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Copyright 1999 Federal News Service, Inc.  
Federal News Service

OCTOBER 19, 1999, TUESDAY

SECTION: IN THE NEWS

LENGTH: 6189 words

HEADLINE: PREPARED TESTIMONY OF
SCOTT MADDOX
MAYOR OF TALLAHASSEE, FLORIDA
ON BEHALF OF THE AMERICAN PUBLIC POWER ASSOCIATION
BEFORE THE SENATE COMMITTEE ON FINANCE
SUBCOMMITTEE ON LONG-TERM GROWTH AND DEBT REDUCTION
SUBJECT - RENEWABLE ENERGY IN
A DEREGULATED ELECTRICITY MARKET

BODY:


Good morning, Mr. Chairman and members of the subcommittee. My name is Scott Maddox and I'm the Mayor of Tallahassee, Florida. I am testifying on behalf of the American Public Power Association. We appreciate the efforts of this committee to build a record on all tax- related electric restructuring issues. Today, I would like to comment specifically on a serious tax problem facing community owned electric utilities as they move to deregulation. If community owned utilities embrace competition, as many state laws are encouraging them to do, they can be placed in a situation where their existing tax-exempt bonds will become retroactively taxable. Congress needs to remove this serious barrier to open competition in order to promote consumer choice and lower electricity prices for all consumers.
The American Public Power Association (APPA) is the national service organization representing the interests of over 2,000 community owned and other state and local government-owned utilities throughout the U.S. While APPA member utilities include state public power agencies, and serve many of the nation's largest cities, the majority of our members are located in small and medium-sized communities in 49 states. In fact, 75 percent of APPA's members are located in cities with populations of 10,000 or less. APPA member utilities provide about 14 percent of all kilowatt-hour sales to ultimate consumers in the U.S. and collectively serve more than 40 million Americans.
Florida has 34 community owned utilities serving more than two million Floridians. Our utilities are diverse. We have large community owned utilities, including Jacksonville, Orlando, Lakeland, Tallahassee and Gainesville, and small utilities, such as Bushnell and Havana, which serve about 1,000 customers each. The subject of this hearing is the tax implications of electric industry deregulation. The implications for community owned utilities in Florida are huge since they hold $6.5 billion in tax-exempt debt. Tallahassee, in particular, has over $297 million in outstanding tax-exempt bonds.My sole purpose today is to help explain a conflict between federal tax policy and energy policy and how it affects Tallahassee as well as the over 2,000 public power communities nationwide. I come to you not just bearing a problem, but also suggesting a reasonable solution. To that end, I ask you and the members of the subcommittee to embrace with confidence and speed S. 386, The Bond Fairness and Protection Act.
A companion bill, H.R. 721, has been introduced in the House. My personal objective today is to help you and your staff better understand a severe problem facing community owned utilities, and why those that have this "private use" problem are willing to give up our use of tax-exempt bonds to build new generation facilities in return for the relief we need. At the same time, it is not fair to penalize these communities that do not have a private use problem by denying them the right to issue tax-exempt municipal bonds for local infrastructure facilities, including electric facilities, in the future. I know there is a lot of misinformation and tension surrounding this issue, but I am confident that this hearing will help separate the facts from the fiction.
I. Reconciling Conflicts Between Existing Tax Laws and Changes in State and Federal Energy Policy
Twenty-three states have now adopted deregulation legislation. Many other states will follow in the near future. These new laws, and the "open access" policies they seek to promote, have created an extremely serious problem for communities served by public power systems that have issued tax-exempt debt to finance their local electric utility infrastructure. If these community owned electric utilities take steps to conform their operations to these new state policies, they are immediately confronted with the nearly insurmountable obstacle of Federal tax code private use restrictions. In most cases, implementation of state restructuring plans - - and even Federal Energy Regulatory Commission (FERC) policies designed to provide open transmission access for competitive wholesale markets -- will jeopardize the financial standing of these public power communities and millions of bondholders across the U.S. Specifically, if community owned utilities participate in competitive markets and violate private use restrictions, their outstanding tax-exempt bonds could become retroactively taxable to the date of issuance.
