Mr. GORTON. Mr. President, last Saturday, together with my colleagues Senators KERRY, JEFFORDS, HOLLINGS, THURMOND, HARKIN, MURRAY, SMITH of Oregon, JOHNSON, and WYDEN. I introduced ``The Bond Fairness and Protection Act of 1999.'' This is a bi-partisan compromise approach to legislation addressing the tax consequences of electricity restructuring on tax-exempt bonds that are issued by municipally-owned or state-owned utilities (often referred to as ``publicly-owned'' utilities) for the generation, transmission, and distribution of electricity.
As my colleagues may recall, last Congress I introduced a substantially similar bill, S. 2182, with eleven cosponsors from both sides of the aisle. Unfortunately, the 105th Congress did not have an opportunity to address this or other proposals on electricity restructuring. This year we have worked to simplify and refine last year's legislation in response to thoughtful comments we received last year, and in an effort to facilitate timely consideration of the legislation in this Congress.
Despite the lack of Federal legislation in this policy area, 18 states have already gone forward and begun to allow retail market choice for electricity consumers at the state and local level. The era of retail competition has already started both for publicly-owned and investor-owned utilities operating in these states.
Until recently, publicly-owned utilities have been able to operate under a strict regime of Federal tax rules governing their ability to issue tax-exempt bonds. These rules were enacted in an era when decision makers did not contemplate retail or wholesale electricity competition. These so-called ``private use'' rules limit the amount of electricity that publicly-owned utilities may sell to private entities through facilities that are financed with tax-exempt bonds. For years, the private use rules were cumbersome but manageable. As states move to restructure the electricity industry however, the private use rules were threatening many public power communities with significant financial penalties as they adjust to the changing marketplace. In effect, the rules are forcing publicly-owned utilities to face the prospects of violating the private use rules, or walling off their customers from competition. In either case, this will raise rates for consumers--the precise opposite of what restructuring is intended to achieve. The consumer can only lose when the marketplace operates in this inefficient manner.
The legislation that I am introducing today would protect all consumers by grandfathering outstanding tax-exempt bonds, but only if the issuing municipality or state utility elects to terminate permanently its ability to issue tax-exempt debt to build new generating facilities. Such an election would not affect transmission and distributions facilities, which generally would still be regulated under most restructuring proposals or frameworks. Publicly-owned utilities that do not make this irrevocable election would continue to operate under a clarified version of exiting law, thus remaining subject to the private use rules.
This legislation attempts to balance and be fair to the interests of all stakeholders in electricity restructuring while keeping the interest of the consumer paramount. It strikes a compromise between publicly-owned utilities and investor-owned utilities by providing an option for publicly-owned utilities to address the problem of how to comply with private use restriction in a restructured marketplace, an option that involves significant trade-offs for the publicly-owned utilities that seek to utilize it. For investor-owned utilities, requiring publicly-owned utilities to forego the ability to issue tax-exempt debt for new generation facilities should mitigate any potential or perceived competitive advantage in the new competitive world. At the same time, it honors promises made to bondholders under contract and existing tax law, thereby avoiding the inequitable consequence of applying old rules to the newly-emerging competitive world of electricity.
In addition, for those concerned about the environment, it provides incentives to deliver electricity efficiently through open access and retail
Mr. President, we plan to work with all interested parties, and most importantly American consumers, to ensure that we develop the fairest and most reasonable solution to this complex problem. We want electricity restructuring to be a good deal for everyone involved, especially the American consumer who deserves the lower electric bills that a competitive marketplace should provide. I believe this legislation addresses all of these concerns and promotes fair competition in the electricity industry. I urge my colleagues to join me in co-sponsoring this legislation.
Mr. President, I ask that the text of the bill, and an explanatory memorandum be printed in the RECORD.
The material follows:
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Bond Fairness and Protection Act of 1999''.
SEC. 2. TAX-EXEMPT BOND FINANCING OF CERTAIN ELECTRIC FACILITIES.
(a) PERMITTED OPEN ACCESS TRANSACTIONS NOT A PRIVATE BUSINESS USE.--Section 141(b)(6) of the Internal Revenue Code of 1986 (defining private business use) is amended by adding at the end the following:
``(C) PERMITTED OPEN ACCESS TRANSACTIONS NOT A PRIVATE BUSINESS USE.--
``(I) IN GENERAL.--For purposes of this subsection, the term `private business use' shall not include a permitted open access transaction.
``(ii) PERMITTED OPEN ACCESS TRANSACTION DEFINED.--For purposes of clause (I), the term `permitted open access transaction' means any of the following transactions or activities with respect to all electric output facility (as defined in subsection (f)(4)(A)) owned by a governmental unit:
``(I) Providing open access transmission services and ancillary services that meet the reciprocity requirements of Federal Energy Regulatory Commission Order No. 888, or that are ordered by the Federal Energy Regulatory Commission, or that are provided in accordance with a transmission tariff of an independent system operator approved by such Commission, or are consistent with state administered laws, rules or orders providing for open transmission access.
``(II) Participation in an independent system operator agreement (which may include transferring control of transmission facilities to an independent system operator), in a regional transmission group, or in a power exchange agreement approved by such Commission.
