[Congressional Record Volume 144, Number 79 (Wednesday, June 17, 1998)]
[Senate]
[Pages S6488-S6491]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GORTON (for himself, Mr. Kerrey, Mr. Jeffords, Mr. 
        Bumpers, and Mrs. Murray):
  S. 2182. A bill to amend the Internal Revenue Code of 1986 to provide 
tax-exempt bond financing of certain electric facilities; to the 
Committee on Finance.


               PRIVATE USE COMPETITION REFORM ACT OF 1998

 Mr. GORTON. Mr. President today I join with Senators Kerrey, 
Jeffords, and Bumpers, to introduce the Private Use Competition Reform 
Act of 1998. This legislation provides a fair balance among public 
financing concerns, principles of fair competition and customer choice 
in the electric utility industry. At the same time, it strikes an 
equitable balance between publicly-owned utilities and investor-owned 
utilities. Most importantly, it advances the interest of consumers.
  The challenge in developing this legislation was to determine the 
middle ground. Some publicly-owned utilities would like to change the 
Tax Reform Act of 1986 so that all existing and all future tax-exempt 
debt would be protected without restrictions. Some investor-owned 
utilities favor elimination of tax-exempt options for municipal 
electric utilities, including much of their existing debt. However, 
this approach would threaten the existence of publicly owned utilities, 
and raise rates for more than 40 million consumers.
  This bill will accomplish two objectives. First, it clarifies how the 
existing private-use requirements--the rules that limit the ability of 
publicly-owned utilities to sell or transport electricity to private 
parties from facilities financed by tax-exempt bonds--will work in a 
new competitive marketplace. Secondly, it provides options, with 
significant tradeoffs, for those utilities that need flexibility and 
encourages municipalities to open their transmission systems and 
provide retail choice to consumers.
  There are three categories of debt addressed in this legislation.
  The first consists of existing debt that has been issued for all 
segments of a public utility's system: generating plants, transmission 
lines, and local distribution systems. This debt was issued under the 
assumption that our existing system would not change, and electric 
utilities would remain closed and not be subject to retail competition.
  The second category of debt pertains to bonds issued after the 
effective date of the enacted bill and used to finance new generating 
facilities. There is a compelling argument that this type of debt 
should not be tax-exempt because power generation, unlike transmission 
and distribution, is emerging as a competitive market.
  The third category of future debt involves those areas of a utility's 
system that will not face competition: transmission and local 
distribution. Since these areas would remain de facto monopolies 
regulated by FERC or local governments and would be increasingly open 
to access by all market participants on a non-discriminatory basis, it 
is appropriate that they should continue to have access to tax-exempt 
financing.
  This bill addresses each area differently. To enable public power 
systems to one up their transmission and distribution systems, it 
provides limited relief to existing tax-exempt debt.

[[Page S6489]]

But there is a significant tradeoff for this relief: eliminating 
publicly-owned utilities' ability to issue tax-exempt debt for 
facilities that will be used in a competitive marketplace.


                          The Current Problem

  The Energy Policy Act of 1992 and the subsequent FERC Order 888 
mandating open transmission access, coupled with state restructuring 
efforts, have created a significant tax problem for public systems.
  To gain access to competitive wholesale markets, a publicly-owned 
utility must provide comparable access; some public power systems own 
vital transmission links within a geographical area. Also, customers of 
public systems--who are also their owners--will want access to other 
power suppliers.
  If publicly-owned systems open their transmission lines they can run 
afoul of the current ``private-use test'' in the tax code and force 
their bonds to become retroactively taxable.
  In sum, the current private use restrictions were written before 
anyone could anticipate a competitive electricity industry; 
consequently this places publicly-owned utilities in a complex bind. 
Allowing private entities to use their transmission facilities could 
trigger the private use tests, resulting in an expensive and chaotic 
defeasance of these bonds. Public systems also face penalties under 
private use regulations if they sell power to existing customers on a 
non-tariff basis or resell power that becomes excess when retail 
customers switch suppliers.
  The Department of Treasury released temporary regulations in January 
of 1998, (twelve years after the Tax Reform Act of 1986), but these 
temporary regulations still fail to provide the flexibility needed for 
public power systems as the electric utility industry transitions to 
retail competition.
  This legislation is needed to address these concerns, and to promote 
fair competition in the electricity industry. This bill will help 
ensure that all Americans can enjoy the benefits of competition--lower 
rates, new and innovative products, and better service.
  Mr. President, I ask unanimous consent that the text of the bill and 
the explanatory memorandum be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 2182

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

     SECTION 1. TAX-EXEMPT BOND FINANCING OF CERTAIN ELECTRIC 
                   FACILITIES.