Under current tax law, electric utilities owned and operated by units of state and local government issue tax-exempt bonds to finance their capital investments. These bonds are subject to the private use rules in the federal tax code designed to prevent private parties from benefiting from lower-cost tax-exempt financing. These private use rules impose two significant restrictions on community owned utilities with tax-exempt financed transmission and generation facilities:
- First, the rules severely restrict the use of community owned utilities' transmission facilities by private business, including investor owned utilities and power marketers, to use their transmission or distribution lines, and could prevent the transfer of control of these facilities to third party, independent grid management organizations.
- Second, the private use rules severely limit the ability of community owned electric systems from selling power (from tax-exempt financed generation facilities) to individual customers on negotiated terms.Both problems discourage community owned utilities from embracing electricity deregulation and form a barrier to open and efficient electricity markets at both the wholesale and retail level. These problems, and the need for flexibility from the private use restrictions, make it impossible for community owned utilities to compete for their own EXISTING CUSTOMERS or open up their transmission lines. The purpose of S. 386 is to prevent existing tax-exempt bonds from becoming retroactively taxable and keeping rates low, not to permit community owned utilities to sell power into distant markets, and aggressively pick off large industrial customers from the private sector and/or build the country's national transmission network!
I am here today because as a Mayor I do not want to raise electric rates for the City of Tallahassee nor do I want to see our bondholders placed in a situation where their investments are not what they bargained for. Moreover, I would like to keep the decision making at the local level in my community, which is precisely what S. 386 does.
Below are some examples of what the private use rules mean in a competitive environment, which already exists in the wholesale market and which is becoming a reality in the retail markets affecting over half the nation's population. (See attachment A for a more detailed description of private use problems titled The Ties That Don't Bond, Private Use and Public Power, February 1999.)
II. Real Life Problems (Opening Transmission Lines, Industrial Contracts, Lost Load Problems, Joint Power Agencies and their Cities are at Risk) a. Transmission
Severe problems exist for all community owned utilities that have transmission facilities.

In its recent Notice of Proposed Rulemaking (NOPR) the FERC calls for all utilities including community owned utilities - to join Regional Transmission Organizations (RTOs) within the next two years. Community owned utilities support formation of RTOs However, transferring ownership or operational control of transmission facilities to an RTO - and even providing for open access in accordance with policy expectations of the Energy Policy Act of 1992 - can result in a retroactive determination that the underlying bonds are taxable.
b. Industrial Contracts
Passage of state electric deregulation legislation enables individual customers to choose from several alternative power suppliers. Private and cooperative utilities, as well as power marketers, are signing contracts with their largest customers in an effort to retain those customers once retail competition is an option. These utilities can provide a specially tailored contract in exchange for a long-term arrangement. Unfortunately, if a community owned utility executes a similar contract, it can count against the private use restrictions. Thus, community owned utilities are limited in the steps they can take to retain existing retail customers. These limitations increase the potential that the utility will lose customers and will compound the impact of the private use problem.
c. Lost Load
As explained above, in retail markets large customers will seek and obtain specially tailored contracts to meet their specific needs, just as they do in buying any other products. Because of outdated private use rules, a community owned utility may be unable to offer such a contract, even to customers in their own service territory that they have been successfully serving for decades. This could deny that customer the best choice in the market, and will lead to loss of customers by the utility for reasons that have absolutely nothing to do with price or quality of service.
If a community owned system loses a customer (and all utilities will lose customers) the public system may be unable to re-market the generating capacity it had built to serve that lost customer as a result of the private use rules. Thus, any excess capacity that a public system has may become idle and unproductive solely as a result of the private use tax rules. Inability to resell the capacity can lead to significant financial losses, and, in turn, higher costs for the remaining customers of that utility as well as a reduction in overall economic efficiency.
