[Federal Register Volume 63, Number 14 (Thursday, January 22, 1998)]
[Rules and Regulations]
[Pages 3256-3266]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-716]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8757]
RIN 1545-AV46
Obligations of States and Political Subdivisions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final and temporary regulations that
provide guidance to state and local governments that issue bonds for
output facilities. This document also contains temporary regulations
that provide guidance to certain nongovernmental persons that are
engaged in the local furnishing of electric energy or gas using
facilities financed with state or local government bonds. These
temporary regulations reflect changes made by the Tax Reform Act of
1986 and the Small Business Job Protection Act of 1996. The temporary
regulations will affect State and local government issuers of
obligations and nongovernmental persons engaged in the local furnishing
of electric energy or gas after the effective date of these
regulations.
The text of these temporary regulations also serves as the text of
the proposed regulations set forth in the notice of proposed rulemaking
on this subject in the Proposed Rules section of this issue of the
Federal Register.
DATES: These regulations are effective January 22, 1998.
For dates of applicability, see Secs. 1.141-15T, 1.142(f)(4)-1T(g),
and 1.150-5T(b) of these regulations.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Allan
Seller (202) 622-3980 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document amends the Income Tax Regulations (26 CFR part 1)
under section 141 by providing special rules for state and local bonds
issued for output facilities. This document also amends the Income Tax
Regulations under section 142(f)(4) by providing rules for
nongovernmental persons engaged in local furnishing of electric energy
or gas using facilities financed with state or local bonds to make the
election provided in that section. Proposed regulations Secs. 1.141-7
and 1.141-8, published on December 30, 1994, (59 FR 67658) addressed
the application of the private activity bond tests under section
141(b)(2) to output contracts for output facilities and the application
of the $15 million limit under section 141(b)(4) to output facility
financings. These sections (the 1994 proposed output regulations) are
withdrawn. Public comments submitted on the 1994 proposed output
regulations, however, have been taken into account in formulating these
temporary regulations.
Explanation of Provisions
A. Section 1.141-7T Special Rules for Output Facilities
1. Basis for Special Rules for Output Facilities
The 1994 proposed output regulations contain special rules for
applying the private business tests to output contracts. Among the
reasons for special rules for output facilities are that
governmentally-owned utilities are often under an open-ended obligation
to assure service to their customers and that general public customers
are ordinarily required to make continuing payments for service. Output
facilities also require special rules because the
[[Page 3257]]
economic benefit provided by these facilities is usually the use of
fungible property, such as electric power or water. The temporary
regulations continue the approach of the proposed regulations, but
contain a number of new provisions, consistent with the general
principles of the existing regulations under Sec. 1.103-7(b)(5), that
take into account changes in the electric industry.
2. The Benefits and Burdens Standard
The 1994 proposed output regulations provide that a contract to
sell output of a financed facility to a nongovernmental person may
cause the private business tests of section 141(b) to be met if it has
the effect of transferring to that nongovernmental person the benefits
of owning the facility and the burdens of paying debt service on the
facility. The temporary regulations adopt this standard, but clarify
its application.
For purposes of the standard, the temporary regulations generally
provide that use of output on a basis different from the general public
has the effect of transferring the benefits of ownership. Similarly,
contracts that provide a substantial certainty that payments for output
will be made under the terms of the contract, other than on a short-
term basis, have the effect of transferring the burden of paying debt
service on a facility. The standard does not require that the burdens
of ownership for general tax purposes be transferred to a
nongovernmental person.
3. Requirements Contracts
The 1994 proposed output regulations provide that take or pay
contracts, take contracts, and certain requirements contracts meet the
benefits and burdens standard. Many commentators, noting that
Sec. 1.103-7(b)(5) does not expressly refer to requirements contracts,
suggested that requirements contracts should never meet the benefits
and burdens standard.
The temporary regulations narrow the rule for requirements
contracts, by providing that a requirements contract meets the benefits
and burdens test only to the extent that the issuer reasonably expects
that it is substantially certain that payments for output will be made
under the contract. Such a requirements contract is in substance
equivalent to a take contract. A retail requirements contract generally
does not meet this standard, unless the contract requires substantial
termination payments or contains other terms that establish substantial
certainty of payment. Whether the payments under a wholesale
requirements contract are substantially certain to be made is
determined on the basis of all the facts and circumstances, taking into
account such factors as whether the purchaser's customer base has
significant indicators of stability, whether the contract covers
historical requirements of the purchaser, and whether the purchaser has
agreed not to construct or acquire other power resources.
4. Special Rule for Output Contracts With Specific Performance Rights
The 1994 proposed output regulations provide that a requirements
contract meets the benefits and burdens standard if the purchaser has
priority rights to the output (or rights to control the allocation of
the available output).
The temporary regulations generally provide that any output
contract that provides the purchaser with specific rights to control
the output or with other specific performance rights to the use of
output of a financed facility meets the benefits and burdens test, even
if the issuer reasonably expects that it is not substantially certain
that payments will be made under the contract. This different standard
applies to output contracts that provide the purchaser with specific
performance rights because those contracts closely resemble leases,
and, thus, provide more substantial rights to the use of a financed
facility.
5. Security Interest Test
The 1994 proposed output regulations do not address how the
security interest test applies to output contracts.
The temporary regulations provide that payments made or to be made
under an output contract pledged as security for an issue are taken
into account under the private security or payment test even if payment
under the contract is not substantially certain. This rule is
appropriate because it is reasonable to presume that payments under a
contract pledged as security for an issue are material to the payment
of debt service on an issue.
6. Use of Nameplate Capacity to Determine Available Output
The 1994 proposed output regulations measure the available output
of a facility by reference to nameplate capacity, but further provide
that, if nameplate capacity or its equivalent is greater than 150
percent of the average expected output, average expected output is used
instead of nameplate capacity. In addition, nameplate capacity is
reduced by scheduled maintenance. Commentators suggested that reference
to nameplate capacity to determine available output is a bright-line,
administrable test, and that the reductions to nameplate capacity in
the 1994 proposed output regulations should be deleted.
The temporary regulations generally provide that nameplate capacity
may be used as a reference to determine available output of a
generating facility. This rule acknowledges that, consistent with
prudent utility practice, governmentally-owned utilities may be
required to acquire or construct facilities with excess capacity for
their current or future reserves. To prevent tax-exempt financings that
are inconsistent with the purposes of section 141, however, the
temporary regulations provide that this rule does not apply if the
issuer reasonably expects on the issue date that nongovernmental
persons that are treated as private business users will purchase 30
percent or more of the actual output of the facility. In such a case,
the Commissioner may determine available output on another reasonable
basis. In addition, the temporary regulations clarify that, if a
limited source of supply constrains the output of a facility (for
example, if seasonal differences in water flow constrain output of a
hydroelectric facility), the available output must be determined by
taking into account these constraints. The temporary regulations also
delete the rule that nameplate capacity is reduced by scheduled
maintenance.
7. Exception for Swapping and Pooling Arrangements
The 1994 proposed output regulations provide that certain
arrangements to swap and pool power do not meet the private business
tests.
The temporary regulations simplify this exception and expand it, so
that it includes swapping arrangements entered into to enhance
reliability of a system.
8. Exceptions for Short-term Sales of Output
The 1994 proposed output regulations provide that 30-day agreements
for spot sales of excess capacity do not result in private business
use.
The temporary regulations provide that the exceptions for short-
term use that apply to other types of arrangements under the general
private activity bond rules in Sec. 1.141-3 also apply to output
contracts. Thus, in general an output contract that is available to the
general public may have a term up to 180 days; an output contract that
is not treated as general public use, but that is offered on the basis
of generally applicable or uniformly applied rates, may have a term of
up to 90 days; and an output
[[Page 3258]]
contract that is specially negotiated may have a term of up to 30 days.