       (a) Permitted Open Access Transactions Not a Private 
     Business Use.--Section 141(b)(6) of the Internal Revenue Code 
     of 1986 (defining private business use) is amended by adding 
     at the end the following:
       ``(C) Permitted open access transactions not a private 
     business use.--
       ``(i) In general.--For purposes of this subsection, the 
     term `private business use' shall not include a permitted 
     open access transaction.
       ``(ii) Permitted open access transaction defined.--For 
     purposes of clause (i), the term `permitted open access 
     transaction' means any of the following transactions or 
     activities with respect to an electric output facility (as 
     defined in subsection (f)(5)(A)) owned or leased by a 
     governmental unit or in which a governmental unit has 
     capacity rights:
       ``(I) Providing open access transmission services and 
     ancillary services that meet the reciprocity requirements of 
     Federal Energy Regulatory Commission Order No. 888, or that 
     are ordered by the Federal Energy Regulatory Commission, or 
     that are provided in accordance with a transmission tariff of 
     an independent system operator approved by such Commission, 
     or are consistent with state administered laws, rules or 
     orders providing for open transmission access.
       ``(II) Participation in an independent system operator 
     agreement, regional transmission group, or power exchange 
     agreement approved by such Commission.
       ``(III) Delivery on an open access basis of electric energy 
     sold by other entities to end-users served by such 
     governmental unit's distribution facilities.
       ``(IV) If open access service is provided under subclause 
     (I) or (III), the sale of electric output of electric output 
     facilities on terms other than those available to the general 
     public if such sale is (1) to an on-system purchaser, (2) an 
     existing off-system sale, or (3) a qualifying load loss sale.
       ``(V) Such other transmissions or activities as may be 
     provided in regulations prescribed by the Secretary.
       ``(iii) Qualifying load loss sale.--For purposes of clause 
     (ii)(IV), a sale of eclectic energy by a governmental unit is 
     a qualifying load loss sale in any calendar year after 1997, 
     if it is a new off-system sale, and the aggregate of new off-
     system sales in such year does not exceed lost load, and if 
     the term of the sale does not exceed three years, and such 
     governmental unit has elected under subsection (f)(2) to 
     suspend issuance of certain tax-exempt bonds for not less 
     than the term of the sale (or for any period equal to the 
     term of the sale that includes the first year of the sale).
       ``(iv) Other definitions; special rules.--For purposes of 
     this subparagraph--
       ``(I) On-system purchaser.--The term `on-system purchaser' 
     means a person who purchases electric energy from a 
     governmental unit and who is directly connected with 
     transmission or distribution facilities that are owned or 
     leased by such governmental unit or in which such 
     governmental unit has capacity rights that are treated under 
     FERC tariffs or existing contracts as equivalent to 
     ownership.
       ``(II) Off-system purchaser.--The term `off-system 
     purchaser' means a purchaser of electric energy from a 
     governmental unit other than an on-system purchaser.
       ``(III) Existing off-system sale.--The term `existing off-
     system sale' means a sale of electric energy to a person that 
     was an off-system purchaser of electric energy in the base 
     year, but not in excess of the KWH purchased by such person 
     in such year.
       ``(IV) New off-system sale.--The term `new off-system sale' 
     means an off-system sale other than an existing off-system 
     sale.
       ``(V) Lost load.--The term `lost load' for the purposes of 
     determining qualifying load loss sales for any year, means 
     the amount (if any) by which (1) the sum of on-system sales 
     of electric energy and existing off-system sales of electric 
