[Congressional Record (Bound Edition), Volume 145 (1999), Part 2]
[Extensions of Remarks]
[Pages 2356-2358]
[From the U.S. Government Publishing Office, www.gpo.gov]




    TAX TREATMENT OF TAX-EXEMPT BONDS UNDER ELECTRICITY DEREGULATION

                                 ______
                                 

                           HON. J.D. HAYWORTH

                               of arizona

                         HON. ROBERT T. MATSUI

                             of california

                    in the house of representatives

                      Thursday, February 11, 1999

  Mr. HAYWORTH. Mr. Speaker, today my colleague Mr. Matsui and I are 
introducing the Bond Fairness and Protection Act of 1999, a bipartisan 
compromise approach to addressing the tax consequences of electricity 
deregulation for tax-exempt bonds issued by municipally- or state-owned 
(``publicly-owned'') utilities for the generation, transmission and 
distribution of electricity.
  Despite the lack of federal legislation in the 105th Congress in this 
area, 18 states have already gone forward and begun to deregulate 
electricity at the state and local level. The era of competition has 
already started both for publicly-owned and investor-owned utilities 
operating in these states. Our home states of Arizona and California 
have taken significant steps down the road to deregulation. In Arizona, 
Salt River Project, a Phoenix-based municipal utility, has already 
opened up its territory to competition. While deregulation faced a 
setback last month, the Arizona Corporation Commission continues to 
work on a deregulation plan for all Arizona utilities that will benefit 
all ratepayers. In California, a statewide deregulation plan is already 
in operation.
  Publicly-owned utilities have operated until now under a strict 
regime of federal tax rules governing their ability to issue tax-exempt 
bonds. These rules were enacted in an era that did not contemplate 
electricity deregulation. These so-called ``private use'' rules limit 
the amount of power that publicly-owned utilities may sell to private 
entities through facilities financed with tax-exempt bonds. For years, 
the private use rules were cumbersome but manageable. As states 
deregulate, however, the private use rules are threatening many 
communities that are served by public power with significant financial 
penalties as they adjust to the changing marketplace. In effect, the 
rules are forcing publicly-owned utilities to face the prospect of 
violating the private use rules, or walling off their customers from 
competition, and in either case raising rates to consumers--the precise 
opposite of what deregulation is supposed to achieve. The consumer can 
only lose when this happens.
  The legislation that we are introducing today would protect all 
consumers by grandfathering

[[Page 2357]]

outstanding tax-exempt bonds, but only if the issuing municipal 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 distribution facilities, which generally 
would still be regulated under most deregulation schemes. 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 deregulation while keeping the 
interests 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 restrictions in a deregulated world, 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 deregulated 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 new deregulated world of electricity.
  In addition, for those concerned about the environment, it provides 
incentives to deliver electricity efficiently and encourages the 
retrofitting of aging facilities. Most importantly, for consumers, it 
allows competition to thrive while protecting local choice and local 
control.
  We point out to our colleagues that identical legislation, S. 386, 
has been introduced in the other body by Senators Gorton, Kerrey, 
Jeffords, Hollings, Thurmond, Harkin, Murray, Smith of Oregon, Johnson, 
Wyden, Leahy and Hagel.
  Mr. Speaker, we plan to work with all interested parties, and most 
importantly American consumers, to ensure that we end up with the 
fairest, most reasonable solution to this complex problem. We want 
electricity deregulation to be a good deal for everyone involved, 
especially the American consumer, who certainly deserves the lower 
electric bills that a competitive marketplace is supposed to provide. 
We believe this legislation addresses all of these concerns and 
promotes fair competition in the electricity industry. We urge our 
colleagues to join us in cosponsoring this legislation.
  Mr. Speaker, I submit the text of the bill to be printed in the 
Record.

                                 H.R.--

       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 an 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 that 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, 1996 or 1997).
       ``(V) Joint action agencies.--A member of a joint action 
     agency that is entitled to 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,
       ``(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 minimis 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) Qualified 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 this Act to sections of 
     the Internal Revenue Code of 1986 shall be deemed to include 
     references to comparable sections of the Internal Revenue 
     Code of 1954.
       (3) Transition rules.--

[[Page 2358]]

       (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.

     

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