9. Special Exceptions for Sales of Output Attributable to Excess
Generating Capacity Which Mitigate Stranded Costs
The 1994 proposed output regulations provide that a single
nonrenewable contract for a term of not greater than 1 year is not
treated as private business use. Commentators suggested that longer
term, renewable contracts to sell output attributable to excess
generating capacity should be disregarded under the private business
use test. Commentators noted that the excess generating capacity
problem may be exacerbated by the development of open-access regulatory
policies and other factors.
The temporary regulations respond to these special considerations
by providing a more flexible exception for sales of output attributable
to excess generating capacity that results from the offering of
nondiscriminatory, open access tariffs. This exception is also
consistent with the Federal Energy Regulatory Commission policy that
utilities should take reasonable steps to mitigate the imposition of
charges to recover legitimate, prudent, and verifiable stranded costs
associated with providing open access. Under this exception, a contract
to sell excess power is not treated as private business use if the term
of the contract (including all renewal options) is not greater than 3
years, the issuer does not issue tax-exempt bonds to increase the
capacity of its generation system during the term of the contract, the
governmental owner offers non-discriminatory, open access transmission
tariffs pursuant to the FERC rules (or comparable state law provisions
pursuant to a plan approved by the FERC), all of the output sold under
the contract is excess capacity resulting from participation in open
access, the contract mitigates stranded costs of the owner that are
attributable to entry into the open access system, and stranded costs
recovered under the contract by that owner are used to redeem tax-
exempt bonds as promptly as reasonably practical.
10. Special Exceptions for Transmission Facilities
The 1994 proposed output regulations provide special rules for
transmission facilities, which are intended to respond to the
development of regulatory policies that require or encourage open
access to transmission systems. Under these special rules, in general,
the use of transmission facilities is not private business use to the
extent that it results from an order or actions taken in response to
(or to prevent) an anticipated order by the United States that those
facilities be used by a particular nongovernmental person, provided
that the transmission facilities were sized based on the issuer's
reasonable expectations about the amount of wheeling. The 1994 proposed
output regulations contain a number of exceptions to this rule, which
are designed to prevent the tax-exempt financing of facilities
constructed for use by nongovernmental persons. The 1994 proposed
output regulations also provide that an issuer must take remedial
action if more than 20 percent of a transmission facility is so used by
a nongovernmental person.
Commentators suggested that the exceptions for use of transmission
systems should be made more flexible to accommodate the development of
open access regulatory policies. Commentators noted that measurement of
use of a transmission system raises a number of complex technical
issues. For example, capacity or available output may be much more
readily determined for a generating unit than for a transmission
system. Some commentators suggested that all use of a transmission
system pursuant to standard tariffs should be treated as general public
use. Other commentators suggested that any rules addressing open access
required by the FERC should also similarly address open access required
by state public utility commissions.
The temporary regulations broaden the exceptions for use of
transmission facilities, but do not treat all use of transmission
facilities pursuant to standard tariffs as general public use. Under
Sec. 1.141-2(d), an action taken in response to a specific FERC order
to wheel power under sections 211 and 212 of the Federal Power Act (16
U.S.C. 824j and 824k) would otherwise qualify for an exception from the
deliberate action rule because it is taken in response to a regulatory
directive made by the federal government. The temporary regulations
additionally provide that an action taken in anticipation of such an
order is not a deliberate action.
The temporary regulations also provide a special exception for
transmission facilities pursuant to which an action is not treated as a
deliberate action if it is taken to implement the offering of non-
discriminatory, open access for the use of financed transmission
facilities in a manner consistent with FERC rules, including
reciprocity conditions of FERC Order No. 888 (61 FR 21540, May 10,
1996), pursuant to a plan approved by the FERC. The special exception
also applies to orders and rules of state regulatory authorities
pursuant to a plan approved by the FERC that are comparable to certain
FERC orders and rules. This exception does not apply, however, to the
sale, exchange, or other disposition of bond-financed transmission
facilities to a nongovernmental person.
Section 1.141-2(d)(1) provides that an issue is an issue of private
activity bonds if the issuer reasonably expects, as of the issue date,
that the issue will meet either the private business tests or the
private loan financing test or if the issuer takes a deliberate action,
subsequent to the issue date, that causes the conditions of either the
private business tests or the private loan financing test to be met.
Thus, reasonable expectations about private business use of
transmission facilities under non-discriminatory, open-access tariffs,
must be taken into account on the issue date of bonds financing those
facilities. A special transition rule applies to bonds (other than
advance refunding bonds) that refund bonds issued prior to July 9, 1996
(the effective date of FERC Order No. 888). Because an issuer is in
general not required to apply the temporary regulations to refunding
bonds issued after the effective date that do not have a weighted
average maturity longer than the remaining weighted average maturity of
the refunded bonds, the special transition rule will apply only if the
issuer chooses to apply the temporary regulations. Whether bonds issued
after July 9, 1996, to finance output facilities met the reasonable
expectations test of section 141 because of the possibility of actions
taken to implement open access tariffs is appropriately determined on a
facts and circumstances basis.
These special rules for transmission facilities are appropriate
because of the unique statutory and regulatory regime that applies to
transmission facilities.
B. Section 1.141-8T $15 Million Limitation for Output Facilities
1. Clarification of Computation of Nonqualified Amount
The 1994 proposed output regulations provide guidance on the
special $15 million limitation on output facilities of section
141(b)(4). In general, this limitation is based on the ``nonqualified
amount'' of an issue or issues that finance a single project.
The temporary regulations clarify that, in determining the total
nonqualified amount for issues
[[Page 3259]]
financing a project, the nonqualified amount is first determined on an
issue-by-issue basis, and that these amounts are then aggregated. The
temporary regulations also provide a simpler method for determining how
much the nonqualified amount of an issue is reduced when principal of
the issue is paid. Under this method, the nonqualified amount of an
issue is reduced by the ratio of adjusted issue price over issue price.
C. Section 1.142(f)(4)-1T Manner of Making Election to Terminate Tax-
exempt Bond Financing
Section 142(f)(4) permits a person engaged in the local furnishing
of electric energy or gas that uses facilities financed with exempt
facility bonds under section 142(a)(8) and that expands its service
area in a manner inconsistent with the requirements of sections
142(a)(8) and 142(f) to make an election to ensure that those bonds
will continue to be treated as exempt facility bonds. In order to make
the election the person engaged in local furnishing must, among other
things, agree to redeem all outstanding bonds that financed the
facilities not later than 6 months after the later of the earliest date
on which the bonds may be redeemed or the date of the election. The
temporary regulations set forth the required time and manner of making
this election. In general, the election must be made on or before the
90th day after the later of (i) the date of the service area expansion
or (ii) the effective date of the temporary regulations.
D. Sec. 1.150-5T Filing Notices and Elections
The temporary regulations specify that notices and elections under
section 142(f)(4)(B) and Sec. 1.141-12(d)(3) must be filed with the
Chief, Employee Plans and Exempt Organizations Division of the
appropriate key district office.
E. Need for Temporary Regulations and Request for Public Comments
Congress passed the Federal Energy Act of 1992 to encourage
deregulation of the electric power industry. Since that time, the
Federal Energy Regulatory Commission and various states have adopted
policies to open up access to transmission facilities. Treasury and the
IRS are aware that these initiatives are causing rapid changes in the
electric power industry, and have received many comments asking for
immediate guidance under section 141 regarding the effect on the tax-
exempt status of bonds of certain restructuring transactions necessary
for utilities to participate in a deregulated electric utility
environment. For example, several comments state that the restructuring
initiatives in various states and regions may not proceed until
Treasury and the IRS clarify the extent to which municipal utilities
may transfer control of certain assets financed with tax-exempt bonds
to an independent system operator. Based on these considerations, it
has been determined that immediate regulatory guidance is necessary to
ensure efficient administration of the tax laws.
