[Federal Register Volume 67, Number 184 (Monday, September 23, 2002)]
[Rules and Regulations]
[Pages 59756-59765]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24137]



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Part VI





Department of the Treasury





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Internal Revenue Service



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26 CFR Part 1



Obligations of States and Political Subdivisions and Guidance Regarding 
Mixed Use Output Facilities; Final Rule and Proposed Rule

  Federal Register / Vol. 67, No. 184 / Monday, September 23, 2002 / 
Rules and Regulations  

[[Page 59756]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9016]
RIN 1545-AY71


Obligations of States and Political Subdivisions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations on the definition of 
private activity bonds applicable to tax-exempt bonds issued by state 
and local governments for output facilities. These regulations affect 
issuers of tax-exempt bonds and provide needed guidance for applying 
the private activity bond restrictions to output facilities.

DATES: Effective Date: These regulations are effective November 22, 
2002.
    Applicability Date: For dates of applicability, see Sec.  1.141-15 
of these regulations.

FOR FURTHER INFORMATION CONTACT: Rose M. Weber (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 tax-exempt bonds 
issued for output facilities. On January 18, 2001, temporary 
regulations (TD 8941) (the temporary regulations) were published in the 
Federal Register (66 FR 4661) to provide guidance under the Internal 
Revenue Code of 1986 regarding, among other things, (a) the application 
of the private activity bond tests under section 141(b)(1) and (2) to 
output contracts for output facilities; and (b) the application of the 
$15 million limit under section 141(b)(4) to output facility 
financings. A notice of proposed rulemaking (REG-114998-99) cross-
referencing the temporary regulations was published in the Federal 
Register on the same day (66 FR 4754). On July 24, 2001, the IRS held a 
public hearing on the proposed regulations. Written comments responding 
to the notice of proposed rulemaking were also received. After 
consideration of all the comments, the proposed regulations are adopted 
as amended by this Treasury decision and the temporary regulations are 
removed. The revisions are discussed below.

Explanation of Provisions

A. Sec.  1.141-7 Special Rules for Output Facilities

1. Benefits and Burdens Test
    The temporary regulations contain a benefits and burdens test for 
determining whether the purchase of output of an output facility is 
taken into account under the private business tests. In particular, the 
temporary regulations provide that the purchase by a nongovernmental 
person of available output of an output facility is taken into account 
under the private business tests if it has the effect of transferring 
substantial benefits of owning the facility and substantial burdens of 
paying the debt service on bonds used to finance the facility. Under 
this test, an output contract transfers substantial benefits of owning 
a facility if it 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. An output contract transfers substantial burdens 
of paying debt service under this test 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).
    Commentators were generally critical of the benefits and burdens 
test in the temporary regulations. Some commentators stated that 
preferential rights is not an adequate concept for determining whether 
substantial benefits of ownership are passed through an output 
contract. Some commentators suggested that a substantial certainty of 
payment by a purchaser does not necessarily constitute a transfer of 
substantial burdens of paying debt service. Other commentators 
recommended that any sale of output by a municipal utility outside of 
its traditional service territory should result in private business 
use.
    The final regulations amend the benefits and burdens test. Under 
the revised provision, an output contract is taken into account under 
the private business tests if it has the effect of transferring to a 
nongovernmental person the benefits of owning the facility and the 
burdens of paying the debt service on bonds issued to finance the 
facility. This test is met if a nongovernmental person agrees to 
purchase available output of a facility pursuant to (1) a take contract 
(that is, a contract under which the purchaser agrees to pay for the 
output if the facility is capable of providing it), or (2) a take or 
pay contract (that is, a contract under which the purchaser agrees to 
pay for the output, whether or not the facility is capable of providing 
it). In addition, as discussed below, certain requirements contracts 
may satisfy the benefits and burdens test. The final regulations define 
requirements contract as an output contract, other than a take contract 
or a take or pay contract, under which a nongovernmental person agrees 
to purchase all or part of its output requirements.
2. Requirements Contracts
    The temporary regulations provide that 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 to the extent that, based on all the facts and 
circumstances, it meets the benefits and burdens test in those 
regulations. Relevant factors in making this determination include 
whether the purchaser's customer base has significant indicators of 
stability, whether the contract covers historical (rather than only 
projected) requirements, and whether the purchaser agrees not to 
construct or acquire other resources. A requirements contract that is 
not a sale at wholesale (a retail requirements contract) generally does 
not meet the benefits and burdens test in the temporary regulations, 
except to the extent it obligates the purchaser to have requirements or 
to make payments that are not contingent on its requirements. 
Reasonable and customary damages and termination provisions do not 
cause a requirements contract to meet the benefits and burdens test 
under the temporary regulations.
    Most commentators were critical of the treatment of requirements 
contracts in the temporary regulations. Some commentators stated that 
the factors for analyzing requirements contracts are not administrable 
and do not necessarily indicate whether a purchaser has acquired 
substantial benefits of ownership or burdens of debt service. Other 
commentators requested that the regulations be amended to specify that 
requirements contracts with power marketers or with purchasers located 
outside the service territory of a municipal utility result in private 
business use.
    The final regulations provide two rules under which a requirements 
contract may satisfy the benefits and burdens test. First, a 
requirements contract (retail or wholesale) generally meets the 
benefits and burdens test to the extent that it contains contractual 
terms that obligate the purchaser to