d. Joint Action Agencies and their Cities are also at Risk
Missouri River Energy Services (MRES) is the supplemental power supplier to 17 community owned electric utilities in western Iowa - providing about 40 percent of the energy needs of these communities. Currently, about half of the entire MRES sales to its Iowa members is for retail service to 6 large customers. Given experience in other industries and independent assessments of the electric utility industry it is likely that at least some of those customers - as well as other industrial customers, large commercial customers and customers with multiple facility locations - will be lost to other power providers. Under the current private use restrictions, the affected Iowa community owned utilities and MRES would be limited in the offsetting sales that could be made. While the energy can be sold on the short-term market, such sales neither covers the full cost of the energy nor services the underlying debt. The revenue shortfall can only be made up through higher rates in the remaining electricity MRES sells to its Iowa members and members in other states. This situation could lead to further load lost and threaten the financial health of the Iowa community owned utilities and MRES. (Note: there are 68 Joint Action Agencies nationwide)
III. IRS Temporary and Proposed Regulations Do not Fix the Problem
The Department of Treasury issued "proposed and temporary" regulations in January 1998, and while the regulations are helpful, they did not resolve all of the issues. First, the regulations are "final and temporary"-lasting three years. They expire in January 2001. Community owned utilities are reluctant to make long-term decisions with substantial financial implications on the basis of temporary regulations. Second, the Joint Committee on Taxation has issued a report questioning the legal authority of the regulations. While we believe (JCT) Treasury acted properly, the JCT report makes us more reluctant to base critical financial decisions on these regulations. Finally, and most importantly, generation private use problems are not adequately addressed in the regulations and future transmission private use problems are not addressed at all. Clearly, the Treasury doesn't have that statutory authority to resolve all of the critical issues facing community owned utilities as we move to electric deregulation. Only Congress can provide permanent transition relief.
IV. Financial Implications (Bad for Consumer, Bondholders and Local Governments)
As the aforementioned conflicts arise, most utilities have two options: defease, or call, their existing tax-exempt debt and replace it with taxable debt, or forgo the sale of capacity from transmission or generating facilities, leaving fixed costs of those facilities to be borne by the remaining ratepayers on the systems and close their transmission and distribution facilities from competition. The first option - refinancing existing debt with taxable debt - would in itself lead to significant turmoil in the bond markets. Community owned utilities and their customers would pay significantly higher rates since bonds would now be taxable. This would be, in effect, a new retroactive tax on consumers, something I know this Committee does not want to embrace. Certainly this situation, and the degree of uncertainty suddenly injected into the equation would, impact all municipal markets and investor confidence if more than $75 billion in tax-exempt debt were suddenly recalled or rendered taxable as a result of incompatibility of the tax laws with state deregulation initiatives.
The second option - leaving unproductive facilities idle simply because of arcane tax rules - is woefully inefficient, both economically and environmentally. This option would leave the remaining customers saddled with potentially high costs and would make the electricity market far less efficient by removing competitively priced electricity from the marketplace.
Both of these options would raise electric rates considerably - possibly by hundreds of millions of dollars - and in the worst case could lead to a death spiral as customers faced with higher electric costs leave the system for other suppliers. If Congress does not address this problem soon, the outcome of the introduction of electricity competition will be higher electric rates for millions of Americans served by community owned utilities.
V. Legislative Proposals
1. S. 386-- The Bond Fairness and Protection Act
APPA supports a solution spearheaded by Senators Slade Gorton and Bob Kerrey -- the Bond Fairness and Protection Act (S. 386/H.R. 721) -- that would preserve local decision making about how to use tax-exempt bonding authority. It would allow each community owned electric system to "elect" to obtain relief from private use limits, but forego the right to issue tax-exempt bonds for new generation facilities in the future. In short, the bill provides two choices:1) Lifts the private use test on outstanding bonds (i.e. grandfather existing bonds), but only if the utility agrees to never again issue tax-exempt bonds to build new generation facilities, or
2. If no private use relief is needed, the utility can continue to issue tax-exempt debt under a clarified version of the existing private use rules.
The bills clarifications of the private use definition allow common sense activities envisioned by developing federal and state; providing open access transmission in compliance with FERC Order 888 or state laws; joining an ISO, Regional Transmission Group (RTG) or power exchange, or; providing open retail access over your distribution.
If enacted, this legislation will accomplish two objectives: 1) clarify existing tax laws and regulations regarding the private use rules so that they will work in a new competitive marketplace and 2) provide encouragement for public power utilities to open their transmission or distribution systems, thereby providing a choice to more consumers.