The regulations are published in both temporary and proposed form
to provide immediate guidance on which issuers can rely in evaluating
their participation in open access regimes, while providing the
opportunity for public comment. In addition, Treasury and the IRS
believe that providing guidance on the effect of open access
participation is more appropriately accomplished by regulation than by
private letter ruling. Treasury and the IRS are also aware, however,
that restructuring efforts are evolving and uncertain, and that new
types of arrangements may be developed to implement restructuring. Many
of the issues that will arise may need to be addressed legislatively.
Accordingly, the regulations are published in temporary form with the
expectation the Treasury and the IRS will reexamine them in light of
new developments within the next three years.
Comments are invited on whether further guidance is needed to
address the new types of contractual arrangements that are arising in
the electric power industry. In particular, comments are invited on
whether there are any instances in which an option of a nongovernmental
purchaser to purchase output of a bond-financed facility should not be
taken into account as private business use.
Effective Dates
Sections 1.141-7T and 1.141-8T are applicable to bonds issued on or
after February 23, 1998.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations.
It is hereby certified that the provisions of these regulations
that impose a collection of information requirement on small entities
do not have a significant impact on a substantial number of small
entities. This certification is based upon the fact that in the years
1987 through 1993 a total of only 61 different state or local
government issuers of exempt facility bonds issued under section 142(f)
for facilities for the local furnishing of electric energy or gas filed
information returns with the Internal Revenue Service under section
149(e). Further, an election under section 142(f)(4) is in no event
required to be filed with the Internal Revenue Service more than once.
Therefore, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. Chapter 6) is not required. Pursuant to
section 7805(f) of the Internal Revenue Code, these temporary
regulations will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Drafting Information
The principal authors of these regulations are Michael G. Bailey
and Allan Seller, Office of Assistant Chief Counsel (Financial
Institutions & Products), and Nancy M. Lashnits, formerly of that
office. However, other personnel from IRS and the Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.141-0 is amended by removing the entries for
Secs. 1.141-7 and 1.141-8 and adding entries to the table in numerical
order to read as follows:
Sec. 1.141-0 Table of contents.
* * * * *
Sec. 1.141-7T Special rules for output facilities (temporary).
(a) Overview.
(b) Definitions.
(1) Available output.
(2) Measurement period.
(3) Sale at wholesale.
(4) Stranded costs.
(5) Take contract and take or pay contract.
(6) Transmission facilities.
(7) Nonqualified amount.
(c) Output contracts.
[[Page 3260]]
(1) General rule.
(2) Benefits and burdens test.
(3) Take contract or take or pay contract.
(4) Requirements contracts.
(5) Contract with specific performance rights.
(d) Measurement of private business use.
(e) Measurement of private security or payment.
(f) Exceptions for certain contracts.
(1) Small purchases of output.
(2) Swapping and pooling arrangements.
(3) Short-term output contracts.
(4) Special 3-year exception for sales of output attributable to
excess generating capacity resulting from participation in open
access.
(5) Special exceptions for transmission facilities.
(6) Certain conduit parties disregarded.
(g) Allocations of output facilities and systems.
(1) Facts and circumstances analysis.
(2) Illustrations.
(3) Transmission contracts.
(4) Allocation of payments.
(h) Examples.
Sec. 1.141-8T $15 million limitation for output facilities
(temporary).
(a) In general.
(1) General rule.
(2) Reduction in $15 million output limitation for outstanding
issues.
(3) Benefits and burdens test applicable.
(b) Definition of project.
(1) General rule.
(2) Separate ownership.
(3) Generating property.
(4) Transmission.
(5) Subsequent improvements.
(6) Replacement property.
(c) Examples.
* * * * *
Sec. 1.141-15T Effective dates (temporary).
(a) through (e) [Reserved].
(f) Effective dates for certain regulations relating to output
facilities.
(1) General rule.
(2) Transition rule for requirement contracts.
(g) Refunding bonds.
(h) Permissive retroactive application.
(i) Permissive retroactive application of certain regulations
pertaining to output contracts.
* * * * *
Par. 3. Section 1.141-2 is amended by adding a sentence at the end
of paragraph (d)(3)(ii)(B) to read as follows:
Sec. 1.141-2 Private activity bond tests.
* * * * *
(d) * * *
(3) * * *
(ii) * * *
(B) * * * See Sec. 1.141-7T(f)(5).
* * * * *
Secs. 1.141-7 and 1.141-8 [Removed]
Par. 3a. Sections 1.141-7 and 1.141-8 are removed.
Par. 4. Sections 1.141-7T and 1.141-8T are added to read as
follows:
Sec. 1.141-7T Special rules for output facilities (temporary).
(a) Overview. This section provides special rules to determine
whether arrangements for purchases of output from an output facility
cause an issue of bonds to meet the private business tests. For this
purpose, unless otherwise stated, water facilities are treated as
output facilities. Section 1.141-3 generally applies to determine
whether other types of arrangements for use of an output facility cause
an issue to meet the private business tests.
(b) Definitions. For purposes of this section and Sec. 1.141-8T,
the following definitions and rules apply:
(1) Available output. The available output of a facility financed
by an issue is determined by multiplying the number of units produced
or to be produced by the facility in one year by the number of years in
the measurement period of that facility for that issue.
(i) Generating facilities. The number of units produced or to be
produced by a generating facility in one year is determined by
reference to its nameplate capacity or the equivalent (or where there
is no nameplate capacity or the equivalent, its maximum capacity),
which is not reduced for reserves or other unutilized capacity.
(ii) Transmission and other output facilities. (A) In general. For
transmission, cogeneration, and other output facilities, available
output must be measured in a reasonable manner to reflect capacity.
(B) Electric transmission facilities. Measurement of the available
output of all or a portion of electric transmission facilities may be
determined in a manner consistent with the reporting rules and
requirements for transmission networks promulgated by the Federal
Energy Regulatory Commission (FERC). For example, for a transmission
network, the use of aggregate load and load share ratios in a manner
consistent with the requirements of the FERC may be reasonable. In
addition, depending on the facts and circumstances, measurement of the
available output of transmission facilities using thermal capacity or
transfer capacity may be reasonable.
(iii) Special rule for facilities acquired or constructed primarily
for use by private business users. If an issuer reasonably expects on
the issue date that persons that are treated as private business users
will purchase more than 30 percent of the actual output of the facility
financed with the issue, the Commissioner may determine the number of
units produced or to be produced by the facility in one year on a
reasonable basis other than by reference to nameplate capacity, such as
the average expected annual output of the facility. For example, the
Commissioner may treat the reasonably expected annual output of a
financed peaking electric generating unit as the available output of
that unit if the issuer reasonably expects, on the issue date of bonds
that finance the unit, that an investor-owned utility will purchase 30
percent of the actual output of the facility under a take or pay
contract, even if the amount of output purchased is less than 10
percent of the available output determined by reference to nameplate
capacity. The reasonably expected annual output of the generating
facility must be consistent with the capacity reported for prudent
reliability purposes.
(iv) Special rule for facilities with a limited source of supply.
If a limited source of supply constrains the output of an output
facility, the number of units produced or to be produced by the
facility must be determined by reasonably taking into account those
constraints. For example, the available output of a hydroelectric unit
must be determined by reference to the reasonably expected annual flow
of water through the unit.
(2) Measurement period. The measurement period of an output
facility financed by an issue is determined under Sec. 1.141-3(g).