[[Page 59757]]

make payments that are not contingent on the output requirements of the 
purchaser or that obligate the purchaser to have output requirements. 
Second, the final regulations continue to apply a facts and 
circumstances approach for wholesale requirements contracts, but 
provide simplified factors and two safe harbors. Under this approach, 
the following factors tend to establish that a wholesale requirements 
contract meets the benefits and burdens test: (1) The term of the 
contract is substantial relative to the term of the issue and (2) the 
amount of output to be purchased represents a substantial portion of 
the available output. A wholesale requirements contract does not meet 
the benefits and burdens test under the facts and circumstances 
approach if it satisfies one of the following safe harbors: (1) Its 
term does not exceed the lesser of five years or 30 percent of the term 
of the issue or (2) the amount of output to be purchased does not 
exceed five percent of the available output of the facility.
3. Pledged Contracts
    Under the temporary regulations, payments under an output contract 
that is pledged as security for an issue are taken into account under 
the private business tests even if they are not substantially certain 
to be made. A contract is pledged for this purpose only if the bond 
documents prohibit substantial amendments of the contract without the 
consent of bondholders.
    Some commentators suggested that this provision adds undue 
complexity and is unnecessary in light of the benefits and burdens 
test. The final regulations adopt this comment and delete the 
provision.
4. Exception for Small Purchases of Output
    The temporary regulations provide that an output contract is not 
taken into account under the private business tests if the average 
annual payments under the contract that are substantially certain to be 
made do not exceed 0.5 percent of the average annual debt service on 
all outstanding tax-exempt bonds issued to finance the facility, 
determined as of the effective date of the contract.
    Some commentators recommended that the 0.5 percent threshold be 
increased to one percent, and that the exception refer to guaranteed 
minimum, rather than substantially certain, payments. Other 
commentators recommended that the exception be deleted. The final 
regulations increase the 0.5 percent threshold to one percent and 
specify that all payments to be made under the contract are taken into 
account.
5. Exception for Short-Term Sales of Output
    The temporary regulations contain an exception under which an 
output contract with a nongovernmental person is not taken into account 
under the private business tests if: (1) The term of the contract, 
including all renewal options, does not exceed one year; (2) the 
compensation under the contract is based on generally applicable and 
uniformly applied rates or represents a negotiated, fair market price; 
and (3) the facility is not financed for a principal purpose of serving 
that nongovernmental person.
    Most commentators recommended that this exception be expanded to 
permit contracts of a longer duration. These commentators stated that 
longer-term contracts are required in order to transfer benefits of 
ownership and burdens of debt service with respect to an output 
facility. Other commentators suggested that the exception should be 
narrower in scope. These commentators recommended that the exception 
take into account the entire anticipated period of ongoing sales, 
irrespective of the term of any contracts or renewal options.
    The final regulations retain and amend the exception for short-term 
output sales. In order to exclude from the private business tests 
output contracts that do not transfer the benefits of ownership and the 
burdens of debt service, the final regulations increase the one-year 
period to three years.
6. Exception for Swapping and Pooling Arrangements
    The temporary regulations provide that certain agreements to swap 
or pool output do not result in private business use to the extent 
that: (1) The swapped output is reasonably expected to be approximately 
equal in value, determined over periods of one year or less; and (2) 
the agreement is entered into for a qualifying purpose, such as 
enhancing reliability.
    Some commentators recommended that the exception be expanded to 
apply to transactions in which the value of the swapped output is not 
approximately equal, but the governmental person is a net importer of 
power. The final regulations do not adopt this recommendation because 
such transactions may not in substance constitute power swaps, and are 
more appropriately analyzed under the benefits and burdens test.
    The final regulations retain the exception for swapping and pooling 
arrangements, but increase the one-year period to three years.
7. Special Rule for Facilities With Significant Unutilized Capacity
    The temporary regulations provide that, if an issuer reasonably 
expects on the issue date that persons that are treated as private 
business users will purchase more than 20 percent of the actual output 
of the facility, 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.
    Commentators suggested that the 20 percent threshold be increased 
to 30 percent in order to be consistent with longstanding IRS ruling 
positions that pre-dated the issuance of regulations under section 141 
for output facilities (e.g., Rev. Proc. 89-3 (1989-1 C.B. 761)). The 
final regulations adopt this comment and change the 20 percent 
threshold to 30 percent.
8. Special Exception for Sales of Output Attributable to Excess 
Generating Capacity Resulting From Open Access
    The temporary regulations contain an exception to private business 
use for certain purchases of output of an electric generating facility 
if: (1) The contract term does not exceed three years; (2) the issuer 
does not utilize tax-exempt financing to increase the generating 
capacity of its system by more than three percent during the contract 
term; (3) the governmental owner offers certain non-discriminatory, 
open access transmission tariffs; (4) all of the output sold is 
attributable to excess capacity resulting from the offer of the open 
access tariffs; and (5) all payments received by the governmental owner 
under the contract (other than the portion allocable to operation and 
maintenance expenses described in Sec.  1.141-4(c)(2)(C)) are applied 
as promptly as is reasonably practical to redeem tax-exempt bonds in a 
manner consistent with Sec.  1.141-12.
    Some commentators stated that this exception contains overly 
restrictive requirements that significantly limit its usefulness. These 
commentators recommended that the exception be expanded to apply to: 
(1) Sales in anticipation of open access or retail competition; (2) 
sales to native load customers if open access is in effect or 
reasonably expected to commence within a reasonable time period; and 
(3) contracts with terms in excess of three

