LEXIS-NEXIS® Congressional Universe-Document
LEXIS-NEXIS® Congressional
Copyright 1999
Federal News Service, Inc.
Federal News Service
OCTOBER 19, 1999, TUESDAY
SECTION: IN THE NEWS
LENGTH: 3788 words
HEADLINE: PREPARED STATEMENT OF
THOMAS R. KUHN
PRESIDENT, THE EDISON ELECTRIC INSTITUTE
BEFORE THE
SENATE COMMITTEE ON FINANCE
SUBCOMMITTEE ON LONG-TERM GROWTH AND DEBT REDUCTION
SUBJECT - EXPANSION OF MUNICIPAL SUBSIDIES
RELATING TO ELECTRIC RESTRUCTURING
BODY:
Mr. Chairman and members of the Subcommittee, I am Thomas R. Kuhn, President of
the Edison
Electric Institute (EEI). EEI is the association of U.S. shareholder-owned
electric utilities, their affiliates and associates worldwide. EEI's members serve
approximately 75% of the nation's
electric customers.
I appreciate the opportunity to appear before this Subcommittee today to
address one of the most important aspects of
electric restructuring. Specifically, I refer to creating a level playing field where
all providers of electricity in competitive markets would have equal
tax and financing opportunities. We commend the Chairman for holding this heating
so that an adequate record can be made of this key component of the
electric restructuring debate.
ELECTRIC RESTRUCTURING IN THE STATES
The pace of electricity restructuring in the states is far more intense than
occurred in either the telecommunications or natural gas industries. Just three
years ago the first state adopted a retail competition plan. Today, roughly 63
percent of all American electricity consumers live in the twenty-three states
that have approved customer choice programs. The remaining states and the
District of Columbia are considering reforms to retail
electric service.Significantly, Mr. Chairman, in those 23 states that have embraced
electric restructuring, nearly all have permitted government- owned municipal utilities
to
"opt out" of compliance with the state law or
"opt in" to competition.., at their own discretion. To date, virtually all municipal
electric utilities have chosen not to permit their customers to benefit from
competition. However, many of these government-owned utilities are aggressively
marketing to customers outside their service territory. Further, Mr. Chairman,
their marketing activities are subsidized by the federal government through the
use of
tax-exempt financing and income
tax exemptions. We believe there is no legitimate justification for the use of
these
tax benefits outside of a government-owned utilities' service territory.
I would submit to members of this subcommittee that these actions by
government-owned utilities are unfair to their own customers, unfair to other
electricity suppliers in the competitive marketplace and unfair to American
taxpayers who are subsidizing this activity.
SCOPE OF REGULATION
It is important to remember what will be regulated and what will not be in
competitive electricity markets. Electricity suppliers will compete to sell
power and energy services to consumers. However, the
"wires" side of the electricity business - the distribution lines that deliver power
to homes and businesses will remain regulated for the foreseeable future.
One of the keys to competitive markets is the existence of competitors.
Thousands of suppliers currently participate in electricity markets, including
over 2,000 municipal
electric utilities, more than 900
electric cooperatives, and roughly 200 shareholder-owned utilities. There also are
morethan 4,000 non-utility generation projects that currently sell their power
to utilities, as well as 650 power marketers. Plans for the construction of new
merchant generating facilities representing over 90,000 megawatts of capacity
are underway in states from coast to coast. As electricity markets become more
competitive, many of these suppliers will be competing headto-head to provide
electricity and a variety of services to consumers.
Most electricity suppliers will move power over distribution and transmission
systems that remain regulated. FERC regulates the interstate high-voltage wires
of shareholder-owned utilities to ensure guaranteed open
access for all suppliers and to set fair and reasonable charges for
transmission services. In 1996, FERC, in its Order 888, ordered
shareholder-owned utilities, which own about 75 percent of the country's
transmission systems, to open up their transmission lines to all suppliers in
the wholesale market. This means that any wholesale power supplier can use
transmission lines owned by shareholder-owned utilities at the same price and
terms that those utilities charge themselves to ship power.
Unlike shareholder-owned utilities, government-owned utilities (many of whom
are municipalities) are not subject to any rate regulation, (or to the full
panalopy of FERC's open access rules.) Admittedly, this issue is not within the
jurisdiction of the Finance Committee. It must be addressed by the Energy and
Natural Resources Committee, however, if true competition is tO occur.TAX SUBSIDIES
IN A COMPETITIVE MARKET
As a frame of reference, I think it would be helpful to review the current
state of the law as it relates to subsidies in a competitive environment. Mr.