(3) Sale at wholesale. For purposes of this section, a sale at
wholesale means a sale of output to any person for resale.
(4) Stranded costs. For purposes of this section, stranded costs
means stranded costs as defined in 18 CFR 35.26 and costs that an
issuer incurred to provide service to a wholesale or retail customer
that subsequently becomes, in whole or in part, an unbundled
transmission customer and that an issuer is authorized to recover by
the FERC or a state regulatory authority.
(5) Take contract and take or pay contract. A take contract is an
output contract under which a purchaser agrees to pay for the output
under the contract if the output facility is capable of providing the
output. A take or pay contract is an output contract under which a
purchaser agrees to pay for the output under the contract, whether or
not the output facility is capable of providing the output.
(6) Transmission facilities. Transmission facilities are facilities
for the transmission or distribution of output. Transmission facilities
include facilities necessary to provide ancillary services required to
be offered as part of open access transmission tariffs under rules
promulgated by the FERC under sections 205 and 206 of the Federal
[[Page 3261]]
Power Act (16 U.S.C. 824d and 824e). Thus, if a facility also serves
another function (for example, a facility that provides for operating
reserves for transmission and also provides generation) an allocable
portion of the facility is treated as a transmission facility.
(7) Nonqualified amount. The nonqualified amount with respect to an
issue is determined under section 141(b)(8).
(c) Output contracts--(1) General rule. The purchase by a
nongovernmental person of the available output of an output facility
(output contract) financed with the proceeds of an issue is taken into
account under the private business tests if the purchase has the effect
of transferring substantial benefits of owning the facility and
substantial burdens of paying the debt service on bonds used (directly
or indirectly) to finance the facility (the benefits and burdens test).
See paragraph (c)(5) of this section for other output contract
arrangements that are taken into account under the private business
tests. See also Sec. 1.141-8T for rules for when an issue that finances
an output facility (other than a water facility) meets the private
business tests because the nonqualified amount of the issue exceeds $15
million.
(2) Benefits and burdens test--(i) Benefits of ownership. An output
contract transfers substantial benefits of owning a facility if the
contract gives the purchaser (directly or indirectly) rights to
capacity of the facility on a basis that is preferential to the rights
of the general public.
(ii) Burdens of paying debt service. An output contract transfers
substantial burdens of paying debt service on an issue to the extent
that the issuer reasonably expects that it is substantially certain
that payments will be made under the terms of the contract
(disregarding default, insolvency, or other similar circumstances). For
example, an output contract is treated as transferring burdens of
paying debt service on an issue if payments must be made upon contract
termination.
(iii) Payments pursuant to pledged contract. Payments made or to be
made under the terms of an output contract that is pledged as security
for an issue are taken into account under the private business tests
even if the issuer reasonably expects that it is not substantially
certain that payments will be made under the contract (disregarding
default, insolvency, or other similar circumstances). For this purpose,
an output contract is pledged as security only if the bond documents
provide that the pledged contract cannot be substantially amended
without the consent of bondholders or a trustee for the bondholders.
(3) Take contract or take or pay contract--(i) In general. The
benefits and burdens test is met if a nongovernmental person agrees
pursuant to a take contract or a take or pay contract to purchase the
available output of a facility. See paragraphs (d) and (e) of this
section for rules regarding measuring the use of, and payments on debt
service for, an output facility for determining whether the private
business tests are met.
(ii) Transmission contracts. In the case of a transmission
facility, an agreement to provide firm or priority transmission
services is generally treated as a take contract or a take or pay
contract. The extent to which transmission services are interruptible
is an important factor indicating that a contract for transmission
services is not treated as a take contract or a take or pay contract.
(4) Requirements contracts--(i) In general. A requirements contract
under which a nongovernmental person agrees to purchase all or part of
its output requirements is taken into account under the private
business tests only to the extent that, based on all the facts and
circumstances, the contract meets the benefits and burdens test. See
Sec. 1.141-15T(f)(3) for special effective dates for the application of
this paragraph (c)(4) to issues financing facilities subject to
requirements contracts.
(ii) Significant factors. Significant factors that tend to
establish that the benefits and burdens test is met under the rule set
forth in paragraph (c)(4)(i) of this section include--
(A) The purchaser's customer base has significant indicators of
stability, such as large size, diverse composition, and a substantial
residential component;
(B) The contract covers historical requirements of the purchaser,
rather than only projected requirements that are in addition to
historical requirements; and
(C) The purchaser agrees not to construct or acquire other power
resources to meet the requirements covered by the contract.
(iii) Special rule for retail requirements contracts. In general, a
requirements contract that is not a sale at wholesale does not meet the
benefits and burdens test because the obligation to make payments on
the contract is contingent on the output requirements of a single user.
Such a requirements contract in general meets the benefits and burdens
test, however, to the extent that it contains contractual terms that
obligate the purchaser to make payments that are not contingent on the
output requirements of the purchaser (such as significant termination
payments) or that obligate the purchaser to have output requirements.
For example, a requirements contract with an industrial purchaser meets
the benefits and burdens test if the purchaser enters into additional
contractual obligations with the issuer or another governmental unit
not to cease operations.
(5) Contract with specific performance rights. An output contract
that provides the purchaser with specific rights to control the output
of a facility or with other specific performance rights to the use of
output of a facility is generally taken into account under the private
business tests, even if the benefits and burdens test is not met.
Payments made and to be made under such a contract are generally taken
into account under the private payment test, even if the issuer does
not reasonably expect that it is substantially certain that payments
will be made under the contract (disregarding default, insolvency, or
other similar circumstances). A customer's normal entitlement to
receive utility service (for example, an entitlement to reasonable
protection against blackouts in times of high demand through rotating
the effects of blackouts) is not treated as a specific performance
right for this purpose.
(d) Measurement of private business use. If an output contract
results in private business use under this section, the amount of
private business use generally is the capacity that must be reserved
for the nongovernmental person under prudent reliability standards. For
example, in the case of a take contract for a peaking electric
generating unit, under which a nongovernmental person has priority
rights to use capacity at any time for the entire term of the bonds,
but under which the total energy purchases are limited in any one year
to 10 percent of annual available output (determined by reference to
nameplate capacity), the amount of private business use is the amount
of capacity that must be reserved for that nongovernmental person under
prudent reliability standards, which may be as much as 100 percent.
(e) Measurement of private security or payment. The measurement of
payments made or to be made by nongovernmental persons under output
contracts as a percent of the debt service of an issue is determined
under the rules provided in Sec. 1.141-4.
(f) Exceptions for certain contracts--(1) Small purchases of
output. An
[[Page 3262]]
output contract is not taken into account under the private business
tests if the purchaser is not required under the contract to make a
payment that is substantially certain to be made under paragraph
(c)(2)(ii) of this section in any year greater than 0.5 percent of the
average annual debt service on an issue that finances the output
facility.
(2) Swapping and pooling arrangements. An agreement that provides
for swapping or pooling of output by one or more governmental persons
and one or more nongovernmental persons does not result in private
business use of the output facility owned by the governmental person to
the extent that--
(i) The swapped output is reasonably expected to be approximately
equal in value (determined over periods of one year or less); and
(ii) The purpose of the agreement is to enable each of the parties
to satisfy different peak load demands, to accommodate temporary
outages, to diversify supply, or to enhance reliability in accordance
with prudent reliability standards.
(3) Short-term output contracts. The exceptions for short-term
arrangements provided in Sec. 1.141-3 (c) and (d)(3) apply to output
contracts. For example, a spot sale for use for a period of 90 days on
the basis of rates that are generally applicable and uniformly applied
generally does not result in private business use, and a spot sale for
use for a period of 30 days on the basis of rates that are specially
negotiated generally does not result in private business use.