[[Page 59758]]

years. These commentators also requested clarification regarding the 
requirement to redeem bonds, the extent to which the rules in Sec.  
1.141-12 apply, and the limitations on tax-exempt financing during the 
contract term.
    These suggested changes raise a number of administrability issues. 
For example, in many cases it may be difficult to predict the nature 
and extent of an issuer's future participation in open access or to 
determine whether a particular sale is made in anticipation of open 
access. In light of these administrability concerns and the expansion 
of the short-term contract exception to three years as described above, 
the final regulations delete the special exception for excess capacity-
related sales.
9. Special Rules for Electric Output Facilities Used To Provide Open 
Access
    Under the temporary regulations, the use of electric generation, 
transmission or distribution facilities by a nongovernmental person may 
result in private business use under the benefits and burdens test. In 
addition, the use of electric facilities under arrangements other than 
output contracts may constitute private business use under the general 
rules of Sec.  1.141-3.
    The temporary regulations do not contain specific provisions for 
determining whether the use of electric output facilities by a regional 
transmission organization (RTO), independent system operator (ISO) or 
other independent transmission operator results in private business 
use. However, the preamble to the temporary regulations states that the 
rules for management contracts under section 141, including Revenue 
Procedure 97-13 (1997-1 C.B. 632), apply in this regard.
    Commentators stated that the management contract guidelines in 
Revenue Procedure 97-13 are not well-tailored to address the use of 
electric facilities by an RTO or an ISO. They requested additional 
guidance concerning the circumstances in which an RTO or an ISO will 
not be treated as a private business user. The final regulations 
provide that a contract for the operation of an electric transmission 
facility by an independent entity, such as an RTO or an ISO 
(independent transmission operator), does not result in private 
business use of the facility if: (1) The facility is owned by a 
governmental person; (2) the operation of the facility by the 
independent transmission operator is approved by the Federal Energy 
Regulatory Commission (FERC) under provisions of the Federal Power Act 
(16 U.S.C. 791a through 821c) (or by a state authority under comparable 
provisions of state law); (3) the independent transmission operator's 
compensation is not based on a share of net profits from the facility; 
and (4) the independent transmission operator does not bear risk of 
loss of the facility.
    The temporary regulations contain two special exceptions under 
which certain actions involving electric transmission or distribution 
facilities are not treated as deliberate actions under Sec.  1.141-
2(d). The first exception applies to certain contracts entered into in 
response to, or in anticipation of, an order by the FERC to wheel power 
under the Federal Power Act, or by a state authority under comparable 
state law. The second exception applies to certain actions to implement 
the offering of non-discriminatory, open access tariffs in a manner 
consistent with certain FERC rules under the Federal Power Act or 
comparable state law. The final regulations retain these special 
exceptions.
    Commentators requested additional guidance regarding the 
circumstances in which electric transmission and distribution 
facilities that are available for use on a non-discriminatory, open 
access basis will not be used for a private business use. The final 
regulations provide that the use of an electric transmission or 
distribution facility by a nongovernmental person pursuant to an output 
contract does not result in private business use if: (1) The facility 
is owned by a governmental person; (2) the facility is available for 
use on a nondiscriminatory, open access basis (a transmission facility 
meets this requirement if it is operated by a qualifying independent 
transmission operator); and (3) the facility is not financed for a 
principal purpose of serving that nongovernmental person.