This bipartisan bill has gained strong support in the Senate, where it has 30 cosponsors, seven of which are on this Committee -- Senators Jeffords; Thompson; Grassley; Moynihan; Hatch; and Robb and Kerrey. Companion House legislation (H.R. 721) sponsored by Reps. J.D. Hayworth (R-AZ) and Bob Matsui (D-CA) has 87 cosponsors.

In addition, the provisions of H.R. 721 were recently incorporated by Chairman Joe Barton (R-TX) in H.R. 2944, The Electricity Competition and Reliability Act, comprehensive electricity legislation expected to be considered next week by the Energy and Power Subcommittee of the House Commerce Committee. (See Attachment B for a complete list of co- sponsors of S. 386/H.R. 721, the Bond Fairness and Protection Act.)
Support for this legislation has grown considerably. Seniors, environmental groups, investor owned utilities, state and local organization, as well as over 166 local governing organizations, ranging in size from as small as the City of Chattahoochee, Florida to as large as the San Antonio City Council, have publicly endorsed S. 386, the Bond Fairness and Protection Act. Moreover 57 Local Chambers of Commerce support the GortonKerrey bill, because of ability for local communities to make their own financial decision. Companies such as Alcoa, Praxair, Enron Corp. as well as many others have voiced support for S. 386. Over 1000 local elected officials throughout the country have also endorsed the Gorton-Kerrey approach. (See Attachment C for a complete list of organizations and resolutions endorsing the bill.)
Congressional action in this area is urgently needed -- existing wholesale markets cannot function effectively, and state restructuring plans cannot be fully implemented, without public power's full participation. The private use restrictions not only hamstring the ability of public power utilities to ensure that their communities receive the benefits that effective competition can provide, but also negatively impact the underlying market.In conclusion, The Bond Fairness and Protection Act, assures a fair and reasonable resolution of this problem, and it provides a resolution that respects the inherent rights of the units of local government we represent.
Concerns Raised About S. 386 are Unfounded
a. Transmission: Some have argued that S. 386, The Bond Fairness and Protection Act, will promote the building of transmission lines on a tax-exempt basis and that community owned electricity systems will finance all transmission facilities nationwide. Nothing is farther from the truth. It is a fundamentally flawed assumption that if community owned utilities have access to tax-exempt financing they will then build the entire national grid. This assumption does not recognize the current reality of the transmission system in this country or the difficulty of siting new lines or how and why state and local governments issue tax-exempt bonds. If the use of tax-exempt financing drove transmission construction decisions, it should be doing so now. So why doesn't public power own more that 8 or 9 percent of the existing transmission lines, and why do we have so many transmission constraints all over the country? Because utilities can't put wires anywhere they want and you don't run multiple sets of wires from the same generation source!
Even more significant is the fact that community owned utilities focus on the needs of their communities. They do not exist to engage in activities far removed from those communities. As the Mayor of Tallahassee, I can assure you that neither I nor the city council would permit our community owned utility to issue tax-exempt debt to finance transmission facilities in distant parts of the state, much less in distant parts of the country. Even though such debt might be legally separated from debt our city issued for other purposes, the credit worthiness of our city is affected by the security of the debt issued by our utility. We would not allow our credit rating to be adversely affected by actions of our local utility, especially if their actions would not directly benefit our own community. I can assure you local elected officials throughout the country certainly share this view.
b. Public Power Systems Can Still Issue Tax-Exempt Bonds For Future Generation Facilities: Not all community owned utilities have or expect to have a private use problem - and many will not take the "election" made available by the Gorton-Kerrey bill. Requiring all utilities to forego future tax-exempt financing would force many municipal systems -including systems in Florida, Alaska, Iowa and Delaware to name a few - to give up an essential tool of municipal government for no reason. In addition, a wide array of local government groups would strongly oppose the mandated denial of tax- exempt financing for what is a legitimate governmental function. The Gorton-Kerrey bill allows each local utility to determine which policy option is best for the community. In short, it promotes local control.