Chairman, I believe we can make this very simple.., shareholder-owned utilities
pay large amounts of
taxes each year (the highest effective
tax rate of virtually any industry). Government- owned utilities pay no income
tax, are permitted to use
tax-exempt financing (a 2% interest rate differential in a competitive market
where price margins are expected to be less than 1%), receive preferential
access to low cost federally-produced hydro power and are exempt from numerous
other federal and state
taxes. Let me explain by example:
Under current law, the following is illustrative.
1) Shareholder-Owned Utilities $9.88
billion (annual) Federal Income
Taxes Paid (1995)
2) Government-Owned Municipals $0 (annual) Federal Income
Taxes Paid .(1995)
3) Government-Owned (Municipals) Subsidies Received (1995)
A. Federal Preference Power $1.86 billion B. Cost of Capital (Tax-Exempt Financing) $1.32 billion C. Federal Income
Tax Exemption $2.26 billion D. Other
Taxes $0.79 billion $6.23 billion (annual)
BACKGROUND ON THE PRIVATE USE RULES
Mr. Chairman, the
"private use" rules of current law have been the subject of much debate over the past 30
years. As we move forward in considering the appropriate
tax rules for the
electric restructuring debate, it may be useful to consider the Congressional rationale
for imposing limitations on
tax-exempt financing.
Since the late 1960s, and particularly
since the
Tax Reform Act of 1986 ("TRA"), Congress repeatedly has attempted to restrict the use of
tax-exempt bonds to financing legitimate governmental purposes.
In the General Explanation of the
Tax Reform Act of 1986 (TRA), HR.3838, at 1151 (May 4, 1987), the Joint Committee
on Taxation stated that
"(t)o the extent possible, Congress desired to restrict
tax- exempt financing for private activities without affecting the ability of
State and local governments to issue bonds for traditional governmental
purposes." The same types of impacts described by the Joint Committee on Taxation (too
great a volume of
tax-exempt debt, misallocation of societal resources and lost revenue to the
Federal Treasury) will result if governmental utilities are allowed to compete
with Federal subsidies in a competitive power market.
That Congress has specifically and
repeatedly acted to limit the expansion of governmental utilities use of
tax-exempt bonds. The TRA of 1986 contains special rules, particularly the $15
million limitation on private use, restricting the use of
tax-exempt bonds by governmental utilities. Additional special restrictions on the
growth of governmental utilities were imposed by the Omnibus Budget
Reconciliation Act of 1987. These rules specifically limited the use of
tax-exempt bonds to finance the expansion of governmental utilities. As the
rationale for these new limitations, the House Ways and Means Committee stated
that:
"The committee is aware of recent actions taken by several State and local
governments to acquire assets of or interests in existing
electric and gas generating and transmission systems. Financing the purchase of such
investor-owned facilities with
tax-exempt bonds effectively substitutes
tax-exempt securities for taxable securities. As such,
any benefit that consumers may gain from using
tax-exempt financing rather than taxable financing comes at the expense of reduced
Federal Government revenues. Since such use of taxexempt financing is
undertaken at the discretion of the State or local government, it effectively
removes control of Federal Government revenues from Congress. The cost to the
Federal Government in terms of revenue foregone could be substantial if this
activity were allowed to continue and grow. Therefore, consistent with its
actions in recent years to limit the Federal revenue loss from
tax-exempt bonds, the committee believes it is important to restrict the use of
tax-exempt bonds for the purchase of privately-owned output facilities."
IRS REGULATIONS
As you know Mr. Chairman, California was the first state to enact
electric restructuring legislation. Prior to that event, government- owned (municipal)
utilities were active in communicating with the IRS and Treasury that they
could not
enter competitive markets without violating the
"private use" rules of the Internal Revenue Code. To protect these government-owned
utilities who wished to enter into competition, the IRS issued generous
temporary regulations which exempted municipal utilities from violating the
private use rules if:
- they joined an ISO or other aggregator of
electric power;
- they made
"short-term" sales (extending up to 180 days) outside their service territory, including to
power aggregators like the California Power Exchange. They made sales for up to
3 years outside their service territory to replace
"lost load" to competition.
As the Committee moves ahead in its consideration of appropriate
tax and financing options available to the various market participants, I would
urge you to keep in mind that the public power community has already been
granted extensive regulatory relief from current law private use rules
by the IRS.
I also urge the Committee to take note of the action taken by the municipal
utilities in Califomia after the IRS issued regulations to protect them if they
entered into competition. Specifically, they
"opted-out" (refused to join the California restructuring plan). The publication Bond
Buyer reported on May 21, 1999 that David Freeman, general manager was:
"... not sure whether LADWP will let competitors enter its market in the next 10
years, and added that so far his utility has been the 'primary beneficiary'
from California's competition, making millions of dollars in profits by selling
power to other utilities."It quoted, Mr. Freeman as saying:
"We have made $80 million in net profits (emphasis added) over the last 10 or 11
months selling into the power exchange. I go to bed every night and thank the
Lord for
competition because it is enriching us..."