B. Sec.  1.141-8 $15 Million Limitation for Output Facilities

    The temporary 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 provide that facilities having different 
purposes or serving different customer bases are not ordinarily part of 
the same project. For example, a peaking unit and a baseload unit 
generally are not part of the same project.
    The temporary regulations also provide that, in the case of 
generation and related facilities, project means property located at 
the same site. However, separate generating units are not part of the 
same project if one unit is reasonably expected, on the issue date of 
each issue that finances the facilities, to be placed in service more 
than three years before the other.
    Some commentators noted that there is an ambiguity in the temporary 
regulations regarding whether a peaking unit and a baseload unit that 
are located at the same site and placed in service within the same 
three-year period are part of the same project. The final regulations 
clarify that a peaking unit and a baseload unit generally are not part 
of the same project, even if they are located at the same site and 
placed in service within the same three-year period.

C. Need for Final Regulations

    Congress passed the Energy Policy Act of 1992, Public Law 102-486 
(106 Stat. 2776), to encourage restructuring of the electric power 
industry. Since that time, the FERC and many states have adopted 
policies to provide open access to transmission and distribution 
facilities. Treasury and the IRS are aware that these initiatives have 
caused many changes in the electric power industry, and that 
restructuring efforts are ongoing. The temporary regulations were 
published in order to provide 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 
restructured electric utility industry.
    Commentators stated that the lack of final regulations addressing 
these issues has hindered public power systems in undertaking long-term 
planning. Commentators also stated that uncertainty regarding the 
characterization under the private business tests of certain open 
access transactions has hampered participation by public power systems 
in open access plans. The final regulations are being issued at this 
time in order to address these concerns, notwithstanding that 
restructuring initiatives continue to evolve. It is anticipated that 
the special rules in the final regulations for open access transactions 
will not result in a significant increase in the volume of tax-exempt 
bonds for output facilities. In the event that such an increase does 
occur, Treasury and the IRS may reconsider relevant aspects of the 
regulations and propose additional limitations on the use of tax-exempt 
financing for such facilities.

Effective Dates

    The final regulations apply to bonds sold on or after November 22, 
2002.

[[Page 59759]]

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 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, and because the 
rule does not impose a collection of information on small entities, the 
provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do 
not apply.

Drafting Information

    The principal authors of these regulations are Bruce M. Serchuk and 
Rose M. Weber, Office of Chief Counsel (Tax-exempt and Government 
Entities), Internal Revenue Service, and Stephen J. Watson, Office of 
Tax Legislative Counsel, Department of the Treasury. However, other 
personnel from the IRS and 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 
Sec. Sec.  1.141-7T, 1.141-8T and 1.141-15T and adding entries to the 
table in numerical order for Sec. Sec.  1.141-7, 1.141-8 and 1.141-
15(f) through (i) to read as follows:

Sec.  1.141-0  Table of contents.

* * * * *


Sec.  1.141-7  Special rules for output facilities.

    (a) Overview.
    (b) Definitions.
    (1) Available output.
    (2) Measurement period.
    (3) Sale at wholesale.
    (4) Take contract and take or pay contract.
    (5) Requirements contract.
    (6) Nonqualified amount.
    (c) Output contracts.
    (1) General rule.
    (2) Take contract or take or pay contract.
    (3) Requirements contract.
    (4) Output contract properly characterized as a lease.
    (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) Certain conduit parties disregarded.
    (g) Special rules for electric output facilities used to provide 
open access.
    (1) Operation of transmission facilities by nongovernmental 
persons.
    (2) Certain use by nongovernmental persons under output contracts.
    (3) Ancillary services.
    (4) Exceptions to deliberate action rules.
    (5) Additional transactions as permitted by the Commissioner.
    (h) Allocations of output facilities and systems.
    (1) Facts and circumstances analysis.
    (2) Illustrations.
    (3) Transmission and distribution contracts.
    (4) Allocation of payments.
    (i) Examples.


Sec.  1.141-8  $15 million limitation for output facilities.

    (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 and distribution.
    (5) Subsequent improvements.
    (6) Replacement property.
    (c) Examples.
* * * * *


Sec.  1.141-15  Effective dates.

* * * * *
    (f) Effective dates for certain regulations relating to output 
facilities.
    (1) General rule.
    (2) Transition rule for requirements contracts.
    (g) Refunding bonds for output facilities.
    (h) Permissive retroactive application.
    (i) Permissive application of certain regulations relating to 
output facilities.

* * * * *
    Par. 3. Section 1.141-2 is amended by revising the last sentence of 
paragraph (d)(3)(ii)(B) to read as follows:


Sec.  1.141-2  Private activity bond tests.

* * * * *
    (d) * * *
    (3) * * *
    (ii) * * *
    (B) * * * See Sec.  1.141-7(g)(4).
* * * * *
    Par. 4. Section 1.141-7 is added to read as follows:


Sec.  1.141-7  Special rules for output facilities.

