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Copyright 1999 Federal News Service, Inc.  
Federal News Service



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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 Council (the "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 on the 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 those bonds.
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 tax-exempt bonds 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 offsystem purchasers.
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 other electric providers for these customers. In fact, this change would merely give publicly-owned utilities the same ability to contract with their customers as the investor-owned "two county" utilities that benefit from tax-exempt bonds have. Moreover, given the changing nature of how electricity is being sold, 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 customers.
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 Relief
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 financed with 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 tax-exempt bond-financed 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 facilities for electric generation andtransmission. Distribution facilities could continue to be financed with 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 Competition Plan.
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.
Comprehensive Deregulation Legislation
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 deregulation plan.
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 tax 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 Federal 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 the Federal 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 deregulation.
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 customers.

LOAD-DATE: October 21, 1999