LEXIS-NEXIS® Congressional Universe-Document
Federal News Service, Inc.
Federal News Service
OCTOBER 19, 1999, TUESDAY
SECTION: IN THE NEWS
LENGTH: 2665 words
HEADLINE: PREPARED STATEMENT OF
PRESIDENT AND CEO
NEBRASKA PUBLIC POWER DISTRICT
ON BEHALF OF THE LARGE PUBLIC POWER COUNCIL
SENATE FINANCE COMMITTEE
SUBCOMMITTEE ON LONG-TERM GROWTH AND DEBT REDUCTION
My name is William Mayben and I am President and CEO of the Nebraska Public
Power District. I am testifying today on behalf of the Large Public Power
"LPPC"). We appreciate the opportunity to participate in today's hearing on the
tax issues involved in electricity
deregulation, a process that will have a direct impact on virtually everyone in America.
The LPPC is an association of 21 of the largest state and locally- owned
electric utilities in the United States. LPPC's members directly and indirectly provide
reliable, high-quality, low-cost electricity to approximately 6.5 million
customers in both urban and rural settings. Like their approximately 2000
smaller public power counterparts throughout the country, LPPC's members are
not-for-profit entities committed to the people and communities they serve.
Today I would like to discuss some issues that arise in moving from a regulated
to a deregulated market that we believe need to be addressed to treat public
power fairly in the deregulating electricity market.
Private Use Relief
Public power systems, like other businesses, need access to capital to make the
investments necessary to continue providing efficient dependable service to
their customers. However, unlike our investor- owned utility counterparts,
public entities cannot issue stock. Therefore, like every other State or local
government entity, public power utilities have no practical source of external
financing other than the municipal bond markets.
In exchange for the right to issue
tax-exempt bonds to investors, public power systems must operate under a
strictregime of Federal
tax rules governing their ability to issue such debt. These rules generally limit
private business use of
tax-exempt bond financed facilities ("private use rules"). The principal test for private use under the present law provides that no
more than the lesser of 10 percent of the bond proceeds or $15 million per
facility may be used by a private business. Public power companies have relied
tax- exempt bond market for capital and fully complied with the private use rules
at the time bonds were issued and continue to do so throughout the terms of
In the regulated electricity market of the past, the private use rules were
cumbersome but manageable. However, with the
Energy Policy Act of 1992, Congress began to significantly alter the regulated
monopoly by introducing the element of competition into the wholesale
marketplace. The 1992 legislation along with the Federal Energy Regulatory
Commission (FERC) Orders 888 and 889 have promoted an open transmission network
allowing greater choice of wholesale power supply. While open transmission
continues to evolve through developments in the marketplace and legislative and
regulatory initiatives, the private-use restrictions are a factor impeding
attainment of fully open transmission. This stifles a competitive wholesale
marketplace as contemplated by Congress in 1992.
In California approximately 30% of the transmission is owned by public power
entities. Federal private-use restrictions are in direct conflict with federal
energy policy and limit use of the public power transmission. This leaves a
major void in the
California Independent System Operator (ISO).
In addition to wholesale
deregulation many states are implementing retail choice. With greater competition,
publicly-owned utilities face some difficult choices under today's private use
rules. In a deregulated competitive environment, large private business
customers will seek and obtain specially tailored contracts to meet their
special electricity needs, just as they do in buying any product.1 If the
private use rules in effect today remain intact, a public power utility may be
prevented from offering its customers such a contract, even to private
businesses in its own service territory that it has been serving for decades.
If a public power system loses customers in a competitive marketplace, as a
result of the private use rules, the utility may be unable to
re- market the generating capacity it had built to serve those lost customers.
That excess capacity may become idle and unproductive for the economy as a
result of the private use rules. The inability to sell the excess capacity will
result in higher costs for the remaining customers, precipitating a further
erosion of the public utility's customer base.