    (a) Overview. This section provides special rules to determine 
whether arrangements for the purchase 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. Sections 1.141-3 and 1.141-4 generally apply 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.  1.141-8, 
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, maintenance or other unutilized 
capacity.
    (ii) Transmission and other output facilities--(A) In general. For 
transmission, distribution, 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 with significant unutilized 
capacity. If an issuer reasonably expects on the issue

[[Page 59760]]

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 or other 
capacity, such as the average expected annual output of the facility. 
For example, the Commissioner may determine the available output of a 
financed peaking electric generating unit by reference to the 
reasonably expected annual 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 more than 30 percent of the actual 
output of the facility during the measurement period 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 this purpose, a limited source of supply shall include 
a physical limitation (for example, flow of water), but not an economic 
limitation (for example, cost of coal or gas). 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. A sale at wholesale means a sale of output 
to any person for resale.
    (4) 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.
    (5) Requirements contract. A requirements contract is an output 
contract, other than a take contract or a take or pay contract, under 
which a nongovernmental person agrees to purchase all or part of its 
output requirements.
    (6) 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 pursuant to a 
contract by a nongovernmental person of available output of an output 
facility (output contract) financed with proceeds of an issue is taken 
into account under the private business tests if the purchase has the 
effect of transferring the benefits of owning the facility and the 
burdens of paying the debt service on bonds used (directly or 
indirectly) to finance the facility (the benefits and burdens test). 
See paragraph (c)(4) of this section for the treatment of an output 
contract that is properly characterized as a lease for Federal income 
tax purposes. See paragraphs (d) and (e) of this section for rules 
regarding measuring the use of, and payments of debt service for, an 
output facility for determining whether the private business tests are 
met. See also Sec.  1.141-8 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) Take contract or take or pay contract. 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 available output of a 
facility.
    (3) Requirements contract--(i) In general. A requirements contract 
may satisfy the benefits and burdens test under paragraph (c)(3)(ii) or 
(iii) of this section. See Sec.  1.141-15(f)(2) for special effective 
dates for the application of this paragraph (c)(3) to issues financing 
facilities subject to requirements contracts.
    (ii) Requirements contract similar to take contract or take or pay 
contract. A requirements contract generally meets the benefits and 
burdens test 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 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. A 
requirements contract does not meet the benefits and burdens test, 
however, by reason of a provision that requires the purchaser to pay 
reasonable and customary damages (including liquidated damages) in the 
event of a default, or a provision that permits the purchaser to pay a 
specified amount to terminate the contract while the purchaser has 
requirements, in each case if the amount of the payment is reasonably 
related to the purchaser's obligation to buy requirements that is 
discharged by the payment.
    (iii) Wholesale requirements contract--(A) In general. A 
requirements contract that is a sale at wholesale (a wholesale 
requirements contract) may satisfy the benefits and burdens test, 
depending on all the facts and circumstances.
    (B) Significant factors. Significant factors that tend to establish 
that a wholesale requirements contract meets the benefits and burdens 
test include, but are not limited to--
    (1) The term of the contract is substantial relative to the term of 
the issue or issues that finance the facility; and
    (2) The amount of output to be purchased under the contract 
represents a substantial portion of the available output of the 
facility.
    (C) Safe harbors. A wholesale requirements contract does not meet 
the benefits and burdens test if--
    (1) The term of the contract, including all renewal options, does 
not exceed the lesser of 5 years or 30 percent of the term of the 
issue; or
    (2) The amount of output to be purchased under the contract (and 
any other requirements contract with the same purchaser or a related 
party with respect to the facility) does not exceed 5 percent of the 
available output of the facility.
    (iv) Retail requirements contract. Except as otherwise provided in 
this paragraph (c)(3), a requirements contract that is not a sale at 
wholesale does not meet the benefits and burdens test.
    (4) Output contract properly characterized as a lease. 
Notwithstanding any other provision of this section, an output contract 
that is properly characterized as a lease for Federal income tax 
purposes shall be tested under the rules contained in Sec. Sec.  1.141-
3 and 1.141-4 to determine whether it is taken into account under the 
private business tests.
    (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 amount of output purchased under 
the contract.
    (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

[[Page 59761]]