(4) Special 3-year exception for sales of output attributable to
excess generating capacity resulting from participation in open access.
The purchase of output of an output facility (not including a water
facility) by a nongovernmental person is not treated as private
business use if all of the following requirements are met:
(i) The term of the contract is not longer than 3 years, including
all renewal options.
(ii) The issuer does not make expenditures to increase the
generating capacity of its system during the term of the contract that
are, or will be, financed with proceeds of tax-exempt bonds.
(iii) The governmental owner offers non-discriminatory, open access
transmission tariffs for use of its transmission system pursuant to
rules promulgated by the FERC under sections 205 and 206 of the Federal
Power Act (16 U.S.C. 824d and 824e) (or comparable provisions of state
law pursuant to a plan approved by the FERC).
(iv) All of the output sold under the contract is attributable to
excess capacity resulting from the offer of the non-discriminatory,
open access transmission tariffs referred to in paragraph (f)(5)(ii) of
this section.
(v) The contract mitigates stranded costs of the governmental owner
that are attributable to the offer of the non-discriminatory, open
access transmission tariffs referred to in paragraph (f)(5)(ii) of this
section.
(vi) Any stranded costs recovered by the governmental owner
(including amounts recovered under the contract) with respect to the
output facility under rules promulgated by the FERC under the Federal
Power Act (or comparable provisions of state law) are applied as
promptly as is reasonably practical to redeem tax-exempt bonds that
financed that facility in a manner consistent with Sec. 1.141-12.
(5) Special exceptions for transmission facilities--(i) Mandated
wheeling. Entering into a contract for the use of transmission
facilities financed by an issue is not treated as a deliberate action
under Sec. 1.141-2(d) if--
(A) The contract is entered into in response to (or in anticipation
of) an order by the United States under sections 211 and 212 of the
Federal Power Act (16 U.S.C. 824j and 824k) (or a state regulatory
authority under comparable provisions of state law pursuant to a plan
approved by the FERC); and
(B) The terms of the contract are bona fide and arm's length, and
the consideration paid is consistent with the provisions of section
212(a) of the Federal Power Act.
(ii) Actions taken to implement non-discriminatory, open access. An
action is not treated as a deliberate action under Sec. 1.141-2(d) if
it is taken to implement the offering of non-discriminatory, open
access tariffs for the use of transmission facilities financed by an
issue in a manner consistent with rules promulgated by the FERC under
sections 205 and 206 of the Federal Power Act (16 U.S.C. 824d and 824e)
(or by a state regulatory authority under comparable provisions of
state law pursuant to a plan approved by the FERC). This paragraph
(f)(5)(ii) does not apply, however, to the sale, exchange, or other
disposition of transmission facilities to a nongovernmental person.
(iii) Application to reasonable expectations test to certain
current refunding bonds. An action taken or to be taken with respect to
transmission facilities refinanced by an issue is not taken into
account under the reasonable expectations test of Sec. 1.141-2(d) if--
(A) The action is described in paragraph (f)(5) (i) or (ii) of this
section;
(B) The bonds of the issue are current refunding bonds that,
directly or indirectly, refund bonds issued before July 9, 1996; and
(C) The weighted average maturity of the refunding bonds is not
greater than the remaining weighted average maturity of those prior
bonds.
(6) Certain conduit parties disregarded. A nongovernmental person
acting solely as a conduit for the exchange of output among
governmentally owned and operated utilities is disregarded in
determining whether the private business tests are met with respect to
financed facilities owned by a governmental person. Use of property by
a power marketer in the trade or business of purchasing and reselling
power, however, is taken into account under the private business tests.
(g) Allocations of output facilities and systems--(1) Facts and
circumstances analysis. Whether output sold under an output contract is
allocated to a particular facility (for example, a generating unit), to
the entire system of the seller of that output (net of any uses of that
system output allocated to a particular facility), or to a portion of a
facility is based on all the facts and circumstances. Significant
factors to be considered in determining the allocation of an output
contract to financed property are the following:
(i) The extent to which it is physically possible to deliver output
to or from a particular facility or system.
(ii) The terms of a contract relating to the delivery of output
(such as delivery limitations and options or obligations to deliver
power from additional sources).
(iii) Whether a contract is entered into as part of a common plan
of financing for a facility.
(iv) The method of pricing output under the contract, such as the
use of market rates rather than rates designed to pay debt service of
tax-exempt bonds used to finance a particular facility.
(2) Illustrations. The following illustrate the factors set forth
in paragraph (g)(1) of this section:
(i) Physical possibility. Output from a generating unit that is fed
directly into a low voltage distribution system of the owner of that
unit and that cannot physically leave that distribution system
generally must be allocated to those receiving electricity through that
distribution system. Output may be allocated without regard to physical
limitations, however, if exchange or similar agreements provide output
to a purchaser where, but for the exchange
[[Page 3263]]
agreements, it would not be possible for the seller to provide output
to that purchaser.
(ii) Contract terms relating to performance. A contract to provide
a specified amount of electricity from a system, but only when at least
that amount of electricity is being generated by a particular unit, is
allocated to that unit. For example, a contract to buy 20 MW of system
power with a right to take up to 40 percent of the actual output of a
specific 50 MW facility whenever total system output is insufficient to
meet all of the seller's obligations generally is allocated to the
specific facility rather than to the system.
(iii) Common plan of financing. A contract entered into as part of
a common plan of financing for a facility generally is allocated to the
facility if debt service for the issue of bonds is reasonably expected
to be paid, directly or indirectly, from payments substantially certain
to be made under the contract (disregarding default, insolvency, or
other similar circumstances).
(iv) Pricing method. Pricing based on the capital and generating
costs of a particular turbine tends to indicate that output under the
contract is properly allocated to that turbine.
(3) Transmission contracts. Whether use under an output contract
for transmission is allocated to a particular facility or to a
transmission network is based on all the facts and circumstances, in a
manner similar to paragraphs (g) (1) and (2) of this section. In
general, the method used to determine payments under a contract is a
more significant contract term for this purpose than nominal contract
path. In general, if reasonable and consistently applied, the
determination of use of transmission facilities under an output
contract may be based on a method used by third parties, such as
reliability councils.
(4) Allocation of payments. Payments for output provided by an
output facility financed with two or more sources of funding are
generally allocated under the rules in Sec. 1.141-4(c).
(h) Examples. The following examples illustrate the application of
this section:
Example 1. Joint ownership. Z, an investor-owned electric
utility, and City H agree to construct an electric generating
facility of a size sufficient to take advantage of the economies of
scale. H will issue $50 million of its 25-year bonds, and Z will use
$100 million of its funds for construction of a facility they will
jointly own as tenants in common. Each of the participants will
share in the ownership, output, and operating expenses of the
facility in proportion to its contribution to the cost of the
facility, that is, one-third by H and two-thirds by Z. H's bonds
will be secured by H's ownership interest in the facility and by
revenues to be derived from its share of the annual output of the
facility. H will need only 50 percent of its share of the annual
output of the facility during the first 20 years of operations. It
agrees to sell 10 percent of its share of the annual output to Z for
a period of 20 years pursuant to a contract under which Z agrees to
take that power if available. The facility will begin operation, and
Z will begin to receive power, 4 years after the H bonds are issued.