Similarly, Seattle Light has entered the California competitive market by
signing contracts for the sale of power to Nordstrom Department stores in
California. Just like the situation with LADWP, no other competitor has the
reciprocal right to sell into Seattle Light's service territory.
Currently, there are 31 large, aggressive government-owned utilities with over
13,000 MW of excess power to sell. That's more than the total capacity of any
one of 28 individual states. It is reasonable to expect these government-owned
utilities will continue making commercial sales outside their service
territories, taking advantage of
tax subsidies which were designed to help them serve customers within their
service territories.
THE ROLE OF PUBLIC POWER The public power community has been very direct in
announcing its plans for expanding the role government-subsidized power in the
electric
restructuring debate. Specifically, they recommend a government-owned and
controlled transmission system for the United States. This positionwas set
forward by the Large Public Power Council (LPPC) in December 1998 when it
published
""Uncrossing the Wires - Transmission in a Restructured Market." The executive summary to this document states:
"The clear conclusion is that the interests of all those concerned - FERC,
participants in the generation market, members of the transmission grid and,
most importantly, consumers-would be best served by a not-for-profit TransCo."
We disagree with the conclusion, but public power's objective is clear -
government ownership of all transmission.
Legislation sponsored by Senator Gorton (S.386) would allow municipal utilities
to finance new transmission facilities with
tax-exempt debt. If public power is successful in its efforts, our transmission
system in the future would become
a governmental grid financed with
tax-free dollars. The Federal Treasury would lose money as taxpaying entities are
displaced by taxexempt ones. The goal of
deregulation is competition, not more governmental involvement in the
electric business.
Mr. Chairman, it is the opinion of EEI that a government-owned and controlled
transmission system is not consistent with the creation of a fair and equitable
system for bringing competition to America's
electric consumers. We urge you to reject public power's efforts in this area.
CURRENT LEGISLATION
I. As noted above, the public power community is already benefiting from
electric restructuring in the states as well as the current IRS regulations on private
use. To their credit, they have been successful in urging members of the Senate
and House to support even more sweeping legislation (S.386, Gorton and H.R.721,
Hayworth) to further enhance their
tax and
financing advantages over other market participants who pay
taxes and are generally unable to issue
tax- exempt debt. These identical bills, if enacted into law, would provide public
power with a vast new ability to exploit their
tax and financing advantages over
tax-paying entities in the new competitive market. Their ability to use
tax-exempt debt alone provides them with over a 25% financing advantage over
tax- paying entities, an advantage unrelated to competitive efficiencies.
As we move forward with
electric restructuring legislation, I believe our objective should be to enhance
competition for all
electric consumers, not just the few served by public power. S.386 would have the
effect of growing government, contrary to the goal of creating a competitive
marketplace. The bill would expand the ability of government-owned utilities to
finance transmission facilities with
tax exempt-bonds. S.386, contrary to its stated purpose, also expands the ability
of many government-owned utilities to issue new
tax-exempt bonds for generation and transmission facilities by providing new
exceptions from the private business use rules. The bill allows
government-owned utilities to sell for profit outside their existing boundaries
while allowing these utilities to continue to issue new
tax-exempt debt and not pay income
tax on profits from sales in these markets. While we have no problem competing
with public power on a fair andequitable basis, we believe that Federal
subsidies intended to benefit a munis' own service territory customers should
not be used outside their boundaries to create unfair economic distortions.
Moreover this legislation broadens the role of government in the
electric industry, contrary to the goal of
movement to a more competitive marketplace.
Many claims have been made in support of S.386. Let me address just a few:
Claim: S.386 is a compromise.
Fact: The bill is not a compromise. It only serves the interests of public
power by providing substantial loopholes allowing government- owned utilities
to sell for profit in distant markets currently served by taxpaying,
shareholder-owned
electric utilities. The bill allows these government-owned utilities to continue to
issue new
tax-exempt debt and not pay income
tax on profits from sales in distant markets.
Claim: Without passage of S.386, public power customers may be denied access to
competitive services and prices, and government-owned utilities would be unable
to replace lost customers.
Fact: This contention is simply
wrong. IRS regulations issued last year specifically allow government-owned
utilities to replace lost customers without losing
tax-exempt financing.
Many government-owned utilities, which were established to serve their local
communities, already are venturing beyond their boundaries to attract valuable
commercial and industrial customers - and they are using their considerable
tax advantages and other federal subsidies to do it. For example, The Energy
Authority (owned by the city of Jacksonville, Florida, Santee Cooper in South
Carolina and the Municipal
Electric Authority of Georgia) has operated a 24-hour trading floor since August, 1997.
