[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