[Congressional Record (Bound Edition), Volume 147 (2001), Part 7]
[Extensions of Remarks]
[Page 9505]
[From the U.S. Government Publishing Office, www.gpo.gov]



                    MUNICIPAL GAS SUPPLY ACT OF 2001

                                 ______
                                 

                            HON. MAC COLLINS

                               of georgia

                    in the house of representatives

                         Thursday, May 24, 2001

  Mr. COLLINS. Mr. Speaker, I am introducing legislation today to 
correct a problem created by the IRS that has interfered with the 
ability of municipal gas systems to enter into long-term prepaid 
contracts to obtain natural gas for their citizens. I am joined today 
by 20 of my colleagues who share my great concern for this issue.
  The approximately 1,000 publicly owned gas distribution systems in 
the United States comprise about 5 percent of the market. They are 
primarily located in small towns and rural communities. In the last 15 
years there have been major changes in the natural gas industry that 
have increased their exposure to the great uncertainties of the natural 
gas market. In 1985 the Federal Energy Regulatory Commission ``FERC'' 
began deregulating the delivery of natural gas. In 1993 FERC began 
requiring that pipelines ``unbundle'' their services to customers. This 
meant that municipal gas systems could no longer purchase natural gas 
supplies on a reliable and regulated basis from interstate natural gas 
pipelines. This fundamental change in the marketplace meant that for 
the first time municipal gas systems had to acquire reliable gas 
supplies and transport on their own in a deregulated marketplace. In 
response, many formed joint action agencies, as contemplated in the 
FERC restructuring, to acquire and manage the delivery of gas.
  In today's natural gas markets, long-term prepaid supply arrangements 
are the most reliable means for municipal gas systems to obtain an 
assured supply of natural gas. To fund prepaid supply contracts, the 
municipality or the joint action agency issues tax-exempt bonds. These 
contracts contain stiff penalties if the supplier fails to perform 
making this the most reliable gas supply that municipal gas agencies 
can purchase. Until August of 1999, joint action agencies entered into 
prepayment supply contracts with gas suppliers to obtain a long-term 
(e.g., 10-year) supply of gas.
  In August 1999, the IRS published a request for comment that has 
effectively prevented municipal gas systems from using their tax-exempt 
borrowing authority to fund the purchase of long-term, prepaid supplies 
of natural gas for their citizens. The IRS questioned whether the 
purchase of a commodity, such as natural gas, under a prepaid contract 
financed by tax-exempt bonds has a principal purpose of earning an 
investment return, in which case the bonds would run afoul of the 
arbitrage rules of the Internal Revenue Code. The IRS has not issued 
any guidance following the August 1999 request for comment.
  Under the Internal Revenue Code, tax-exempt bonds may not be used to 
raise proceeds that are then used to acquire ``investment-type 
property'' having a higher yield than the bonds. Governmental bonds 
that violate this arbitrage restriction do not qualify for tax-exempt 
status. Treasury regulations provide that investment-type property 
includes certain prepayments for property or services ``if a principal 
purpose for prepaying is to receive an investment return.'' But, ``a 
prepayment does not give rise to investment-type property if . . . the 
prepayment is made for a substantial business purpose other than 
investment return and the issuer has no commercially reasonable 
alternative to the prepayment. . ..'' A very similar standard is used 
to determine whether a prepayment transaction is treated as a loan for 
purposes of the private loan financing test. If a transaction is 
considered a private loan financing, the bonds are treated as private 
activity bonds. Although municipal gas systems clearly have a 
``substantial business purpose'' for entering into prepayment 
transactions and ``no commercially reasonable alternative,'' the 
failure of the IRS to issue any guidance following its August 1999 
request for comment has eliminated the most efficient tool available to 
public gas systems to secure long term supplies of natural gas.
  The IRS has essentially acted against municipal gas systems without 
going through any of the administrative procedures required for agency 
action. It has not issued any regulations, ruling or other guidance; it 
has simply put out a request for comment that has effectively prevented 
the issuance of any tax-exempt obligations to fund prepaid contracts 
for natural gas.
  The legislation we are introducing today would clarify the law, both 
with respect to the arbitrage rules and the private loan financing 
rules, to remove the confusion created by the IRS.
  This country is now facing an energy crisis. All across the nation 
the price of natural gas has been at record levels as purchasers have 
scrambled to obtain an assured supply. Meanwhile, by requesting comment 
and then failing to act, the IRS has prevented small communities from 
using their tax-exempt borrowing authority to obtain a long-term, 
assured supply of competitively priced natural gas. This problem must 
be addressed as part of comprehensive energy legislation that Congress 
will soon consider.

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