     energy in such year is less than (2) the sum of such sales of 
     electric energy in the base year.
       ``(VI) Base year.--The term `base year' means 1997 (or, at 
     the election of such unit, in 1995 or 1996).
       ``(VII) Joint action agencies.--A member of a joint action 
     agency that is entitled to make a qualifying load loss sale 
     in a year may transfer that entitlement to the joint action 
     agency in accordance with rules of the Secretary.''
       (b) Election To Terminate Tax Exempt Financing.--Section 
     141 of the Internal Revenue Code of 1986 (relating to private 
     activity bond; qualified bond) is amended by adding at the 
     end the following:
       ``(f) Election To Terminate or Suspend Tax-Exempt Bond 
     Financing for Certain Electric Output Facilities.--
       ``(1) Termination election.--An issuer may make an 
     irrevocable election under this paragraph to terminate 
     certain tax-exempt financing for electric output facilities. 
     If the issuer makes such election, then--
       ``(A) except as provided in paragraph (3), no bond the 
     interest on which is exempt from tax under section 103 may be 
     issued on or after the date of such election with respect to 
     an electric output facility; and
       ``(B) notwithstanding paragraph (1) or (2) of subsection 
     (a) or paragraph (5) of subsection (b), with respect to an 
     electric output facility no bond that was issued before the 
     date of enactment of this subsection, the interest on which 
     was exempt from tax on such date, shall be treated as a 
     private activity bond, for so long as such facility continues 
     to be owned by a governmental unit.
       ``(2) Suspension election.--For purpose of subsection 
     (b)(6)(C)(iii), an issuer may elect to suspend certain tax-
     exempt financing for electric output facilities for a 
     calendar year. If the issuer makes such election, then 
     (except as provided in paragraph (3)) no bond, the interest 
     on which is exempt from tax under section 103, may be issued 
     in such calendar year with respect to an electric output 
     facility.
       ``(3) Exceptions.--An election under paragraph (1) or (2) 
     does not apply to--
       ``(A) any qualified bond (as defined in subsection (e)),
       ``(B) any eligible refunding bond, or
       ``(C) any bond issued to finance a qualifying T&D facility, 
     or
       ``(D) any bond issued to finance repairs or pollution 
     control equipment for electric output facilities. Repairs 
     cannot increase by more than a de minimus degree the capacity 
     of the facility beyond its original design.
       ``(4) Form and effect of elections.--An election under 
     paragraph (1) or (2) shall be made in such a manner as the 
     Secretary prescribes and shall be binding on any successor in 
     interest to the issuer.
       ``(5) Definitions.--For purposes of this subsection--
       ``(A) Electric output facility.--The term `electric output 
     facility' means an output facility that is an electric 
     generation, transmission, or distribution facility.
       ``(B) Eligible refunding bond.--The term `eligible 
     refunding bond' means state or local bonds issued after an 
     election described in paragraph (1) or (2) that directly or 
     indirectly refund state or local bonds issued before such 
     election, if the weighted average maturity of the refunding 
     bonds do not exceed the remaining weighted average maturity 
     of the bonds issued before the election.
       ``(C) Qualifying t&d facility.--The term `qualifying T&D 
     facility' means--
       ``(i) transmission facilities over which services described 
     in subsection (b)(6)(C)(ii)(I) are provided, or
       ``(ii) distribution facilities over which services 
     described in subsection (b)(6)(C)(ii)(III) are provided.''
       (c) Effective Date, Applicability, and Transition Rules.--
       (1) Effective date.--The amendments made by this section 
     take effect on the date of enactment of this Act, except that 
     a governmental unit may elect to apply section