Moreover, the community owned utilities that issue tax-exempt bonds for new generation will still be subject to the stringent 10 percent private use test. This fact alone will inhibit, if not prohibit, them from building competitive generation facilities to sell power in the open market. Further, the construction of "new" merchant generation plants - plants constructed to sell power in the competitive generation market - is inherently risky. So as a local elected official, I would not want my community owned utility to take risks of this nature because in the end they could have an adverse effect on the overall credit rating and credit worthiness of my community. Opponents of the bill never highlight this fact.
c. Exceptions In The Bill Are Too Broad: It has been argued that this legislation provides large loopholes that make it unfair. One such area is the exemptions in the bill for electing utilities. It is correct that this legislation includes a limited number of minimal exceptions. However, they are targeted, narrow and necessary to transition into a competitive electricity marketplace. First, the bill allows for available refinancing of outstanding generation bonds - provided the term of the bond is not extended. Second, tax-exempt bonds can be issued for project renovations - provided that the generation capacity of the project is not significantly increased. Third, the bill allows tax-exempt financing for environmental compliance - an "exception" insisted upon by the bill's sponsors. (Note: private utilities have used tax-exempt pollution control bonds in the past and continue to refinance this debt; in addition, private utilities continue to have access to tax-exempt financing for fishery protection efforts at privately licensed hydropower projects.)
2. Clinton Administration's Legislation S. 1048
APPA would like to comment on the Clinton Administration's proposed private use solution. The Administration's proposal would eliminate all authority for state and localities to issue tax-exempt bonds in the future for generating and transmission facilities. Distribution facilities would still be eligible for bond financing. The Administration's proposal is commendable in that it eliminates the private use restrictions on outstanding tax-exempt electric utility debt and protects bondholders.
However, we oppose this proposal on two grounds. First, it provides no element of choice. All community owned electric systems would lose the ability to issue tax-exempt bonds regardless of whether they face private use problems. This approach represents a virtually unprecedented restriction on the ability of state and local governments to use tax-exempt financing for facilities that would not violate private use restrictions. APPA, along with other state and local organizations, oppose this aspect of the bill because of its federally intrusive approach.
Second, we find little justification for eliminating tax-exempt financing for transmission facilities. Transmission lines are not being deregulated; they are just becoming more open -- for all to use. Transmission and distribution facilities are expected to continue as regulated monopoly functions - it is not expected that multiple parties will seek to build competing systems. However, under FERC rules and under many state deregulation plans, these facilities will be available on an open access, common-carrier basis. Thus, any reduction in system costs resulting from tax-exempt financing will be available equally to all users of the system. Community owned systems will not receive a "competitive advantage." Moreover, providing local "wires" is a basic function of community owned utilities, and we are not willing to relinquish this basic community owned authority.3. H.R. 1253, The Private Sector Enhancement and Protection Act (Bad Policy)
The Private Sector Enhancement and Protection Act, H.R. 1253 would increase the rates of public power systems and eliminate them as competitors as the electric utility industry moves to a more competitive structure. H.R. 1253 does not provide relief on existing tax-exempt bonds, the primary reason legislation is needed. Moreover, with a number of exceptions, H.R. 1253 would deny public power utilities that sell outside their "qualified governmental service area" the use of tax-exempt financing and would require them to give up their income tax-exemption on sales outside their qualified governmental service area. Rep. English, the author of the bill, says that his bill would impact "less than 30 large, aggressive utilities that want to sell electric generation outside of their service territory!! Unfortunately the bill captures over 752 community owned utilities, and 450 of them own no generation.


Specifically, the bill as introduced would apply to all "governmental electric output facilities," with exceptions for:
- local distribution facilities within a utility's service area;
- small utilities (defined as those that provide electricity to less than 5,000 consumers and that derive at least 30 percent of average gross income from sales to residential customers during any three- calendar year period);
- sales to another governmental utility for resale only to ultimate consumers located within the purchasing utility's territory;
- sales pursuant to a pooling or swap arrangement, to a regional transmission group, or for emergency transfers;
- sales pursuant to an existing contract or a renewal of an existing contract provided the renewal is at the sole option of the purchaser;
- and de minimus sales (less than 10 percent of the utility's average sales during the preceding three calendar years).