The measurement period for the property financed by the issue is 21
years. H also will sell the remaining 40 percent of its share of the
annual output to numerous other private utilities under contracts of
90 days or less entered into under a prevailing rate schedule,
including demand charges. No contracts will be executed obligating
any person other than Z to purchase any specified amount of the
power for any specified period of time. No person (other than Z)
will make payments substantially certain to be made (disregarding
default, insolvency, or other similar circumstances) under paragraph
(c)(2) of this section that will result in a transfer of substantial
burdens of paying debt service on bonds used directly or indirectly
to provide H's share of the facilities. The bonds are not private
activity bonds, because H's one-third interest in the facility is
not treated as used by the other owners of the facility. Although 10
percent of H's share of the annual output of the facility will be
used in the trade or business of Z, a non-governmental person, under
the rule in paragraph (c) of this section, that portion constitutes
not more than 10 percent of the available output of H's ownership
interest in the facility.
Example 2. Requirements contract treated as take contract. (i)
City J issues 20-year bonds to acquire an electric generating
facility having a reasonably expected economic life substantially
greater than 20 years and a nameplate capacity of 100 MW. The
available output of the facility under paragraphs (b)(1) of this
section is approximately 17,520,000 MWh. On the issue date, J enters
into a contract with T, an investor-owned utility, to provide T with
all of its power requirements for a period of 10 years, commencing
on the issue date. J reasonably expects that T will actually
purchase an average of 20 MW over the 10-year period. Based on all
of the facts and circumstances, including the size, diversity, and
composition of T's customer base, J reasonably expects that it is
substantially certain (disregarding default, insolvency, or other
similar circumstances) that T will actually purchase only an average
of 16 MW over the 10-year period. The contract is a requirements
contract that must be taken into account under the private business
tests pursuant to paragraph (c)(4) of this section because it
provides T with substantial benefits of ownership (rights to
capacity) and obligates T with substantial burdens of making
payments that the issuer reasonably expects are substantially
certain.
(ii) J is required to reserve for T's use 40 MW of capacity in
accordance with prudent reliability standards. Under paragraph (d)
of this section, the amount of private business use under this
contract, therefore, is approximately 20 percent (40 MW x 24 hours
x 365 days x 10 years, or 3,504,000 MWh) of the available
output. Accordingly, the issue meets the private business use test.
J reasonably expects that the amount to be paid for an average of 16
MW of power (less the operation and maintenance costs directly
attributable to generating that 16 MW of power), will be more than
10 percent of debt service on the issue on a present-value basis.
The payment for 16 MW of power is an amount that J reasonably
expects is substantially certain to be made under paragraph (c)(2)
of this section. Accordingly, the issue meets the private security
or payment test because J reasonably expects that it is
substantially certain that payment of more than 10 percent of the
debt service will be indirectly derived from payments by T. The
bonds are private activity bonds under paragraph (c) of this
section. Further, if 20 percent of the sale proceeds of the issue is
greater than $15 million and the issue meets the private security or
payment test with respect to the $15 million output limitation, the
bonds are also private activity bonds under section 141(b)(4). See
Sec. 1.141-8T.
Example 3. Allocation of existing contracts to new facilities.
Power Authority K, a political subdivision created by the
legislature in State X to own and operate certain power generating
facilities, sells all of the power from its existing facilities to
four private utility systems under contracts executed in 1999, under
which the four systems are required to take or pay for specified
portions of the total power output until the year 2029. Existing
facilities supply all of the present needs of the four utility
systems, but their future power requirements are expected to
increase substantially beyond the capacity of K's current generating
system. K issues 20-year bonds in 2004 to construct a large
generating facility. As part of the financing plan for the bonds, a
fifth private utility system contracts with K to take or pay for 15
percent of the available output of the new facility. The balance of
the output of the new facility will be available for sale as
required, but initially it is not anticipated that there will be any
need for that power. The revenues from the contract with the fifth
private utility system will be sufficient to pay less than 10
percent of the debt service on the bonds (determined on a present
value basis). The balance, which will exceed 10 percent of the debt
service on the bonds, will be paid from revenues derived from the
contracts with the four systems initially from sale of power
produced by the old facilities. The output contracts with all the
private utilities are allocated to K's entire generating system. See
paragraphs (g)(1) and (2) of this section. Thus, the bonds meet the
private business use test because more than 10 percent of the
proceeds will be used in the trade or business of a nongovernmental
person. In addition, the bonds meet the private payment or security
test because payment of more than 10 percent of the debt service,
pursuant to underlying arrangements, will be derived from payments
in respect of property used for a private business use.
[[Page 3264]]
Example 4. Allocation to displaced resource. Municipal utility
MU, a political subdivision, purchases all of the electricity
required to meet the needs of its customers (1,000 MW) from B, an
investor-owned utility that operates its own electric generating
facilities, under a 50-year take or pay contract. MU does not
anticipate that it will require additional electric resources, and
any new resources would produce electricity at a higher cost to MU
than its cost under its contract with B. Nevertheless, B encourages
MU to construct a new generating plant sufficient to meet MU's
requirements. MU issues obligations to construct facilities that
will produce 1,000 MW of electricity. MU, B, and I, another
investor-owned utility, enter into an agreement under which MU
assigns to I its rights under MU's take or pay contract with B.
Under this arrangement, I will pay MU, and MU will continue to pay
B, for the 1,000 MW. I's payments to MU will at least equal the
amounts required to pay debt service on MU's bonds. In addition,
under paragraph (g)(1)(iii) of this section, the contract among MU,
B, and I is entered into as part of a common plan of financing of
the MU facilities. Under all the facts and circumstances, MU's
assignment to I of its rights under the original take or pay
contract is allocable to MU's new facilities under paragraph (g) of
this section. Because I is a nongovernmental person, MU's bonds are
private activity bonds.
Example 5. Transmission facilities transferred to independent
system operator. (i) In 1998, the public utilities commission of
State C adopts a plan for restructuring its electric power industry.
The plan fosters competition by providing both wholesale and retail
customers with non-discriminatory access to transmission facilities
within the State. The plan provides that investor-owned utilities
will transfer operating control over all of their transmission
assets to an independent system operator (ISO), which is a
nongovernmental person that will operate those combined assets as a
single, state-wide system. Municipally-owned utilities are eligible
for, but are not required to participate in, the open access system
implemented by the ISO. The functions of the ISO include control of
transmission access and pricing, scheduling transmission, control
area operations, and settlements and billing. In addition, under
certain circumstances the ISO may order the transmission owners to
construct additional transmission facilities. The restructuring plan
is approved by the FERC pursuant to sections 205 and 206 of the
Federal Power Act.
(ii) In 1994 City D had issued bonds to finance improvements to
its transmission system. In 1998, D transfers operating control of
its transmission system to the ISO pursuant to the restructuring
plan. At the same time, D chooses to apply the private activity bond
regulations of Secs. 1.141-0 through 1.141-15 to the 1994 bonds. The
operation of the financed facilities by the ISO does not meet the
exception for management contracts that do not give rise to private
business use under Sec. 1.141-3(b)(4)(iii)(C) because it is not a
contract solely for the operation of a facility under that
exception. Under the special exception in paragraph (f)(5) of this
section, however, the transfer of control is not treated as a
deliberate action. Accordingly, the transfer of control does not
cause the 1994 bonds to meet the private activity bond tests.
Example 6. Current refunding. The facts are the same as in
Example 5 of this paragraph (h), and in addition D issues bonds in
1999 to currently refund the 1994 bonds. The weighted average
maturity of the 1999 bonds is not greater than the remaining
weighted average maturity of the 1994 bonds. D chooses to apply the
private activity bond regulations of Secs. 1.141-0 through 1.141-15
to the refunding bonds. In general, reasonable expectations must be
separately tested on the date that refunding bonds are issued under
Sec. 1.141-2(d). Under the special exception in paragraph (f)(5) of
this section, however, the transfer of the financed facilities to
the ISO need not be taken into account in applying the reasonable
expectations test to the refunding bonds.
Sec. 1.141-8T $15 million limitation for output facilities
(temporary).