[[Page S6490]]

     141(b)(6)(C) of the Internal Revenue Code of 1986, as added 
     by subsection (a), with respect to permitted open access 
     transactions on or after July 9, 1996.
       (2) Applicability.--References in the Act to sections of 
     the Internal Revenue Code of 1986, as amended, shall be 
     deemed to include references to comparable sections of the 
     Internal Revenue Code of 1954, as amended.
       (3) Transition rules.--
       (A) Private business use.--Any activity that was not a 
     private business use prior to the effective date of the 
     amendment made by subsection (a) shall not be deemed to be a 
     private business use by reason of the enactment of such 
     amendment.
       (B) Election.--An issuer making the election under section 
     141(f) of the Internal Revenue Code of 1986, as added by 
     subsection (b), shall not be liable under any contract in 
     effect on the date of enactment of this Act for any claim 
     under section 141(f) of such Code arising from having made 
     the election.
       (d) Short Title.--This Act may be cited as the ``Private 
     Use Competition Reform Act of 1998''.
                                  ____


                         Explanation of S. 2182


                               background

       Interest on bonds issued by state and local governments is 
     generally exempt from Federal income taxes. One exception to 
     this general rule relates to bonds that finance output 
     facilities used in a private business. In the case of such 
     facilities, if the contractual arrangements for sale of the 
     output transfer the benefits and burdens of ownership of the 
     facility to private parties, the use is treated as a private 
     business use and the bonds issued to finance the facility may 
     not be tax-exempt. If at the time of issuance the issuer 
     reasonably expected that the private business use rules would 
     be violated or the issuer thereafter took deliberate action 
     that resulted in a violation, interest on the bonds is 
     retroactively taxable to date of issuance.
       There has been significant uncertainty as to how these 
     private business use rules apply to public power systems in 
     the emerging competitive wholesale and retail electricity 
     markets. In particular, questions have been raised as to 
     whether such systems may (1) provide open access transmission 
     services, (2) contractually commit their transmission systems 
     to an Independent System Operator (ISO), (3) open their 
     distribution facilities to retail competition, or (4) lower 
     prices to particular customers to meet competition.


                          proposed amendments

       S. 2182 would amend the Internal Revenue code of 1986 to 
     make two modifications to the private business use rules as 
     they apply to electric facilities: (1) to clarify the 
     application of the existing private business use rules in the 
     new competitive environment, and (2) to make the private 
     business use rules inapplicable to existing tax-exempt debt 
     issued by any public power system that elects not to issue 
     new tax-exempt debt for electric generation and certain other 
     facilities.
       1. Clarification of Existing Private Business Use Rules. 
     Subsection (a) of section 1 of the bill amends section 
     141(b)(6) of the Code to make it clear that the following 
     activities (referred to as ``permitted open access 
     transactions'') do not result in a private business use and 
     will not make otherwise tax-exempt bonds taxable:
       (a) Providing open access transmission service consistent 
     with Federal Energy Regulatory Commission (FERC) Order No. 
     888 or with State open transmission access rules.
       (b) Joining a FERC approved ISO, regional transmission 
     group (RTG), power exchange, or providing service in 
     accordance with an ISO, RTG, or power exchange tariff.
       (c) Providing open access distribution services to 
     competing retail sellers of electricity.
       (d) If open access transmission or distribution services 
     are offered, contracting for sale of power at non-tariff 
     rates--
       (i) with on-system purchasers or existing off-system 
     purchasers, or
       (ii) with new off-system purchasers for up to three years 
     to offset lost load, but only if the issuer elects to 
     temporarily suspend use of certain tax-exempt financing. A 
     sale qualifies under this provision if aggregate new off-
     system sales do not exceed lost load, and if the public power 
     system has elected to suspend issuance of certain tax-exempt 
     bonds for a period at least as long as the term of the sale. 
     ``Lost load'' means the amount by which on-system sales and 
     existing off-system sales in a year are reduced from such 
     sales in a 1995, 1996, or 1997 base year. A special rule 
     permits a member of a joint action agency that is entitled to 
     make a qualifying load loss sale in a year to transfer that 
     entitlement to the joint action agency.

