HR 1253 IH

To amend the Internal Revenue Code of 1986 to restrict the use of tax-exempt financing by governmentally owned electric utilities and to subject certain activities of such utilities to income tax.

March 24, 1999

Mr. ENGLISH (for himself, Mr. CRANE, Mr. RAMSTAD, and Mrs. JOHNSON of Connecticut) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to restrict the use of tax-exempt financing by governmentally owned electric utilities and to subject certain activities of such utilities to income tax.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. BONDS ISSUED TO FINANCE CERTAIN GOVERNMENTAL ELECTRIC OUTPUT FACILITIES TREATED AS PRIVATE ACTIVITY BONDS.

(a) GOVERNMENTAL UNITS NO LONGER ELIGIBLE FOR EXCEPTION FROM TERMINATION OF LOCAL FURNISHING PROVISIONS- Paragraph (3) of section 142(f) of the Internal Revenue Code of 1986 is amended by adding at the end the following flush sentence:

`For purposes of applying this paragraph to bonds issued after the date of the enactment of this sentence, the term `person' shall not include a governmental unit.'

(b) CERTAIN ISSUES FOR GOVERNMENTAL ELECTRIC OUTPUT FACILITIES TREATED AS PRIVATE ACTIVITY BONDS- Section 141 of such Code (relating to private activity bonds) is amended by adding at the end the following new subsection:

`(f) ISSUES FOR GOVERNMENTAL ELECTRIC OUTPUT FACILITIES-

`(1) IN GENERAL- The term `private activity bond' includes any bond issued as part of an issue if any proceeds of the issue are to be used (directly or indirectly) for the construction or acquisition of any governmental electric output facility.

`(2) GOVERNMENTAL ELECTRIC OUTPUT FACILITY; ELECTRIC ENERGY SERVICES- For purposes of this subsection--

`(A) GOVERNMENTAL ELECTRIC OUTPUT FACILITY-

`(i) IN GENERAL- The term `governmental electric output facility' means any facility (including any generation, transmission, or distribution facility) used or to be used in connection with the furnishing for sale of electric energy services by any governmental utility.

`(ii) EXCEPTION FOR PROPERTY CONVERTED TO NONOUTPUT USE- The term `governmental electric output facility' shall not include any property described in subsection (d)(4).

`(B) ELECTRIC ENERGY SERVICES- The term `electric energy services' includes the furnishing of electric energy.

`(3) EXCEPTION FOR LOCAL GOVERNMENTAL UTILITIES-

`(A) IN GENERAL- Paragraph (1) shall be applied by not taking into account any facility owned by a local governmental utility.

`(B) LOCAL GOVERNMENTAL UTILITY- For purposes of this subsection, the term `local governmental utility' means any governmental utility if--

`(i) all governmental electric output facilities (other than generation facilities) which--

`(I) are owned by such utility, and

`(II) are placed in service after the date of the enactment of this subsection,

are located within the qualified governmental service area of such utility,

`(ii) electric energy services furnished by such utility are sold only to ultimate consumers located within such area, and

`(iii) no governmental electric output facility owned by such utility is designed differently, sized larger, built sooner, or constructed in a more costly manner than is reasonably necessary for ultimate consumers located within such area.

`(C) JOINT ACTION POWER AGENCIES- For purposes of determining whether a participant in a joint action power agency meets the requirements of subparagraph (B)--

`(i) such participant shall be treated as owning its share of the governmental electric output facilities owned by such agency, and

`(ii) the determination of whether the requirements of clause (i) or (iii) of subparagraph (B) are met shall be made by treating the qualified governmental service area of such participant as including such area of all participants in such agency.

`(4) EXCEPTION FOR SMALL GOVERNMENTAL UTILITIES-

`(A) IN GENERAL- Paragraph (1) shall be applied by not taking into account any facility owned by a small governmental utility.

`(B) SMALL GOVERNMENTAL UTILITY- For purposes of this subsection, the term `small governmental utility' means any governmental utility if--

`(i) as of the issuance date of the issue, it is reasonably expected that such utility will furnish electric energy services for sale to less than 5,000 consumers, and

`(ii) at least 30 percent of its average gross income during any 3-calendar year period is from sales to residential consumers.

`(5) EXCEPTION FOR LOCAL DISTRIBUTION FACILITIES- Paragraph (1) shall be applied by not taking into account any distribution facility if--

`(A) such facility is located within the qualified governmental service area of such utility, and

`(B) such facility meets the requirements of paragraph (3)(B)(iii).

