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: 1559 words
HEADLINE: PREPARED TESTIMONY OF
REPRESENTATIVE PHIL ENGLISH
BEFORE THE
SENATE COMMITTEE ON FINANCE
SUBCOMMITTEE ON LONG-TERM GROWTH AND DEBT REDUCTION
BODY:
Mr. Chairman and Members of the subcommittee, I want to thank you for the
opportunity to testify before you today on an issue that is extremely important
to me as a member of Congress and as a consumer. As you are aware, the
tax implication of electricity restructuring are significant. The Commonwealth of
Pennsylvania and 22 other states are introducing competition into electricity
markets. Decisions Congress make now will define electricity markets nationwide
and will determine to what extent consumers will benefit from such competition.
I believe that for electricity competition to work, the federal government
needs to address the artificial competitive advantages of complete exemption
from federal income
taxes and the use of
tax-exempt financing by government-owned utilities when competing against other
sellers of electricity. These
tax advantages may have had little practical impact when each
electric utility, whether privately or governmentally-owned, sold power within its own
service territory. However, as the Joint Committee on Taxation (JCS-20-97)
noted,
"if certain
electric service providers were permitted to retain their ability to receive
tax-exempt financing in a competitive marketplace, those providers might have a
considerable cost advantage over other competitors in a deregulated market." This would distort competition and grow government-owned utilities at the
expense of their taxpaying competitors.
I became interested in this issue when my constituents - specifically
shareholder-owned and rural
electric cooperative utilities - brought to my attention their concern about
government-owned utilities using
tax-exempt financing to lure away their existing customers. All
electric providers understand that changes need to be made from moving from a
monopolistic to a competitive environment. The question is what kind of change
should be made.
The issue before us now is how to integrate municipal utilities into the
competitive market in a way that advances -- not distorts -- competition.
Tax-free financing and exemption from Federal and state income
taxes pose no problem to
electric competition if, and only if, government-owned utilities limit the use of
tax-free financing and exemptions to their traditional service areas.
On March 24th, I introduced The Private Sector Enhancement and Taxpayer
Protection
Act of 1999, H.R. 1253, which addresses competitive concerns by prohibiting
tax-free bonds from being used to finance generation and transmission by
government utilities if such utilities choose to compete in open electricity
markets. If such utilities elect to do so, any sales outside of their
traditional service areas should be, like other commercial operations, subject
to federal income
tax.
This legislation will not affect government-owned utilities if they use
tax-exempt financing and other subsidies to provide power in their historic
service areas. Moreover, the legislation will not affect municipal utilities
that do not elect to sell generation or transmission in the new competitive
marketplace. Since the vast majority of government utilities, of which there
are more than 2,000, do not generate electricity, this bill will not affect
them. In addition, this legislation does not affect existing bonds or
current bondholders, federal authorities such as the Bonneville Power
Administration or rural
electric cooperatives. The Pennsylvania Rural
Electric Association and the Edison
Electric Institute have endorsed my bill. Copies of their endorsements follow my
testimony.
As noted by the Congressional Research Service in a June 10, 1999 memorandum,
Congress has engaged in an effort for 30 years to deny use of the federal
subsidy provided by
tax-exempt bonds for goods and services that do not satisfy its conception of
public services. Some of these efforts have been directed specifically at
public power. Concern regarding the spread of power subsidized with
tax-exempt bonds caused Congress, in the 1986
Tax Reform Act, to impose more severe restrictions on private use of bond proceeds
for government-owned utility property than it did for all
other eligible private activities. Congress' desire to further limit the spread
of electricity subsidized by
tax-exempt bonds has been demonstrated two times following the 1986 Act. First,
the Omnibus Budget Reconciliation Act of 1987 adopted a provision that
essentially treats as private- activity subject to the volume cap, any
tax-exempt bond issue for which 5% or more of the proceeds are used to acquire
output property owned by shareholder-owned utilities.
Second, the Omnibus Budget Reconciliation of 1996 further restricted
shareholder or independent power producers' use of bonds for
"local furnishing" to service territories that were using the bonds prior to January 1, 1997.
Those providers using the bonds at that time were grandfathered; additional
"local furnishers" were prohibited.
It is clear that three decades of
tax legislation has been directed to controlling the spread of the
tax-exempt
bond subsidy to areas not served historically by public power. Why would we
want to reverse course at this time? That's exactly what will happen if
provisions of S. 386/H.R. 721 are enacted into law. These bills expand the
ability of all government-owned utilities to issue new
tax-exempt debt to serve customers outside their traditional service territory.
These bills would allow public power to use facilities financed with
tax- exempt bonds to compete against private companies to sell power. It would
enable government utilities to grab control over the electricity transmission
system through the use of
"not-for-profit" transmission control companies -- a stated goal of public power. What
legitimate governmental purpose would be served under this type of financing
arrangement? I can't think of one. What it would do is provide special benefits
to public power customers
at the expense of all other taxpayers. As noted in a Congressional Research
Service study (98-528 E):
"the exclusion from federal income taxation of interest income on
tax-exempt bonds for public power is a subsidy that obscures rather than reveals
the true cost of electricity and redistributes income to public power customers
from the 75% of the country that purchases its
electric power through the private sector Allowing
tax-exempt bonds to be used for new output facilities after
deregulation of generation and retailing has been implemented would give public power a
competitive advantage over IOUs."
Congress should have deep public policy concerns with the direction H.R. 721
and S. 386 would take the electricity marketplace.
Electric generation and transmission is such a capital intensive industry that control
will naturally flow to those with the lowest cost of capital - in this case,
tax-exempt financing. Thus, by reducing private use restrictions, these bills
would increase government ownership of the nation's power grid at a time when
electricity markets throughout the world are being privatized. In fact, the
expansion of public power into competitive markets is already underway as a
result of temporary IRS regulations. Some examples:
"The Bond Buyer" on May 21, 1999 reported that the general manager of the Los Angeles
Department of Water and Power stated that LADWP has been the
"primary beneficiary" from California's competition and that it has
"made $80 million in net profits over the last 10 or 11 months selling in the
power exchange." They are able to do this because of a loophole in the regulations that provide
that short-term sales do not result in private business use.
The Energy Authority (TEA) (jointly owned by Jacksonville, Santee Cooper,
Municipal Authority of Georgia and Nebraska Public Power District (NPPD) has
operated a 24-hour trading floor since August 1997. This operation is
advantaged over other traders in that it does not have to pay Federal income
tax. Moreover, NPPD has stated that it joined The Energy Authority because it has
"excess capacity for sale" (NPPD Web page). Just last week
"The Bond Buyer" reported that The Energy Authority is
"apparently generating handsome profits for its four (municipal) owners. The
article reported that one official stated
"Let me just say that we have exceeded all our expectations in terms of what we
thought this organization could do. It has generated numbers many times larger
that our estimated net revenues when we went into this business in fiscal 1999,
which ended June 30, the agency sold about $6 million worth of energy outside
its
ordinary territory - as compared to $35 million in sales to its members. The
profit margin on the off-system trading was in excess of 8% of sales."
These examples speak for themselves: the IRS regulations and pending
tax legislation (H.R. 721/S.386) are about public power entities using
tax exemptions to make profits when competing head-to-head with taxpaying
businesses. That clearly is not in our nation's public policy interest.
Enactment of H.R. 721/S. 386 would further exacerbate what already is an
egregious and lucrative misuse of the
tax system.
I would ask the Senate Finance Committee to address this issue, and encourage
the adoption of legislation that moves competition forward, not backward. Thank
you for the opportunity to address you today.
END
LOAD-DATE: October 21, 1999