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Copyright 1999 Federal News Service, Inc.  
Federal News Service



LENGTH: 1559 words



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.

LOAD-DATE: October 21, 1999