`(6) EXCEPTIONS TO RULES REQUIRING THAT ULTIMATE CONSUMERS BE LOCATED WITHIN QUALIFIED GOVERNMENTAL SERVICE AREA-

`(A) IN GENERAL- For purposes of clauses (ii) and (iii) of paragraph (3)(B), a sale shall be treated as being to an ultimate consumer located within a governmental utility's qualified governmental service area if such sale meets--

`(i) the governmental utility exception of subparagraph (B),

`(ii) the pooling exception of subparagraph (C),

`(iii) the existing contract exception of subparagraph (D),

`(iv) the de minimis exception of subparagraph (E), or

`(v) the transmission exception of subparagraph (F).

`(B) GOVERNMENTAL UTILITY EXCEPTION- A sale of electric energy services meets the governmental utility exception of this subparagraph if the sale is by a governmental utility with a qualified governmental service area to another governmental utility for resale solely to ultimate consumers located within the qualified governmental service area of the purchasing governmental utility.

`(C) POOLING EXCEPTION- A sale of electric energy services meets the pooling exception of this subparagraph if--

`(i) the sale is by a governmental utility with a qualified governmental service area to a person for the resale of the electric energy services,

`(ii) such sale is--

`(I) pursuant to a pooling or swap arrangement to a person that owns distribution facilities for distribution through those facilities,

`(II) pursuant to a regional transmission group or other similar arrangement to a person that owns distribution facilities for distribution through those facilities, or

`(III) for the emergency transfer of electric energy services, and

`(iii) the dollar amount of the pooling sales by the governmental utility during a calendar year does not exceed the dollar amount of the pooling purchases by such utility during such year.

`(D) EXISTING CONTRACT EXCEPTION- A sale of electric energy services meets the existing contract exception of this subparagraph if the sale is pursuant to--

`(i) a binding contract in effect on the date of the enactment of this subsection, or

`(ii) a renewal of such a contract but only if such renewal is at the sole option of the purchaser.

`(E) DE MINIMIS EXCEPTION- A sale of electric energy services meets the de minimis exception of this subparagraph if--

`(i) the sale is by a governmental utility with a qualified governmental service area to a person who owns any electric energy distribution facility for distribution and resale by such person through such facility,

`(ii) all of the governmental electric output facilities of such utility meet the requirements of paragraph (3)(B)(iii), and

`(iii) the aggregate dollar amount of the sales described in clause (i) during any calendar year (other than sales which meet the requirements of any other subparagraph of this paragraph) does not exceed 10 percent of the average of the dollar amounts of the governmental utility's sales of electric energy services of the same type as the sale during the 3 preceding calendar years.

`(F) TRANSMISSION EXCEPTION- A sale of electric energy services meets the transmission exception of this subparagraph if the only electric energy services provided by the governmental utility with respect to such sale are provided by--

`(i) any transmission or distribution facility placed in service before the date of the enactment of this subsection,

`(ii) any distribution facility which meets the requirements of paragraph (5), or

`(iii) any transmission or distribution facility which meets the requirements of clauses (i) and (iii) of paragraph (3)(B).

If electric energy is sold in connection with the sale of any transmission or distribution service, the sale of such service meets the requirements of this subparagraph only if the sale of the electric energy is to ultimate consumers located within the qualified governmental service area of such utility.

`(7) QUALIFIED GOVERNMENTAL SERVICE AREA- For purposes of this subsection--

`(A) IN GENERAL- The term `qualified governmental service area' means, with respect to any governmental utility, the area--

`(i)(I) in which such utility has the obligation to supply electric energy services to ultimate consumers, or

`(II) if such utility has no such obligation, which is coincident to an electric distribution system of such utility and immediately adjacent thereto, and

`(ii) which is claimed openly as a service area by such utility without a competing claim or dispute.

`(B) OBLIGATION TO SUPPLY- For purposes of subparagraph (A)(i), a governmental utility shall be considered to have an obligation to provide service only if an explicit requirement of law imposes on such utility the obligation to provide retail electric service to any person within the area who requests such service and who meets the terms and conditions applicable to all other similarly situated consumers.

`(8) OTHER DEFINITIONS- For purposes of this subsection--

`(A) GOVERNMENTAL UTILITY-

`(i) IN GENERAL- The term `governmental utility' means any governmental unit which is engaged in the activity or business of the selling, generating, transmitting, or distributing electric energy.

`(ii) CONTROLLED GROUPS- A governmental unit and all related persons of such unit shall be treated as 1 person which is a governmental utility if such unit, or any such person, is engaged in any activity or business referred to in clause (i).

`(B) RELATED PERSON- The term `related person' means a group of related persons (within the meaning of section 144(a)(3)), which includes a governmental unit, and shall include a taxable person, owned or controlled, in whole or in part, by a governmental unit.