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 output contract for the use of a facility is not taken into 
account under the private business tests if the average annual payments 
to be made under the contract do not exceed 1 percent of the average 
annual debt service on all outstanding tax-exempt bonds issued to 
finance the facility, determined as of the effective date of the 
contract.
    (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 three years 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. An output contract with a 
nongovernmental person is not taken into account under the private 
business tests if--
    (i) The term of the contract, including all renewal options, is not 
longer than 3 years;
    (ii) The contract either is a negotiated, arm's-length arrangement 
that provides for compensation at fair market value, or is based on 
generally applicable and uniformly applied rates; and
    (iii) The output facility is not financed for a principal purpose 
of providing that facility for use by that nongovernmental person.
    (4) 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.
    (g) Special rules for electric output facilities used to provide 
open access--(1) Operation of transmission facilities by 
nongovernmental persons--(i) In general. The operation of an electric 
transmission facility by a nongovernmental person may result in private 
business use of the facility under Sec.  1.141-3 and this section based 
on all the facts and circumstances. For example, a transmission 
facility is generally used for a private business use if a 
nongovernmental person enters into a contract to operate the facility 
and receives compensation based, in whole or in part, on a share of net 
profits from the operation of the facility.
    (ii) Certain use by independent transmission operators. A contract 
for the operation of an electric transmission facility by an 
independent entity, such as a regional transmission organization or an 
independent system operator (independent transmission operator), does 
not constitute private business use of the facility if--
    (A) The facility is owned by a governmental person;
    (B) The operation of the facility by the independent transmission 
operator is approved by the FERC under one or more provisions of the 
Federal Power Act (16 U.S.C. 791a through 821c) (or by a state 
authority under comparable provisions of state law);
    (C) No portion of the compensation of the independent transmission 
operator is based on a share of net profits from the operation of the 
facility; and
    (D) The independent transmission operator does not bear risk of 
loss of the facility.
    (2) Certain use by nongovernmental persons under output contracts--
(i) Transmission facilities. The use of an electric transmission 
facility by a nongovernmental person pursuant to an output contract 
does not constitute private business use of the facility if--
    (A) The facility is owned by a governmental person;
    (B) The facility is operated by an independent transmission 
operator in a manner that satisfies paragraph (g)(1)(ii) of this 
section; and
    (C) The facility is not financed for a principal purpose of 
providing that facility for use by that nongovernmental person.
    (ii) Distribution facilities. The use of an electric distribution 
facility by a nongovernmental person pursuant to an output contract 
does not constitute private business use of the facility if--
    (A) The facility is owned by a governmental person;
    (B) The facility is available for use on a nondiscriminatory, open 
access basis by buyers and sellers of electricity in accordance with 
rates that are generally applicable and uniformly applied within the 
meaning of Sec.  1.141-3(c)(2); and
    (C) The facility is not financed for a principal purpose of 
providing that facility for use by that nongovernmental person (other 
than a retail end-user).
    (3) Ancillary services. The use of an electric output facility to 
provide ancillary services required to be offered as part of an open 
access transmission tariff under rules promulgated by the FERC under 
the Federal Power Act (16 U.S.C. 791a through 821c) does not result in 
private business use.
    (4) Exceptions to deliberate action rules--(i) Mandated wheeling. 
Entering into a contract for the use of electric transmission or 
distribution facilities 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); 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 electric transmission or distribution 
facilities 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 comparable provisions of state law). This paragraph 
(g)(4)(ii) does not apply, however, to the sale, exchange, or other 
disposition (within the meaning of section 1001(a)) of transmission or 
distribution facilities to a nongovernmental person.
    (iii) Application of reasonable expectations test to certain 
current refunding bonds. An action taken or to be taken with respect to 
electric transmission or distribution 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 (g)(4)(i) or (ii) of this 
section;
    (B) The bonds of the issue are current refunding bonds that refund 
bonds originally issued before February 23, 1998; and
    (C) The weighted average maturity of the refunding bonds is not 
greater than the remaining weighted average maturity of the prior 
bonds.
    (5) Additional transactions as permitted by the Commissioner. The 
Commissioner may, by published guidance, set forth additional 
circumstances in which the use of electric output facilities in a 
restructured electric industry does not constitute private business 
use.

[[Page 59762]]

    (h) 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 (h)(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 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 under the contract.
    (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 and distribution contracts. Whether use under an 
output contract for transmission or distribution is allocated to a 
particular facility or to a transmission or distribution network is 
based on all the facts and circumstances, in a manner similar to 
paragraphs (h)(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 or distribution 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).
    (i) 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 24-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 20 
years. H also will sell the remaining 40 percent of its share of the 
annual output to numerous other private utilities under contracts of 
three years or less that satisfy the exception under paragraph 
(f)(3) of this section. No other contracts will be executed 
obligating any person to purchase any specified amount of the power 
for any specified period of time. No person (other than Z) will make 
payments that will result in a transfer of the 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 nongovernmental person, under this section, that 
portion constitutes not more than 10 percent of the available output 
of H's ownership interest in the facility.
    Example 2. Wholesale requirements 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 paragraph (b)(1) of this section is approximately 
17,520,000 MWh (100 MW x 24 hours x 365 days x 20 years). 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 30 MW over the 
10-year period. The contract is taken into account under the private 
business tests pursuant to paragraph (c)(3) of this section because 
the term of the contract is substantial relative to the term of the 
issue and the amount of output to be purchased is a substantial 
portion of the available output.
    (ii) Under paragraph (d) of this section, the amount of 
reasonably expected private business use under this contract is 
approximately 15 percent (30 MW x 24 hours x 365 days x 10 years, or 
2,628,000 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 30 MW of power (less the operation and 
maintenance costs directly attributable to generating that 30 MW of 
power), will be more than 10 percent of debt service on the issue on 
a present-value basis. Accordingly, the issue meets the private 
security or payment test because J reasonably expects 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 15 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.  1.141-8.
    Example 3. Retail contracts. (i) State Agency M, a political 
subdivision, issues bonds in 2003 to finance the construction of a 
generating facility that will be used to furnish electricity to M's 
retail customers. In 2007, M enters into a 10-year contract with 
industrial corporation I. Under the contract, M agrees to supply I 
with all of its power requirements during the contract term, and I 
agrees to pay for that power at a negotiated price as it is 
delivered. The contract does not require I to pay for any power 
except to the extent I has requirements. In addition, the contract 
requires I to pay reasonable and customary liquidated damages in the 
event of a default by I, and permits I to terminate the contract 
while it has requirements by paying M a specified amount that is a 
reasonable and customary amount for terminating the contract. Any 
damages or termination payment by I will be reasonably related to 
I's