First and foremost, the bill does not lift the private use restrictions on outstanding tax exempt debt or the problems associated with these restrictions.
This proposal has been constructed on an unsound foundation and is based on the faulty assumption that the "playing field" is tilted in favor of public power. The faulty assumption relies on incorrect information about the role public power plays in 2,000 communities across the country and lack of knowledge about community sovereignty over community owned bond issuance.
This sovereignty is based on our federalist system of government. In most countries, the central government exerts substantial if not total control over financial affairs of subordinate governments. In stark contrast, one of the distinguishing characteristics of our federalist system is the ability of state and local governments to issue debt on their own behalf to finance local infrastructure needs without federal intervention. Public power systems are eligible to issue tax-exempt bonds because they are entities of state and local government, and are owned and operated by the communities they serve.
Moreover, the proposal subjects public power communities to federal income taxation on revenue from electric sales made outside their existing service territory. Proposals that suggest income or other federal taxes be imposed on any unit of state and local government is also contrary to our federalist system wherein one level of government does not tax another.
Lastly, the proposal prohibits public power systems from using tax- exempt bonds for generation facilities if they sell power outside of their traditional service territory. At a time when states are requiring electric utilities to open their service territories and offer consumers a choice, H.R. 1253 pushes publicly owned utilities to build a fence around their communities--or suffer a significant tax penalty. In essence, it raises rates on consumers and hinders competition.
Vl. Nuclear Decommissioning Fund Tax Deduction/Cooperatives' 85/15 Tax Exemption Issue
APPA recognizes that certain provisions of the U.S. Tax Code affecting all electric utilities conflict with changes in the electric utility industry brought about by state restructuring initiatives. These provisions include: 1 .) contributions to nuclear decommissioning funds; 2.) the 85/15 rules affecting rural electric cooperatives tax exempt status, and 3.) the private use restrictions for public power. We believe it is imperative for Congress to provide tax equity between all sectors of the industry and urge Congress to address these issues simultaneously.
U.S. Tax Code provisions dealing with the tax treatment of contributions to nuclear decommissioning funds, and the tax-exempt status of rural electric coops who receive more that 15 percent of their electric revenue from non-members, are also affected by state restructuring legislation.
On the nuclear decommissioning tax issue, private investor-owned utility owners of nuclear power facilities may deduct authorized contributions to an approved decommissioning fund in calculating federal income taxes. The allowed amount of such deductions by law is the lesser of the state utility commission approved amount, or an amount approved by the Internal Revenue Service. Without this special provision, these contributions would not be deductible for income tax purposes until decommissioning expenses are actually incurred.
With state restructuring and deregulation, and the elimination of cost-of-service rates, the amount of state authorized contributions to decommissioning funds may be zero. And since federal law requires that deductions shall be the lesser of state or IRS allowed amounts, current contributions to such funds may no longer be deductible for federal income tax purposes. With respect to the tax-exempt status of rural electric cooperative, we understand that if more than 15 percent of the revenue come from other than members, all income from that year becomes taxable. State restructuring activities may force coops to exceed this threshold with regard to revenues received for the use of their transmission facilities, or for the sales of energy and capacity from their generation facilities.
These provisions of the U.S. Tax Code dealing with all segments of the electric utility industry need to be reconciled with changes in state laws so that the public policy objectives of these Tax Code provisions do not conflict with or create obstacles to the realization of the public policy objectives of newly enacted state electricity deregulation efforts. And all of these Tax Code provisions should be dealt with comprehensively.
The Clinton Administration's comprehensive electricity bill (S. 1048) includes a provision allowing for nuclear decommissioning funds to continue to be tax deductible. However later in the year broader legislation was introduced in both the House and the Senate, which included provisions to eliminate any tax liability associated with the transfer of such nuclear decommission funds in the event that nuclear facilities are sold. This broader legislation, The Nuclear Decommissioning Funds Clarification Act, H.R. 2038/S. 1308 currently has two co-sponsors in the Senate and 17 in the House.