`(C) POOLING SALES AND PURCHASES-

`(i) POOLING SALES- The term `pooling sales' means sales by the utility which are treated as described in subparagraph (A) of section 141(f)(6) solely by reason of subparagraph (C) thereof.

`(ii) POOLING PURCHASES- The term `pooling purchases' means purchases by the utility in a sale which is a pooling sale by another utility.'

(c) TREATMENT OF PRE-EFFECTIVE DATE BONDS FINANCING TRANSMISSION AND DISTRIBUTION FACILITIES-

(1) IN GENERAL- Paragraph (6) of section 141(b) of such Code is amended by adding at the end the following new subparagraph:

`(C) SPECIAL RULES RELATING TO CERTAIN OUTPUT FACILITIES- For purposes of the first sentence of subparagraph (A), with respect to bonds issued on or before the date of the enactment of this subparagraph, the term `private business use' shall not include use by a person of a transmission or distribution facility of a governmental utility if--

`(i) such use is provided as part of a comprehensive statewide or regional open-access regime mandated or encouraged by a Federal or State regulatory entity, or

`(ii)(I) such use results from the turnover of operational control (in whole or in part) of, but not an ownership interest in, a transmission facility by a governmental utility to an independent system operator,

`(II) such facility is used by the independent system operator to provide transmission services and specified ancillary services on an open-access nondiscriminatory basis,

`(III) the independent system operator meets the principles set forth in Federal Energy Regulatory Commission Order No. 888 and/or any successor provision,

`(IV) the governmental utility follows comparable rules in opening up its qualified governmental service area (as defined in section 141(f)(7)) to retail competition as are applicable to other owners of distribution facilities (other than governmental utilities) within the State in which the governmental utility is located, and

`(V) the independent system operator does not own any electric distribution facilities.'

(2) CONFORMING AMENDMENT- Subsection (b) of section 141 of such Code is amended by adding at the end the following new paragraph:

`(10) SPECIAL RULES RELATING TO THE PRIVATE SECURITY OR PAYMENT TEST- In calculating

the private security or payment test of paragraph (2), no payments for use described in paragraph (6)(C) shall be treated as payments in respect of property, or borrowed money, used or to be used for a private business use.'.

(d) EFFECTIVE DATE- The amendments made by this section shall apply to obligations issued after the date of the enactment of this Act.

SEC. 2. TAXATION OF INCOME FROM CERTAIN ACTIVITIES OF GOVERNMENTAL UTILITY.

(a) IN GENERAL- Section 115 of the Internal Revenue Code of 1986 (relating to income of States and municipalities) is amended--

(1) by striking `Gross income' and inserting `(a) GENERAL RULE- Gross income', and

(2) by adding at the end the following new subsection:

`(b) EXCEPTION FOR CERTAIN GOVERNMENTAL UTILITIES-

`(1) IN GENERAL- Subsection (a) shall not apply to any gross income derived by any governmental utility from sales of electric energy services--

`(A) to persons not within a qualified governmental service area of such utility, and

`(B) to persons for resale if such resale is to persons outside such service area.

Any amount included in gross income by reason of the preceding sentence shall be treated as gross income derived from an unrelated trade or business under section 512(a)(1), and such utility shall be treated as an organization described in section 511(a)(2).

`(2) EXCEPTIONS-

`(A) IN GENERAL- Paragraph (1) shall not apply to any income derived from any sale--

`(i) which is treated under section 141(f)(6) as made to ultimate consumers located within the qualified governmental service area of the utility, or

`(ii) by any small governmental utility.

`(B) SPECIAL RULE FOR POOLING EXCEPTION- For purposes of applying subparagraph (A)(i), subparagraph (C) of section 141(f)(6) shall be applied without regard to clause (iii) thereof but subsection (b)(1) shall apply to pooling sales to the extent that the dollar amount of such sales by the governmental utility during a calendar year exceeds the dollar amount of the pooling purchases by such utility during such year.

`(C) DE MINIMIS EXCEPTION- For purposes of applying subparagraph (A)(i), subparagraph (E) of section 141(f)(6) shall apply only if the governmental utility is a local governmental utility.

`(3) SPECIAL RULE FOR DETERMINING DEPRECIATION- In the case of a governmental utility whose gross income is subject to tax under this chapter by reason of this subsection, the adjustment under section 1016(a)(3) for any period before the date of the enactment of this subsection shall be treated as being at the fastest rate permitted under this title for such period.

`(4) DEFINITIONS- Terms used in this subsection which are also used in section 141(f) shall have the respective meanings given such terms by such section.'

(b) EFFECTIVE DATE- The amendments made by this section shall apply to amounts received or accrued after the date of the enactment of this Act.

END