[Congressional Record (Bound Edition), Volume 145 (1999), Part 2]
[Senate]
[Pages 2042-2044]
[From the U.S. Government Publishing Office, www.gpo.gov]




   TAX TREATMENT OF TAX-EXEMPT BONDS UNDER ELECTRICITY RESTRUCTURING

 Mr. GORTON. Mr. President, last Saturday, together with my 
colleagues Senators Kerry, Jeffords, Hollings, Thurmond, Harkin, 
Murray, Smith of Oregon, Johnson, and Wyden. I introduced ``The Bond 
Fairness and Protection Act of 1999.'' This is a bi-partisan compromise 
approach to legislation addressing the tax consequences of electricity 
restructuring on tax-exempt bonds that are issued by municipally-owned 
or state-owned utilities (often referred to as ``publicly-owned'' 
utilities) for the generation, transmission, and distribution of 
electricity.
  As my colleagues may recall, last Congress I introduced a 
substantially similar bill, S. 2182, with eleven cosponsors from both 
sides of the aisle. Unfortunately, the 105th Congress did not have an 
opportunity to address this or other proposals on electricity 
restructuring. This year we have worked to simplify and refine last 
year's legislation in response to thoughtful comments we received last 
year, and in an effort to facilitate timely consideration of the 
legislation in this Congress.
  Despite the lack of Federal legislation in this policy area, 18 
states have already gone forward and begun to allow retail market 
choice for electricity consumers at the state and local level. The era 
of retail competition has already started both for publicly-owned and 
investor-owned utilities operating in these states.
  Until recently, publicly-owned utilities have been able to operate 
under a strict regime of Federal tax rules governing their ability to 
issue tax-exempt bonds. These rules were enacted in an era when 
decision makers did not contemplate retail or wholesale electricity 
competition. These so-called ``private use'' rules limit the amount of 
electricity that publicly-owned utilities may sell to private entities 
through facilities that are financed with tax-exempt bonds. For years, 
the private use rules were cumbersome but manageable. As states move to 
restructure the electricity industry however, the private use rules 
were threatening many public power communities with significant 
financial penalties as they adjust to the changing marketplace. In 
effect, the rules are forcing publicly-owned utilities to face the 
prospects of violating the private use rules, or walling off their 
customers from competition. In either case, this will raise rates for 
consumers--the precise opposite of what restructuring is intended to 
achieve. The consumer can only lose when the marketplace operates in 
this inefficient manner.
  The legislation that I am introducing today would protect all 
consumers by grandfathering outstanding tax-exempt bonds, but only if 
the issuing municipality or state utility elects to terminate 
permanently its ability to issue tax-exempt debt to build new 
generating facilities. Such an election would not affect transmission 
and distributions facilities, which generally would still be regulated 
under most restructuring proposals or frameworks. Publicly-owned 
utilities that do not make this irrevocable election would continue to 
operate under a clarified version of existing law, thus remaining 
subject to the private use rules.
  This legislation attempts to balance and be fair to the interests of 
all stakeholders in electricity restructuring while keeping the 
interest of the consumer paramount. It strikes a compromise between 
publicly-owned utilities and investor-owned utilities by providing an 
option for publicly-owned utilities to address the problem of how to 
comply with private use restriction in a restructured marketplace, an 
option that involves significant trade-offs for the publicly-owned 
utilities that seek to utilize it. For investor-owned utilities, 
requiring publicly-owned utilities to forego the ability to issue tax-
exempt debt for new generation facilities should mitigate any potential 
or perceived competitive advantage in the new competitive world. At the 
same time, it honors promises made to bondholders under contract and 
existing tax law, thereby avoiding the inequitable consequence of 
applying old rules to the newly-emerging competitive world of 
electricity.
  In addition, for those concerned about the environment, it provides 
incentives to deliver electricity efficiently through open access and 
retail competition. Most importantly, for consumers the legislation 
allows competition to thrive while providing additional local options.
  Mr. President, we plan to work with all interested parties, and most 
importantly American consumers, to ensure that we develop the fairest 
and most reasonable solution to this complex problem. We want 
electricity restructuring to be a good deal for everyone involved, 
especially the American consumer who deserves the lower electric bills 
that a competitive marketplace should provide. I believe this 
legislation addresses all of these concerns and promotes fair 
competition in the electricity industry. I urge my colleagues to join 
me in co-sponsoring this legislation.
  Mr. President, I ask that the text of the bill, and an explanatory 
memorandum be printed in the Record.
  The material follows:

                                 S. 386

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

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Bond Fairness and Protection 
     Act of 1999''.

     SEC. 2. 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 all electric output facility (as 
     defined in subsection (f)(4)(A)) owned by a governmental 
     unit:
       ``(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 (which may include transferring control of 
     transmission facilities to an independent system operator), 
     in a regional transmission group, or in a 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 to an on-system purchaser or is an 
     existing off-system sale.
       ``(V) Such other transactions or activities as may be 
     provided in regulations prescribed by the Secretary.
       ``(iii) 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 whose electric facilities or equipment 
     are directly connected with transmission or distribution 
     facilities that are owned by such governmental unit.
       ``(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 kilowatt hours purchased by 
     such person in such year.
       ``(IV) Base year.--The term `base year' means 1998 (or, at 
     the election of such unit, in 1996 or 1997).
       ``(V) Joint action agencies.--A member of a joint action 
     agency that is entitled to

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     make a sale described in clause (ii)(IV) in a year may 
     transfer that entitlement to the joint action agency in 
     accordance with rules of the Secretary.''
       ``(VI) Government-owned facility.--An electric output 
     facility (as defined in subsection (f)(4)(A)) shall be 
     treated as owned by a governmental unit if it is owned or 
     leased by such governmental unit or if such governmental unit 
     has capacity rights therein acquired before July 9, 1996, for 
     the purposes of serving one or more customers to which such 
     governmental unit had a service obligation on such date under 
     state law or a requirements contract.
       (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 Tax-Exempt Bond Financing for 
     Certain Electric Output Facilities.--
       ``(1) In general.--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 (2), 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) Exceptions.--An election under paragraph (1) 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 equipment necessary to 
     meet Federal or state environmental requirements applicable 
     to, or repair of, electric output facilities in service on 
     the date of enactment of this subsection. Repairs or 
     equipment may not increase by more than a de minimus degree 
     the capacity of the facility beyond its original design.
       ``(3) Form and effect of elections.--An election under 
     paragraph (1) shall be made in such a manner as the Secretary 
     prescribes and shall be binding on any successor in interest 
     to the electing issuer.
       ``(4) 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) 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 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 
     arising from having made the election.
                                  ____


                         Explanation of S. 386


                               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 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

       This legislation 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 2 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 or power at non-tariff 
     rates with on-system purchasers or existing off-system 
     purchasers.
       Treasury by regulation could add to the list of permitted 
     open access transactions.
       2. Election to Terminate Issuing Future Tax-Exempt Debt.--
     Subsection (b) of section 2 amends section 141 of the Code to 
     permit a public power system to elect to terminate 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) Exceptions to Termination.--Under section 141(f)(2) 
     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 environmentally-
     related 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.

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