Neither the provisions of the Administration's nuclear decommissioning bill (S. 1048) nor the more generous provisions of H.R. 2038/S. 1308 were included in this year's large tax cut bill, H.R. 2488, the Taxpayer Refund and Relief Act of 1999. Instead, that bill contained a "middle ground" provision that dealt with the nuclear decommissioning issue without providing excessively generous tax breaks to private utilities. The Senate Finance Committee did not include this provision in its version of the legislation, and instead agreed that all transactional electric utility tax issues should be considered simultaneously. APPA applauds the committee's decision.
The investor owned utilities, many of whom actively and aggressively oppose the enactment of the Bond Fairness and Protection Act, are now urging Congress to ignore the obvious fact that both the private use and nuclear decommissioning problems are the result of changes in the industry brought about by state restructuring legislation. They are urging Congress to enact the Nuclear Decommissioning Restructuring Act now, but to oppose the simultaneous enactment of the Bond Fairness and Protection Act. APPA endorses tax equity for all sectors of the industry.
VII. Tradable Tax Credit/Renewable Energy Production Incentive (REPI)/ Section 45, Renewable Production Tax Credit
Our primary concern is the private use issue and the need for a fair and reasonable resolution to this problem; however, APPA would like to comment for the record on another matter under jurisdiction of this committee. As you may or may not know, public power has a long- standing position in favor of the development and pursuit of renewable energy. Through our membership and committee process, we have developed principles on renewable energy policy that Congress should consider as it develops legislation promoting the restructuring of the electric utility industry or as it pursues air quality measures. Below is a representative sampling of our renewable energy principles followed by a discussion of a new renewable energy incentive that we would like this committee to contemplate.Principles
1. Public power recognizes the importance for the power generation sector to increase the use of renewable energy and other green technologies.


2. Such increased use can be best achieved through competitively neutral incentives that treat public power entities on an equivalent basis as non-public power entities.
3. Incentives should be structured to assist power generator entities to overcome existing barriers to increased renewable energy use and deployment of other green technologies.
4. Incentives should be structured to provide comparable benefits to each region of the country and allow power generator entities to be most responsive to the needs and preferences of their customers and the competitive market.
5. The incentive should be easy to administer and provide sufficient documentation for easy verification.
Elements of a Renewable Incentive Available to Not-for Profit Entities
APPA advocates the creation of tradable or refundable tax credits for use by energy producing entities unable to take advantage of existing renewable energy tax credits.
The option would make such credits available under the Treasury Department. Not-for profit entities would be eligible to claim a tax credit similar to the Section 45 credit. Specifically, the amount of credit is not effected by the amount of federal tax liability, rather, it would be calculated along the same guidelines as Section 45 projects. A participant would be given a refund based on a 1.5 cents (adjusted for inflation) per kWh of electricity generated from renewable energy projects.
Such a proposal would require an amendment to the Internal Revenue Code to provide a refundable credit against Federal taxes for tax- exempt, as well as taxable electric utilities that produce electricity from eligible renewable energy projects. A new Section 34 would be added to allow for-profit taxable utilities to claim a refund income tax credit while not-for profit entities could claim a refund payment by the Secretary of the Treasury in new Section 6431.
Refunds would be based on the number of kilowatt hours of electric energy generated by the facility through the use of solar, wind, geothermal and biomass as defined by the Public Utility Regulatory Policies Act (PURPA). The amount of such payments would be 1.5 cents per kilowatt hour, adjusted for inflation.
Entities eligible for this refund would be prohibited against "double dipping", that is, taking the benefits of this program together with any other tax or appropriated incentive program designed to promote renewables.
VIII. Conclusion
Federal tax policy must be reconciled with current energy policy. These changes must be done by Congress and are needed today. State and federal deregulation laws cannot be fully implemented without transitional tax relief, and the temporary IRS regulations do not address the entire problem nor do they do so on a permanent basis. In closing, I urge this committee to address these transitional tax issues simultaneously. I also urge you to do so expeditiously. The Bond Fairness and Protection Act is a fair bill and deserves this Committee's support. Thank you for your time.
END


LOAD-DATE: October 21, 1999