) thereof.
                            ``(ii) Pooling purchases.--The term 
                        `pooling purchases' means purchases by the 
                        utility in a sale which is a pooling sale by 
                        another utility.''
    (c) Treatment of Pre-Effective Date Bonds Financing Transmission 
and Distribution Facilities.--
            (1) In general.--Paragraph (6) of section 141(b) of such 
        Code is amended by adding at the end the following new 
        subparagraph:
                    ``(C) Special rules relating to certain output 
                facilities.--For purposes of the first sentence of 
                subparagraph (A), with respect to bonds issued on or 
                before the date of the enactment of this subparagraph, 
                the term `private business use' shall not include use 
                by a person of a transmission or distribution facility 
                of a governmental utility if--
                            ``(i) such use is provided as part of a 
                        comprehensive statewide or regional open-access 
                        regime mandated or encouraged by a Federal or 
                        State regulatory entity, or
                            ``(ii)(I) such use results from the 
                        turnover of operational control (in whole or in 
                        part) of, but not an ownership interest in, a 
                        transmission facility by a governmental utility 
                        to an independent system operator,
                            ``(II) such facility is used by the 
                        independent system operator to provide 
                        transmission services and specified ancillary 
                        services on an open-access nondiscriminatory 
                        basis,
                            ``(III) the independent system operator 
                        meets the principles set forth in Federal 
                        Energy Regulatory Commission Order No. 888 and/
                        or any successor provision,
                            ``(IV) the governmental utility follows 
                        comparable rules in opening up its qualified 
                        governmental service area (as defined in 
                        section 141(f)(4)) to retail competition as are 
                        applicable to other owners of distribution 
                        facilities (other than governmental utilities) 
                        within the State in which the governmental 
                        utility is located, and
                            ``(V) the independent system operator does 
                        not own any electric distribution facilities.''
            (2) Conforming amendment.--Subsection (b) of section 141 of 
        such Code is amended by adding at the end the following new 
        paragraph:
            ``(10) Special rules relating to the private security or 
        payment test.--In calculating the private security or payment 
        test of paragraph (2), no payments for use described in 
        paragraph (6)(C) shall be treated as payments in respect of 
        property, or borrowed money, used or to be used for a private 
        business use.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to obligations issued after the date of the enactment of this 
Act.

SEC. 2. TAXATION OF INCOME FROM CERTAIN ACTIVITIES OF GOVERNMENTAL 
              UTILITY.

    (a) In General.--Section 115 of the Internal Revenue Code of 1986 
(relating to income of States and municipalities) is amended--
            (1) by striking ``Gross income'' and inserting ``(a) 
        General Rule.--Gross income'', and
            (2) by adding at the end the following new subsection:
    ``(b) Exception for Certain Governmental Utilities.--
            ``(1) In general.--Subsection (a) shall not apply to any 
        gross income derived by any governmental utility from sales of 
        electric energy services--
                    ``(A) to persons not within a qualified 
                governmental service area of such utility, and
                    ``(B) to persons for resale if such resale is to 
                persons outside such service area.
        Any amount included in gross income by reason of the preceding 
        sentence shall be treated as gross income derived from an 
        unrelated trade or business under section 512(a)(1), and such 
        utility shall be treated as an organization described in 
        section 511(a)(2).
            ``(2) Exceptions.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                any income derived from any sale--
                            ``(i) which is treated under section 
                        141(f)(6) as made to ultimate consumers located 
                        within the qualified governmental service area 
                        of the utility, or
                            ``(ii) by any small governmental utility.
                    ``(B) Special rule for pooling exception.--For 
                purposes of applying subparagraph (A)(i), subparagraph 
                (C) of section 141(f)(6) shall be applied without 
                regard to clause (iii) thereof but subsection (b)(1) 
                shall apply to pooling sales to the extent that the 
                dollar amount of such sales by the governmental utility 
                during a calendar year exceeds the dollar amount of the 
                pooling purchases by such utility during such year.
                    ``(C) De minimis exception.--For purposes of 
                applying subparagraph (A)(i), subparagraph (E) of 
                section 141(f)(6) shall apply only if the governmental 
                utility is a local governmental utility.
            ``(3) Special rule for determining depreciation.--In the 
        case of a governmental utility whose gross income is subject to 
        tax under this chapter by reason of this subsection, the 
        adjustment under section 1016(a)(3) for any period before the 
        date of the enactment of this subsection shall be treated as 
        being at the fastest rate permitted under this title for such 
        period.
            ``(4) Definitions.--Terms used in this subsection which are 
        also used in section 141(f) shall have the respective meanings 
        given such terms by such section.''
    (b) Effective Date.--The amendments made by this section shall 
apply to amounts received or accrued after the date of the enactment of 
this Act.
                                 <all>