Investors in public power
tax-exempt bonds may face significant penalties if public power systems seek to
retain existing customers by negotiating contracts and marketing excess
capacity. Such actions could constitute a violation of the private use rules,
and thus render the interest on the utility's outstanding bonds taxable. More
than $70 billion of
tax-exempt debt has been issued to finance generation, transmission and
distribution facilities. Investors rely on the ability of public power systems
to repay them
through the sale of power from the assets they financed and to maintain the
tax-exempt status of those bonds. Failure to address private use issues places
these investments in jeopardy. A downgrading of public power bonds could impact
other segments of the municipal bond market upon which states, cities, and
towns rely to finance essential infrastructure. Uncertainty in these markets
could lead to higher borrowing costs, which will ultimately be passed on to
citizens and customers.
The only alternative for public power systems is compliance with the IRS change
of use rules, which will also result in significantly higher costs to customers.
In effect, publicly-owned utilities face the prospect of violating the private
use rules and consequently higher costs, or walling off their customers from
competition: in each case consumers would experience higher rates - the precise
opposite of what
deregulation is supposed to achieve. The consumer
can only lose when this happens.
Updating The Private Use Rules
For the reasons that I have just outlined, the LPPC believes that the private
use rules urgently need to be updated to adapt to the emerging deregulated
electricity marketplace.Our suggested modifications are best embodied in
legislation introduced by Senators Slade Gorton and Bob Kerrey - S. 386 the
Bond Fairness and Protection Act of 1999. This legislation has attracted the
bipartisan support of 29 cosponsors to date. The bill's cosponsors include six
members of the Finance Committee: Senators Jeffords; Thompson; Grassley;
Moynihan; Hatch; and Robb. Congressmen J.D. Hayworth of Arizona and Robert
Matsui of California have introduced a companion bill (H.R. 721) in the House
that enjoys bipartisan support as well.
The Gorton/Kerrey legislation would provide publiclyowned utilities with an
option: they can continue to issue
for generation, transmission and distribution facilities under a set of
private-use rules clarified to provide a modest set of changes to deal with
deregulation; or they can elect to generally forego the ability to issue
tax-exempt debt for new generation facilities, but with a grandfather of their
existing taxexempt bonds from the adverse application of the private use rules.
The clarifications to the private use rules proposed in the legislation are
intended to accommodate the reality of operating in a deregulated market.
Specifically, private use would not include certain
"permitted open access transactions." The bill lists the following activities as permitted open access transactions:
(1) providing open access transmission service consistent with FERC Order No.
888 or with state open transmission access rules'; (2) joining a FERC-approved
Independent System Operator (ISO), Regional Transmission Organization (RTO), power exchange, or providing
service in accordance with an ISO, RTO, or power exchange tariff; (3) providing
open access distribution services to competing retail sellers of electricity;
or (4) if open transmission or distribution services are offered, contracting
for sales of power at non-tariff rates with on-system purchasers or existing
Only the last of these clarifications is new and would merely permit
publicly-owned utilities to enter into longterm contracts with existing
customers, a change that is essential if these utilities are to compete with
electric providers for these customers. In fact, this change would merely give
publicly-owned utilities the same ability to contract with their customers as
"two county" utilities that benefit from
tax-exempt bonds have. Moreover, given the changing nature of how electricity is
a publicly-owned utility should not have to give up the ability to issue
tax-exempt bonds merely in order to contract or to provide service to its historic
The Bond Fairness and Protection Act of 1999 has attracted the support of a
diverse group of organizations including the Independent Energy Producers and
the National League of Cities. Similarly, the Government Finance Officers
Association has endorsed the need for private use relief of the type contained
in S. 386. While the LPPC believes that the Gorton/Kerrey legislation
represents a reasonable solution to the obstacles public power faces in the
deregulation process, we are by no means precluding negotiated changes to the specifics of
the legislation in order to arrive at a consensus. The LPPC would be a willing
and enthusiastic participant in any such effort.
Attached to this testimony are letters of support for the Gorton/Kerrey
bill from various industry participants. Administration Efforts At Private Use
The Administration has recognized the need for private use relief and has taken
some steps to provide it. In January 1998, the Treasury and the Internal
Revenue Service ("IRS") issued temporary and proposed regulations relating to the private use rules
for generation, transmission, and distribution of electricity with facilities
tax-exempt bonds. These rules provide limited relief, within the context of
present law, from the application of the private use rules in a deregulated
environment. Because these regulations are temporary, they will expire three
years after publication unless the IRS finalizes or reissues them.