(a) In general--(1) General rule. Section 141(b)(4) provides a
special private activity bond limitation (the $15 million output
limitation) for issues 5 percent or more of the proceeds of which are
to be used to finance output facilities (other than a facility for the
furnishing of water). Under this rule, a bond is a private activity
bond under the private business tests of section 141(b)(1) and (2) if
the nonqualified amount with respect to output facilities financed by
the proceeds of the issue exceeds $15 million. The $15 million output
limitation applies in addition to the private business tests of section
141(b)(1) and (2). Under section 141(b)(4) and paragraph (a)(2) of this
section, the $15 million output limitation is reduced in certain cases.
Specifically, an issue meets the test in section 141(b)(4) if both of
the following tests are met:
(i) More than $15 million of the proceeds of the issue to be used
with respect to an output facility are to be used for a private
business use. Investment proceeds are disregarded for this purpose if
they are not allocated disproportionately to the private business use
portion of the issue.
(ii) The payment of the principal of, or the interest on, more than
$15 million of the sales proceeds of the portion of the issue used with
respect to an output facility is (under the terms of the issue or any
underlying arrangement) directly or indirectly--
(A) Secured by any interest in an output facility used or to be
used for a private business use (or payments in respect of such an
output facility); or
(B) To be derived from payments (whether or not to the issuer) in
respect of an output facility used or to be used for a private business
use.
(2) Reduction in $15 million output limitation for outstanding
issues--(i) General rule. In determining whether an issue more than 5
percent of the proceeds of which are to be used with respect to an
output facility consists of private activity bonds under the $15
million output limitation, the $15 million limitation on private
business use and private security or payments is applied by taking into
account the aggregate nonqualified amounts of any outstanding bonds of
other issues 5 percent or more of the proceeds of which are or will be
used with respect to that output facility or any other output facility
that is part of the same project.
(ii) Bonds taken into account. For purposes of this paragraph
(a)(2), in applying the $15 million output limitation to an issue (the
later issue), a tax-exempt bond of another issue (the earlier issue) is
taken into account if--
(A) That bond is outstanding on the issue date of the later issue;
(B) That bond will not be redeemed within 90 days of the issue date
of the later issue in connection with the refunding of that bond by the
later issue; and
(C) More than 5 percent of the sale proceeds of the earlier issue
financed an output facility that is part of the same project as the
output facility that is financed by more than 5 percent of the sale
proceeds of the later issue.
(3) Benefits and burdens test applicable--(i) In general. In
applying the $15 million output limitation, the benefits and burdens
test of Sec. 1.141-7T applies, except that ``$15 million'' is
substituted for ``10 percent'', or ``5 percent'' as appropriate.
(ii) Earlier issues for the project. If bonds of an earlier issue
are outstanding and must be taken into account under paragraph (a)(2)
of this section, the nonqualified amount for that earlier issue is
multiplied by a fraction, the numerator of which is the adjusted issue
price of the earlier issue as of the issue date of the later issue, and
the denominator of which is the issue price of the earlier issue. Pre-
issuance accrued interest as defined in Sec. 1.148-1(b) is disregarded
for this purpose.
(b) Definition of project--(1) General rule. For purposes of
paragraph (a)(2) of this section, project has the meaning provided in
this paragraph. Facilities that are functionally related and
subordinate to a project are treated as part of that same project.
Facilities having different purposes or serving different customer
bases are not ordinarily part of the same project. For example, the
following are generally not part of the same project--
[[Page 3265]]
(i) Generation and transmission facilities;
(ii) Separate facilities designed to serve wholesale customers and
retail customers; and
(iii) A peaking unit and a baseload unit.
(2) Separate ownership. Except as otherwise provided in this
paragraph (b)(2), facilities that are not owned by the same person are
not part of the same project. If different governmental persons act in
concert to finance a project, however (for example as participants in a
joint powers authority), their interests are aggregated with respect to
that project to determine whether the $15 million output limitation is
met. In the case of undivided ownership interests in a single output
facility, property that is not owned by different persons is treated as
separate projects only if the separate interests are financed--
(i) With bonds of different issuers; and
(ii) Without a principal purpose of avoiding the limitation in this
section.
(3) Generating property--(i) Property on same site. In the case of
generation and related facilities, project means property located at
the same site.
(ii) Special rule for generating units. Separate generating units
are not part of the same project, if one unit is reasonably expected,
on the date of each issue that finances the project, to be placed in
service more than 3 years before the other. Common facilities or
property that will be functionally related to more than one generating
unit must be allocated on a reasonable basis. If a generating unit
already is constructed or is under construction (the first unit) and
bonds are to be issued to finance an additional generating unit (the
second unit), all costs for any common facilities paid or incurred
before the earlier of the issue date of bonds to finance the second
unit or the commencement of construction of the second unit are
allocated to the first unit. At the time that bonds are issued to
finance the second unit (or, if earlier, upon commencement of
construction of that unit), any remaining costs of the common
facilities may be allocated among the first and second units so that in
the aggregate the allocation is reasonable.
(4) Transmission. In the case of transmission facilities, project
means functionally related or contiguous property and property for
ancillary services, such as property required to be included in open
access transmission tariffs under rules of the FERC. Separate
transmission facilities are not part of the same project if one
facility is reasonably expected, on the issue date of each issue that
finances the project, to be placed in service more than 2 years before
the other.
(5) Subsequent improvements--(i) In general. An improvement to
generating or transmission facilities that is not part of the original
design of those facilities (the original project) is not part of the
same project as the original project if the construction,
reconstruction, or acquisition of that improvement commences more than
3 years after the original project was placed in service and the bonds
issued to finance that improvement are issued more than 3 years after
the original project was placed in service.
(ii) Special rule for transmission facilities. An improvement to
transmission facilities that is not part of the original design of that
property is not part of the same project as the original project if the
issuer did not reasonably expect the need to make that improvement when
it commenced construction of the original project and the construction,
reconstruction, or acquisition of that improvement is mandated by the
federal government or a state regulatory authority to accommodate
requests for wheeling.
(6) Replacement property. For purposes of this section, property
that replaces existing property of an output facility is treated as
part of the same project as the replaced property unless--
(i) The need to replace the property was not reasonably expected on
the issue date or the need to replace the property occurred more than 3
years before the issuer reasonably expected (determined on the issue
date of the bonds financing the property) that it would need to replace
the property; and
(ii) The bonds that finance (and refinance) the replaced property
have a weighted average maturity that is not greater than 120 percent
of the reasonably expected economic life of the replaced property.
(c) Example. The application of the provisions of this section is
illustrated by the following example:
Example. (i) Power Authority K, a political subdivision, intends
to issue a single issue of tax-exempt bonds at par with a stated
principal amount and sales proceeds of $500 million to finance the
acquisition of an electric generating facility. No portion of the
facility will be used for a private business use, except that L, an
investor-owned utility, will purchase 10 percent of the output of
the facility under a take contract and will pay 10 percent of the
debt service on the bonds. The nonqualified amount with respect to
the bonds is $50 million.
(ii) The maximum amount of tax-exempt bonds that may be issued
for the acquisition of an interest in the facility in paragraph (i)
of this Example is $465 million (that is, $450 million for the 90
percent of the facility that is governmentally owned and used plus a
nonqualified amount of $15 million).
Par. 5. Section 1.141-15 is revised to read as follows:
Sec. 1.141-15 Effective dates.
(a) Scope. The effective dates of this section apply for purposes
of Secs. 1.141-1 through 1.141-6(a), 1.141-9 through 1.141-14, 1.145-1
through 1.145-2, 1.150-1(a)(3) and the definition of bond documents
contained in Sec. 1.150-1(b).