[[Page 59763]]

obligation to buy requirements that is discharged by the payment. 
Under paragraph (c)(3) of this section, the contract does not meet 
the benefits and burdens test. Thus, it is not taken into account 
under the private business tests.
    (ii) The facts are the same as in paragraph (i) of this Example 
3, except that the contract requires I to make guaranteed minimum 
payments, regardless of I's requirements, in an amount such that the 
contract does not meet the exception for small purchases in 
paragraph (f)(1) of this section. Under paragraph (c)(3)(ii) of this 
section, the contract meets the benefits and burdens test because it 
obligates I to make payments that are not contingent on its output 
requirements. Thus, it is taken into account under the private 
business tests.
    Example 4. 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 (h)(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 security or payment 
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.
    Example 5. 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 (h)(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 (h) of 
this section. Because I is a nongovernmental person, MU's bonds are 
private activity bonds.
    Example 6. Operation of transmission facilities by regional 
transmission organization. (i) Public Power Agency D is a political 
subdivision that owns and operates electric generation, transmission 
and distribution facilities. In 2003, D transfers operating control 
of its transmission system to a regional transmission organization 
(RTO), a nongovernmental person, pursuant to an operating agreement 
that is approved by the FERC under sections 205 and 206 of the 
Federal Power Act. D retains ownership of its facilities. No portion 
of the RTO's compensation is based on a share of net profits from 
the operation of D's facilities, and the RTO does not bear any risk 
of loss of those facilities. Under paragraph (g)(1)(ii) of this 
section, the RTO's use of D's facilities does not constitute a 
private business use.
    (ii) Company A is located in D's service territory. In 2004, 
Power Supplier E, a nongovernmental person, enters into a 10-year 
contract with A to supply A's electricity requirements. The 
electricity supplied by E to A will be transmitted over D's 
transmission and distribution facilities. D's distribution 
facilities are available for use on a nondiscriminatory, open access 
basis by buyers and sellers of electricity in accordance with rates 
that are generally applicable and uniformly applied within the 
meaning of Sec.  1.141-3(c)(2). D's facilities are not financed for 
a principal purpose of providing the facilities for use by E. Under 
paragraph (g)(2) of this section, the contract between A and E does 
not result in private business use of D's facilities.
    Example 7. Certain actions not treated as deliberate actions. 
The facts are the same as in Example 6 of this paragraph (i), except 
that the RTO's compensation is based on a share of net profits from 
operating D's facilities. In addition, D had issued bonds in 1994 to 
finance improvements to its transmission system. At the time D 
transfers operating control of its transmission system to the RTO, D 
chooses to apply the private activity bond regulations of Sec. Sec.  
1.141-1 through 1.141-15 to the 1994 bonds. The operation of D's 
facilities by the RTO results in private business use under Sec.  
1.141-3 and paragraph (g)(1)(i) of this section. Under the special 
exception in paragraph (g)(4)(ii) 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 8. Current refunding. The facts are the same as in 
Example 7 of this paragraph (i), and in addition D issues bonds in 
2004 to currently refund the 1994 bonds. The weighted average 
maturity of the 2004 bonds is not greater than the remaining 
weighted average maturity of the 1994 bonds. D chooses to apply the 
private activity bond regulations of Sec. Sec.  1.141-1 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 (g)(4)(iii) of this section, however, the transfer of the 
financed facilities to the RTO need not be taken into account in 
applying the reasonable expectations test to the refunding bonds.


Sec.  1.141-7T  [Removed]

    Par. 5. Section 1.141-7T is removed.
    Par. 6. Section 1.141-8 is added to read as follows:


Sec.  1.141-8  $15 million limitation for output facilities.

