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Copyright 1999 Federal News Service, Inc.  
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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.
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.
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)
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."
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.
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.
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.

LOAD-DATE: October 21, 1999