(b) Effective dates. Except as otherwise provided in this section,
Secs. 1.141-1 through 1.141-6(a), 1.141-9 through 1.141-14, 1.145-1
through 1.145-2, 1.150-1(a)(3) and the definition of bond documents
contained in Sec. 1.150-1(b) apply to bonds issued on or after May 16,
1997, that are subject to section 1301 of the Tax Reform Act of 1986
(100 Stat. 2602).
(c) Refunding bonds. Sections 1.141-1 through 1.141-6(a), 1.141-9
through 1.141-14, 1.145-1 through 1.145-2, 1.150-1(a)(3) and the
definition of bond documents contained in Sec. 1.150-1(b) do not apply
to any bonds issued on or after May 16, 1997, to refund a bond to which
those sections do not apply unless--
(1) The weighted average maturity of the refunding bonds is longer
than--
(i) The weighted average maturity of the refunded bonds; or
(ii) In the case of a short-term obligation that the issuer
reasonably expects to refund with a long-term financing (such as a bond
anticipation note), 120 percent of the weighted average reasonably
expected economic life of the facilities financed; or
(2) A principal purpose for the issuance of the refunding bonds is
to make one or more new conduit loans.
(d) Permissive application of regulations. Except as provided in
paragraph (e) of this section, Secs. 1.141-1 through 1.141-6(a), 1.141-
9 through 1.141-14, 1.145-1 through 1.145-2, 1.150-1(a)(3) and the
definition of bond documents contained in Sec. 1.150-1(b) may be
applied in whole, but not in part, to actions taken before February 23,
1998 with respect to--
(1) Bonds that are outstanding on May 16, 1997, and subject to
section 141; or
(2) Refunding bonds issued on or after May 16, 1997.
(e) Permissive retroactive application of certain sections. The
following sections may each be applied to any bonds issued before May
16, 1997--
(1) Section 1.141-3(b)(4);
(2) Section 1.141-3(b)(6); and
(3) Section 1.141-12.
[[Page 3266]]
Par. 6. Section 1.141-15T is added to read as follows:
Sec. 1.141-15T Effective dates (temporary).
(a) through (e) [Reserved]. For guidance see Sec. 1.141-15.
(f) Effective dates for certain regulations relating to output
facilities--(1) General rule. Except as otherwise provided in this
section, Secs. 1.141-7T and 1.141-8T apply to bonds issued on or after
February 23, 1998 that are subject to section 1301 of the Tax Reform
Act of 1986 (100 Stat. 2602).
(2) Transition rule for requirements contracts. Section 1.141-
7T(c)(4) applies to output contracts entered into on or after February
23, 1998. An output contract is treated as entered into on or after
that date if its term is extended, the parties to the contract change,
or other material terms are amended on or after that date.
(g) Refunding bonds in general. Except as otherwise provided in
paragraph (h) or (i) of this section, Secs. 1.141-7T and 1.141-8T do
not apply to bonds issued on or after February 23, 1998, to refund a
bond to which the Secs. 1.141-7T and 1.141-8T do not apply unless--
(1) The weighted average maturity of the refunding bonds is longer
than--
(i) The weighted average maturity of the refunded bonds; or
(ii) In the case of a short-term financings (such as a bond
anticipation note), 120 percent of the weighted average reasonably
expected economic life of the facilities financed; or
(2) A principal purpose of the issuance of the refunding bonds is
to make one or more new conduit loans.
(h) Permissive retroactive application. Except as provided in
Sec. 1.141-15 (d) or (e) or paragraph (i) of this section, Sec. 1.141-1
through 1.141-6, 1.141-7T through 1.141-8T, 1.141-9 through 1.141-14,
1.145-1 through 1.145-2, 1.150-1(a)(3) and the definition of bond
documents contained in Sec. 1.150-1(b) may be applied in whole, but not
in part to--
(1) Bonds that are outstanding on May 16, 1997, and subject to
section 141; or
(2) Refunding bonds issued on or after May 16, 1997.
(i) Permissive retroactive application of certain regulations
pertaining to output contracts. Section 1.141-7T(f) (4) and (5) may be
applied to any bonds issued before February 23, 1998.
Par. 7. Section 1.142(f)(4)-1T is added to read as follows:
Sec. 1.142(f)(4)-1T Manner of making election to terminate tax-exempt
bond financing (temporary).
(a) Overview. Section 142(f)(4) permits a person engaged in the
local furnishing of electric energy or gas (a local furnisher) that
uses facilities financed with exempt facility bonds under section
142(a)(8) and that expands its service area in a manner inconsistent
with the requirements of sections 142(a)(8) and 142(f) to make an
election to ensure that those bonds will continue to be treated as
exempt facility bonds. The election must meet the requirements of
paragraphs (b) and (c) of this section.
(b) Time for making election--(1) In general. An election under
section 142(f)(4)(B) must be filed with the Internal Revenue Service on
or before 90 days after the later of--
(i) The date of the service area expansion that causes bonds to
cease to meet the requirements of sections 142(a)(8) and 142(f); or
(ii) February 23, 1998.
(2) Date of service area expansion. For the purposes of this
section, the date of the service area expansion is the first date on
which the local furnisher is authorized to collect revenue for the
provision of service in the expanded area.
(c) Manner of making election. An election under section
142(f)(4)(B) must be captioned ``ELECTION TO TERMINATE TAX-EXEMPT BOND
FINANCING'', must be signed under penalties of perjury by a person who
has authority to sign on behalf of the local furnisher, and must
contain the following information--
(1) The name of the local furnisher;
(2) The tax identification number of the local furnisher;
(3) The complete address of the local furnisher;
(4) The date of the service area expansion;
(5) Identification of each bond issue subject to the election,
including the complete name of each issue, the tax identification
number of each issuer, the issue date of each issue, the issue price of
each issue, the adjusted issue price of each issue as of the date of
the election, the earliest date on which the bonds of each issue may be
redeemed, and the principal amount of bonds of each issue to be
redeemed on the earliest redemption date;
(6) A statement that the local furnisher making the election agrees
to the conditions stated in section 142(f)(4)(B); and
(7) A statement that each issuer of the bonds subject to the
election has received written notice of the election.
(d) Effect on section 150(b). Except as provided in paragraph (e)
of this section, if a local furnisher files an election within the
period specified in paragraph (b) of this section, section 150(b) does
not apply to bonds identified in the election during and after that
period.
(e) Effect of failure to meet agreements. If a local furnisher
fails to meet any of the conditions stated in an election pursuant to
paragraph (c)(6) of this section, the election is invalid.
(f) Corresponding provisions of the Internal Revenue Code of 1954.
Section 103(b)(4)(E) of the Internal Revenue Code of 1954 set forth
corresponding requirements for the exclusion from gross income of the
interest on bonds issued for facilities for the local furnishing of
electric energy or gas. For the purposes of this section any reference
to sections 142(a)(8) and (f) of the Internal Revenue Code of 1986
includes a reference to the corresponding portion of section
103(b)(4)(E) of the Internal Revenue Code of 1954.
(g) Effective dates. Section 1.142(f)(4)-1 applies to elections
made on or after February 23, 1998.
Par. 8. Section 1.150-5T is added to read as follows:
Sec. 1.150-5T Filing notices and elections (temporary).
(a) In general. Notices and elections under the following sections
must be filed with the Chief, Employee Plans and Exempt Organizations)
of the appropriate key district office--
(1) Section 1.141-12(d)(3); and
(2) Section 1.142(f)(4)-1T.
(b) Effective dates. This section applies to notices and elections
filed on or after February 23, 1998.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Approved: December 23, 1997.
Jonathan Talisman,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 98-716 Filed 1-21-98; 8:45 am]
BILLING CODE 4830-01-U