The Administration also included revisions to the
tax rules governing private use of
electric facilities in its FY 2000 Budget submission. Limited private use relief
provisions were also
included in the Administration's comprehensive
deregulation plan submitted to Congress in April.
The Administration proposal would bar the use of taxexempt bonds for new
electric generation andtransmission. Distribution facilities could continue to be
tax-exempt bonds subject to the existing private use rules. Second, the
Administration proposal would grandfather existing
tax-exempt bonds from private use rules if the bonds were used to finance: (1)
transmission facilities the private use of which results from a FERC order
requiring non- discretionary open access to those facilities; or (2) generation
or distribution facilities the private use of which results from retail
competition or a contract effective after implementation of retail competition.
The proposal would permit current, but not advance, refunding of bonds issued
before date of enactment of the Administration's Comprehensive Electricity
The LPPC applauds the Administration's
recognition of the need to address private use rule problems and its efforts to
afford publicly- owned utilities some opportunity to participate in a
deregulated market. However, neither the temporary regulations nor the
proposals contained in the Administration's
deregulation plan address some other serious problems associated with private use rules or
offers the flexibility that S. 386 provides which would allow public power to
continue to be viable in the future. Further, as noted above, the temporary
regulations, unless finalized, will expire in January of 2001.
In this testimony I have tried to summarize the changes to present
tax law that the LPPC believes are necessary as part of a deregulated environment.
We also are acutely aware that we are not the only stakeholders involved in the
deregulation debate. Current providers of electricity to America include not only public
power systems but also
investor-owned utilities and
electric cooperatives. Each of these groups has specific requests that they deem
imperative to ensure their viability in a deregulated environment.
For example, in the investor-owned sector, the
tax consequence of nuclear decommissioning is a troublesome problem for various
utilities with nuclear facilities throughout the nation. These nuclear plants
were constructed during an era of regulated service areas when the customer
base was established and cost-effectiveness was less relevant. Now, as various
states enter into anopen electricity market, these facilities are being
purchased or taken offline. The costs and other
tax issues associated with this decommissioning are substantial. The utilities
that own the nuclear plants in question have requested help in the form of
tax relief with respect to the costs of decommissioning these units as well as the
tax effects of transferring funds for nuclear decommissioning.
Both the private use and nuclear
decommissioning problems grow from the move toward
deregulation. Clearly, all sectors of the industry require some measure of relief because of
the move to a more competitive marketplace. Further, addressing the problems of
any one segment of the market while ignoring the others could provide an unfair
advantage for one type of entity over the others.
Therefore, the consideration of the menu of problems caused by the transition
to a deregulated electricity market should be done simultaneously to prevent
granting one segment of the market a competitive edge over the others. In fact,
the Administration has recognized the essential nature of this
"linkage" by including both limited private use relief and nuclear decommissioning
proposals in its
This linkage however was broken with the passage of The Taxpayer Refund and
Relief Act of 1999, (H.R. 2488) this summer that included only nuclear
decommissioning relief. While the veto of the
bill has rendered the issue moot for now, there are certain to be other
attempts to legislate in this area in the future.
We believe it is essential that the private use rule modifications for public
power systems move simultaneously with nuclear decommissioning
tax relief for investor-owned utilities and other transition relief for coops.
This would help ensure fairness for everyone that is essential to achieving the
goals of electricity
deregulation: affordable and reliable electricity for all.
Again, Mr. Chairman we appreciate this opportunity to present our views on the
tax issues involved in electricity
deregulation. We urge Congress to provide much needed relief from the clear conflict between
application of private use restrictions of the Internal Revenue Code to
publicly-owned utilities and the federal
deregulation ofwholesale energy supply. As you know, the marketplace is not waiting for
legislation to further deregulate at the retail level; it is happening now in
numerous states and localities around the country. But only Congress can fix
tax rules that are in conflict with federal energy policy and increasingly with
state energy policy.
We stand ready to offer our assistance and cooperation to the Committee in any
way possible as you consider the
tax issues related to electricity
1 In the state of Florida, for example, nearly half of the total electricity
sales of the state's 32 municipal utilities come from only about 10% of their
LOAD-DATE: October 21, 1999