     Treasury by regulation could add to the list of permitted 
     open access transactions.
       2. Election to Terminate or Suspend Issuing Future Tax-
     Exempt Debt. Subsection (b) of section 1 amends section 141 
     of the Code to permit a public power system to elect to 
     terminate or suspend issuing new tax-exempt bonds.
       (a) Termination Election.--Under new Code section 
     141(f)(1), if a public power system elects to terminate 
     issuance of new tax-exempt bonds, it may then undertake 
     transactions that are not otherwise permissible under the 
     private business use rules (as amended above) without 
     endangering the tax-exempt status of its existing bonds. 
     Specifically, if the issuer makes an irrevocable termination 
     election under this provision, then (subject to the 
     exceptions discussed below) no tax-exempt bond may be issued 
     on or after the date of such election with respect to an 
     electric output facility, and no tax-exempt bond that was 
     issued before the date of enactment will be treated as a 
     private activity bond. This treatment continues for so long 
     as such facility continues to be owned by a governmental 
     unit.
       Essentially, making this termination election will 
     eliminate the possibility of a private business use challenge 
     to existing tax-exempt debt. If a utility does not make the 
     election, its existing tax-exempt debt for electric 
     generation facilities would continue to be subject to 
     applicable private business use rules and the marketing 
     constraints thereunder.
       (b) Suspension Election. New section 141(f)(2) provides an 
     alternative to the election to permanently terminate issuing 
     tax-exempt bonds described above. Under the alternative, an 
     issuer may elect to suspend certain tax-exempt financing for 
     electric output facilities in return for temporary relief 
     from certain of the private business use rules, so as to 
     permit the issuer to make sales to offset lost load, as 
     described in 1(d) above.
       (c) Exceptions to Termination or Suspension. Under section 
     141(f)(4) even if a public power system made the suspension 
     or termination election, it could continue to issue tax-
     exempt bonds for the following purposes: for transmission and 
     distribution facilities used to provide open access 
     transmission and distribution services; for ``qualified 
     bonds'' as defined in section 141(e) of the Code (which are 
     not currently subject to private business use restrictions); 
     for eligible refunding bonds (bonds that refinance existing 
     bonds but do not extend their average maturity); and for 
     bonds issued to finance repairs of, or pollution control 
     equipment for, electrical output facilities, so long as the 
     capacity of the facility is not increased over a de minimis 
     amount.
       3. Effective Dates. Subsection (c) makes the provisions of 
     the bill effective on date of enactment, but an issuer may 
     elect to make the private business use rules as clarified by 
     the bill applicable retroactively to 1996 (when FERC issued 
     its Order No. 888). Paragraph (2) of subsection (c) makes it 
     clear that the provisions of the bill apply to bonds issued 
     under the Internal Revenue Code of 1954 as well as the 
     Internal Revenue Code of 1986. This subsection also makes 
     clear that any activity that was not a private business use 
     prior to the enactment of the bill will not be deemed to be a 
     private business use by reason of the bill's enactment. in 
     addition, an issuer making the election under the bill will 
     not be liable under any contract in effect on the date of 
     enactment of the bill for any contract claim arising from 
     having made the election.

 Mr. KERREY. Mr. President, consumers in Nebraska currently pay 
some of the lowest rates in the nation for their electric service. They 
receive power from 171 entities--more individual electric systems than 
any other state. Nebraska is also the only state in the nation which 
relies entirely on public power for its electric service.
  This structure has served Nebraskans well, and the legislation that 
Senators Gorton, Bumpers, Jeffords, and I are introducing today will 
ensure that consumers in my state continue to receive superior electric 
service as efforts to deregulate the electric industry move forward.
  Mr. President, the legislation we are introducing accomplishes three 
important goals:
  First, this bill enables public power systems to open their 
transmission lines to other power producers and to transfer control of 
their transmission facilities to an Independent System Operator without 
jeopardizing the status of their tax-exempt bonds. This will enable 
consumers throughout the country to receive electricity from their 
power producer of choice in an open access marketplace.
  Secondly, this bill enables public power systems to make non-tariff 
sales of lost ``load'' resulting from retail competition, without 
jeopardizing the ability of the utility to issue tax-exempt debt in the 
future. This will allow public utilities to continue to provide quality 
service to current customers and attract new customers in a deregulated 
environment.
  Finally, Mr. President, this legislation gives public power systems 
the option of terminating issuance of new tax-exempt debt for 
generation facilities, while grandfathering all existing debt. This 
provision will give public power systems the flexibility necessary to 
make business decisions about the future based on their financial 
status and the electricity demands in their individual service areas.
  Mr. President, I commend Senator Gorton for the time and energy that 
he has devoted to this issue. It is critical that Congress alleviate 
the burden which current private-use regulations place on the ability 
of public power

[[Page S6491]]

systems to function in a deregulated environment.
  While Congress moves toward electricity deregulation, I will continue 
to fight for the consumers of my state to ensure that their best 
interests are not compromised. The legislation my colleagues and I are 
introducing today is a realistic and workable solution to the private-
use dilemma, and I encourage my colleagues to give it their full 
support.
                                 ______