[Congressional Record Volume 143, Number 158 (Monday, November 10, 1997)]
[Senate]
[Pages S12437-S12438]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




  AMENDMENTS TO THE INTERNAL REVENUE CODE REGARDING TAX-EXEMPT OUTPUT 
                             FACILITY BONDS

  Mr. MURKOWSKI. Mr. President, today we are on the verge of a 
revolution, the revolution of the transmission and distribution of 
electricity that is fast bringing about competition and deregulation to 
both the wholesale and retail level. Nowhere has the competitive model 
advanced further than in the State of California, where full 
deregulation will become a reality at the beginning of 1998. As many as 
13 other States representing one-third of America have moved to 
competition in the electric industry. These are States with a 
significant population center.
  On Saturday, November 8, I introduced legislation referred to the 
Finance Committee, and I believe that it will enhance the States' 
ability to facilitate competition. The legislation arises from the 
Energy Committee's intensive review of the electric power industry and 
from the Joint Tax Committee's report that I requested.

  Over the past two Congresses, the committee has held 14 hearings and 
workshops on competitive change in the electric power industry, 
receiving testimony from more than 130 witnesses. One of the workshops 
specifically focused on how public power utilities will participate in 
the competitive marketplace. At these and in other forums, concerns 
have been expressed by representatives of public power about the 
potential jeopardy to their tax-exempt bonds if they participate in 
State competitive programs, or if they transmit power pursuant to FERC 
Order No. 888, or pursuant to a Federal Power Act section 211 
transmission order.
  The Joint Tax Committee report, titled ``Federal Income Tax Issues 
Arising in Connection with Proposal to Restructure the Electric Power 
Industry,'' concluded that current tax laws effectively preclude public 
power utilities from participating in State open access restructuring 
plans without jeopardizing the tax-exempt status of their bonds. Under 
the tax law, if the private use and interest restriction is violated, 
the utility's bonds become retroactively taxable.
  These concerns have been echoed by the FERC. For example, in FERC 
Order No. 888, the Commission stated the reciprocal transmission 
service by a municipal utility will not be required if providing such 
service would jeopardize the tax-exempt status of the municipal 
utility. A similar concern exists if FERC issues a transmission order 
under section 211 of the Federal Power Act.
  Mr. President, if consumers and businesses are to maximize the full 
benefits of open competition in this industry it will be necessary for 
all electricity providers to interconnect their facilities into the 
entire electric grid. Unfortunately, this system efficiency is 
significantly impaired because of current

[[Page S12438]]

tax law rules that effectively preclude public power entities--entities 
that financed their facilities with tax-exempt bonds--from 
participating in State open access restructuring plans and Federal 
transmission programs, without jeopardizing the exempt status of their 
bonds.

  No one wants to see bonds issued to finance public power become 
retroactively taxable because a municipality chooses to participate in 
a State open access plan. That would cause havoc in the financial 
markets and could undermine the financial stability of many 
municipalities. At the same time, public power should not obtain a 
competitive advantage in the open marketplace based on the Federal 
subsidy that flows from the ability to issue tax-exempt debt. Clearly 
we must provide for the transition to allow public providers to enter 
the private competitive marketplace without severe economic dislocation 
for municipalities and consumers.
  To remedy this dilemma, I have introduced legislation that will allow 
municipal utilities to interconnect and compete in the open marketplace 
without the draconian retroactive impacts currently required by the Tax 
Code. My bill is modeled after legislation that passed Congress last 
year which addressed electricity and gas generation and distribution by 
local furnishers.
  My bill removes the current law impediments to public power's 
capacity to participate in open access plans if such entities are 
willing to forego future use of federally subsidized tax-exempt 
financing. If public power entities make this election, and choose to 
compete on a level playing field with other electric power suppliers, 
tax exemption of the interest on their outstanding debt will be 
unaffected. They will be allowed an extended period during which 
outstanding bonds subject to the private use restrictions may be 
retired instead of retroactive taxation, which is the situation under 
existing law. The relief provided by my bill applies equally to 
outstanding bonds for electric generation, transmission, and 
distribution facilities. This would occur 6 months after the date of 
the bonds.
  Mr. President, without this legislation, public power will face an 
untenable choice: either stay out of the competitive marketplace or 
face the threat of retroactive taxability of their bonds. With this 
legislation, public power will be able to transition into 
the competitive marketplace.

  Let me provide a few examples of real-world choices that public power 
faces today. According to the Joint Tax Committee report, the mere act 
of transferring public power transmission lines to a privately operated 
independent service operator [ISO] could cause the public entity's tax 
exempt bonds to be retroactively taxable. Similarly, a transfer of 
transmission lines to a State operated ISO could, in many instances, 
trigger similar retroactive loss of tax-exemption depending on the 
amount or value of the power that is transmitted along those lines to 
private users. Moreover, participation in a State open access plan 
could, de facto, force public power entities to take defensive actions 
to maintain their competitive position which could inevitably lead to 
retroactive taxation of their bonds. Such actions would include 
offering a discounted rate to selective customers or selling excess 
capacity to a broker for resale under long-term contract at fixed rates 
or discounted rates.
  I have also heard from the California Governor and members of the 
California Legislature about many of these problems and the need for 
legislation to address them. I stand ready to work with them and 
representatives from other States to solve this problem as part of the 
legislation I have introduced.
  Mr. President, my bill allows public power to participate in the new 
competitive world and provides a safe harbor within which they can 
transition from tax-exempt financing to the level playing field of the 
competitive marketplace. In addition, the legislation recognizes that 
there are some transactions that public power entities engage in that 
should not jeopardize the tax-exempt status of their bonds under 
current law and seeks to protect those transactions by codifying the 
rules governing them. This list may need to be expanded and I look 
forward to the input of the affected utilities in this regard.
  In general, the exceptions contained in this bill closely parallel 
the policies enunciated in the legislative history of the amendments 
made in the 1986 Tax Reform Act. For example, the sale of electricity 
by one public power entity to another public power entity for resale by 
the second public power entity would be exempt so long as the second 
public power entity is not participating in a State open access plan. 
In addition, a public power entity would be allowed to enter into 
pooling and swap arrangements with other utilities if the public power 
entity is not a net seller of output, determined on an annual basis. 
Finally, the bill contains a de minimis exception for sale of excess 
output by a facility when such sales do not exceed $1 million.
  Mr. President, this legislation attempts to balance many competing 
interests. This will be a difficult transition and this legislation 
does not address all the difficult problems to be faced. This is why I 
emphasize today that this is a starting point for discussion over the 
months ahead.
  I look forward to receiving comments from all interested parties and 
will encourage Finance Committee Chairman Roth to hold hearings on this 
bill early next year.
  I am open to making revisions to this bill consistent with a public 
policy that emphasizes a level playing field and a soft transition to 
competition for our important public utilities. I look forward 
especially to working with the chairman of the Senate Finance 
Committee, Senator Roth, who has been a leader in addressing tax issues 
relating to competition in this industry.

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