The Nebraska Public Power District (NPPD) joined the Energy Authority to
enhance their marketing capabilities. NPPD has publicly stated that their
reason for joining was because
"they have excess capacity for sale."
If government-owned utilities are concerned about replacing lost customers, why
do they
need to build new generating facilities? For example, Santee Cooper, which
testified before Congress that public power needs to be able to replace lost
customers, recently announced plans to construct a $275 million
tax-free bond-financed power plant.
Claim: Government-owned utilities are more closely regulated than any other
type of utility. Fact: The fact is, however, that government-owned utilities
regulate themselves - they are not regulated by independent agencies. In some
cases they may be regulated by PUCs for environmental compliance and other
federal or state statutes, but they set their own transmission and distribution
rates, which are exempt from FERC and, generally, state PUC approval Hence,
they can erect barriers to their customers by charging high rates for
transmission or distribution access by other suppliers of electricity.Claim:
S.386 is
a reasonable approach because a government-owned utility will no longer be able
to issue
tax-exempt debt for new generation facilities if it does not abide by current law
private use restrictions.
Fact: The bill contains numerous loopholes that would allow government-owned
utilities to sell substantial power outside its service territory and still use
new,
tax-exempt bonds for generation facilities.
Mr. Chairman, I could go on about the inequities of S.386. Perhaps it would be
more useful, however, if I summarize our concerns with this legislation.
Government-owned utilities would be able to
"cherry-pick" industrial customers of other generators of electricity. The bill would expand
the current law exceptions to private business use for
tax-exempt bonds without imposing requirements that the lines financed with the
tax-exempt debt be
located within the service territory of the government-owned utility.
There is no requirement that the government-owned utility open its distribution
system to competition to obtain the relief in the bill which enables it to
compete outside it's boundaries.There is no requirement for government-owned
utilities to submit to FERC jurisdiction. Thus, customers of the
government-owned utility could be
"walled-off" from competition through manipulation of transmission pricing or access rules
(preventing other suppliers of electricity from competitively bidding for
governmentowned utility customers).
New transmission and new distribution could be financed with
tax- exempt debt without regard to location, enabling public power to take over
all new transmission.
Government-owned utilities could compete for new customers outside their
service territory and avoid paying income
tax.., a large, unjustified competitive advantage.
II. More balanced proposals are
available that integrate government- owned utilities into competitive
electricity markets without distorting competition or growing government.
Government-owned utilities can best be integrated into competitive markets by
applying to them the same
tax and finance rules as applied to all other market participants. This principle
is embodied in H.R. 1253, introduced by Rep. Philip English (R-PA). H.R. 1253
would require government-owned utilities that sell power in competitive markets
to finance new generation and transmission facilities with taxable bonds, and
to pay income
taxes on profits from those sales, just like all other competitive suppliers. The
bill would have no impact on existing
tax-exempt bonds or current bondholders. In addition, the 2,200 plusmunicipal
electric utilities that continue to serve their traditional customers would not be
impacted by the legislation.
Another approach is
found in the Administration's electricity restructuring proposal embodied in S.
1047 and the accompanying
tax provisions of S. 1048, which have been introduced by request by Chairman
Murkowski (R-AK) and Senator Jeff Bingaman (DoNM). These proposals exempt
municipally-owned utilities from private use rules for existing bonds while, at
the same time, placing them on an equal footing with other electricity
suppliers for issuing debt in the future, as long as they open their systems to
competition. That is, current bonds would continue to remain
tax-free, but government-owned utilities would not be able to issue
tax-free bonds for the construction of generation or transmission facilities in
the future.
The Administration's approach also offers a balance of interests and a
compromise means of integrating government-owned utilities into competitive
markets. It reduces distortion of
competition caused by subsidies, allows municipals who wish to compete to do so
using financing techniques comparable to those of other competitive suppliers,
and allows competition to move forward for the benefit of real choice for
customers.
CONCLUSION
Mr. Chairman, the expansion of municipal subsidies in the newly competitive
electricity market is a difficult issue to address. I pledge to you that EEI is
prepared to continue our discussionswith the public power community to seek a
reasonable compromise to this difficult issue. We believe such discussions are
more beneficial to all
electric consumers than passage of punitive legislation, such as S.386, which only
benefits one stakeholder in the electricity debate.
There is a legitimate role for public power in the electricity marketplace. If
legislation is needed to deal with the
tax and financing elements of
electric restructuring, it should not harm the 2,200 plus government-owned (municipal) utilities that want to serve their customers. Nor should it,
however, provide unfair
tax rules which only benefit large, aggressive government-owned utilities who want
to sell excess power beyond their service territory. A reasonable compromise
should be found. S.386 is not such a compromise.
END
LOAD-DATE: October 21, 1999