    (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, an issue consists of private 
activity bonds 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 sale 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--

[[Page 59764]]

    (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 5 percent or 
more 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) 5 percent or more 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 5 percent or more 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.  1.141-7 applies, except that ``$15 million'' is applied 
in place of ``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--
    (i) Generation, transmission and distribution facilities;
    (ii) Separate facilities designed to serve wholesale customers and 
retail customers; and
    (iii) A peaking unit and a baseload unit (regardless of the 
location of the units).
    (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 issue date of each issue that finances the units, 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 between the first and second units so that 
in the aggregate the allocation is reasonable.
    (4) Transmission and distribution. In the case of transmission or 
distribution facilities, project means functionally related or 
contiguous property. Separate transmission or distribution facilities 
are not part of the same project if one facility is reasonably 
expected, on the issue date of each issue that finances the facilities, 
to be placed in service more than 2 years before the other.
    (5) Subsequent improvements--(i) In general. An improvement to 
generation, transmission or distribution 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 and distribution facilities. An 
improvement to transmission or distribution 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 output facility 
have a weighted average maturity that is not greater than 120 percent 
of the reasonably expected economic life of the facility.
    (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 sale 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

[[Page 59765]]

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).


Sec.  1.141-8T  [Removed]

    Par. 7. Section 1.141-8T is removed.
    Par. 8. Section 1.141-15 is amended by revising paragraph (a) and 
adding paragraphs (f), (g), (h) and (i) to read as follows:


Sec.  1.141-15  Effective dates.

    (a) Scope. The effective dates of this section apply for purposes 
of Sec. Sec.  1.141-1 through 1.141-6(a), 1.141-7 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).
* * * * *
    (f) Effective dates for certain regulations relating to output 
facilities--(1) General rule. Except as otherwise provided in this 
section, Sec. Sec.  1.141-7 and 1.141-8 apply to bonds sold on or after 
November 22, 2002, that are subject to section 1301 of the Tax Reform 
Act of 1986 (100 Stat. 2602).
    (2) Transition rule for requirements contracts. For bonds otherwise 
subject to Sec. Sec.  1.141-7 and 1.141-8, Sec.  1.141-7(c)(3) applies 
to output contracts entered into on or after September 19, 2002. An 
output contract is treated as entered into on or after that date if it 
is amended on or after that date, but only if the amendment results in 
a change in the parties to the contract or increases the amount of 
requirements covered by the contract by reason of an extension of the 
contract term or a change in the method for determining such 
requirements. For purposes of this paragraph (f)(2)--
    (i) The extension of the term of a contract causes the contract to 
be treated as entered into on the first day of the additional term;
    (ii) The exercise by a party of a legally enforceable right that 
was provided under a contract before September 19, 2002, on terms that 
were fixed and determinable before such date, is not treated as an 
amendment of the contract. For example, the exercise by a purchaser 
after September 19, 2002 of a renewal option that was provided under a 
contract before that date, on terms identical to the original contract, 
is not treated as an amendment of the contract; and
    (iii) An amendment that increases the amount of requirements 
covered by the contract by reason of a change in the method for 
determining such requirements is treated as a separate contract that is 
entered into as of the effective date of the amendment, but only with 
respect to the increased output to be provided under the contract.
    (g) Refunding bonds for output facilities. Except as otherwise 
provided in paragraph (h) or (i) of this section, Sec. Sec.  1.141-7 
and 1.141-8 do not apply to any bonds sold on or after November 22, 
2002, to refund a bond to which Sec. Sec.  1.141-7 and 1.141-8 do not 
apply unless--
    (1) The refunding bonds are subject to section 1301 of the Tax 
Reform Act of 1986 (100 Stat. 2602); and
    (2)(i) The weighted average maturity of the refunding bonds is 
longer than--
    (A) The weighted average maturity of the refunded bonds; or
    (B) 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
    (ii) A principal purpose for the issuance of the refunding bonds is 
to make one or more new conduit loans.
    (h) Permissive retroactive application. Except as provided in 
paragraphs (d), (e) or (i) of this section, Sec. Sec.  1.141-1 through 
1.141-6(a), 1.141-7 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 by issuers in whole, but not in part, to--
    (1) Outstanding bonds that are sold before November 22, 2002, and 
subject to section 141; or
    (2) Refunding bonds that are sold on or after November 22, 2002, 
and subject to section 141.
    (i) Permissive application of certain regulations relating to 
output facilities. Issuers may apply Sec. Sec.  1.141-7(f)(3) and 
1.141-7(g) to any bonds.


Sec.  1.141-15T  [Removed]

    Par. 9. Section 1.141-15T is removed.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: September 17, 2002.
Pamela F. Olson,
Acting Assistant Secretary of the Treasury.
[FR Doc. 02-24137 Filed 9-19-02; 12:39 pm]
BILLING CODE 4830-01-P