``(III) Delivery on an open access basis of electric energy sold by other entities to end-users served by such governmental unit's distribution facilities.
``(IV) If open access service is provided under subclause (I) or (III), the sale of electric output of electric output facilities on terms other than those available to the general public if such sale is to an on-system purchaser or is an existing off-system sale.
``(V) Such other transactions or activities as may be provided in regulations prescribed by the Secretary.
``(iii) DEFINITIONS; SPECIAL RULES.--For purposes of this subparagraph--
``(I) ON-SYSTEM PURCHASER.--The term `on-system purchaser' means a person who purchases electric energy from a governmental unit and whose electric facilities or equipment are directly connected with transmission or distribution facilities that are owned by such governmental unit.
``(II) OFF-SYSTEM PURCHASER.--The term `off-system purchaser' means a purchaser of electric energy from a governmental unit other than an on-system purchaser.
``(III) EXISTING OFF-SYSTEM SALE.--The term `existing off-system sale' means a sale of electric energy to a person that was an off-system purchaser of electric energy in the base year, but not in excess of the kilowatt hours purchased by such person in such year.
``(IV) BASE YEAR.--The term `base year' means 1998 (or, at the election of such unit, in 1996 or 1997).
``(V) JOINT ACTION AGENCIES.--A member of a joint action agency that is entitled to make a sale described in clause (ii)(IV) in a year may transfer that entitlement to the joint action agency in accordance with rules of the Secretary.''
``(VI) GOVERNMENT-OWNED FACILITY.--An electric output facility (as defined in subsection (f)(4)(A)) shall be treated as owned by a governmental unit if it is owned or leased by such governmental unit or if such governmental unit has capacity rights therein acquired before July 9, 1996, for the purposes of serving one or more customers to which such governmental unit had a service obligation on such date under state law or a requirements contract.
(b) ELECTION TO TERMINATE TAX EXEMPT FINANCING.--Section 141 of the Internal Revenue Code of 1986 (relating to private activity bond; qualified bond) is amended by adding at the end the following:
``(f) ELECTION TO TERMINATE TAX-EXEMPT BOND FINANCING FOR CERTAIN ELECTRIC OUTPUT FACILITIES.--
``(1) IN GENERAL.--An issuer may make an irrevocable election under this paragraph to terminate certain tax-exempt financing for electric output facilities. If the issuer makes such election, then--
``(A) except as provided in paragraph (2), no bond the interest on which is exempt from tax under section 103 may be issued on or after the date of such election with respect to an electric output facility; and
``(B) notwithstanding paragraph (1) or (2) of subsection (a) or paragraph (5) of subsection (b), with respect to an electric output facility no bond that was issued before the date of enactment of this subsection, the interest on which was exempt from tax on such date, shall be treated as a private activity bond, for so long as such facility continues to be owned by a governmental unit.
``(2) EXCEPTIONS.--An election under paragraph (1) does not apply to--
``(A) any qualified bond (as defined in subsection (e)).
``(B) any eligible refunding bond, or
``(C) any bond issued to finance a qualifying T&D facility, or
``(D) any bond issued to finance equipment necessary to meet Federal or state environmental requirements applicable to, or repair of, electric output facilities in service on the date of enactment of this subsection. Repairs or equipment may not increase by more than a de minimus degree the capacity of the facility beyond its original design.
``(3) FORM AND EFFECT OF ELECTIONS.--An election under paragraph (1) shall be made in such a manner as the Secretary prescribes and shall be binding on any successor in interest to the electing issuer.
``(4) DEFINITIONS.--for purposes of this subsection.
``(A) ELECTRIC OUTPUT FACILITY.--The term `electric output facility' means an output facility that is an electric generation, transmission, or distribution facility.
``(B) ELIGIBLE REFUNDING BOND.--The term `eligible refunding bond' means state or local bonds issued after an election described in paragraph (1) that directly or indirectly refund state or local bonds issued before such election, if the weighted average maturity of the refunding bonds do not exceed the remaining weighted average maturity of the bonds issued before the election.
``(C) QUALIFYING T&D FACILITY.--The term `qualifying T&D facility' means--
``(I) transmission facilities over which services described in subsection (b)(6)(C)(ii)(I) are provided, or
``(ii) distribution facilities over which services described in subsection (b)(6)(C)(ii)(III) are provided.''
(c) EFFECTIVE DATE, APPLICABILITY, AND TRANSITION RULES.--
(1) EFFECTIVE DATE.--The amendments made by this section take effect on the date of enactment of this Act, except that a governmental unit may elect to apply section 141(b)(6)(C) of the Internal Revenue Code of 1986, as added by subsection (a), with respect to permitted open access transactions on or after July 9, 1996.
(2) APPLICABILITY.--References in the Act to sections of the Internal Revenue Code of 1986, as amended, shall be deemed to include references to comparable sections of the Internal Revenue Code of 1954, as amended.
(3) TRANSITION RULES.--
(A) PRIVATE BUSINESS USE.--Any activity that was not a private business use prior to the effective date of the amendment made by subsection (a) shall not be deemed to be a private business use by reason of the enactment of such amendment.
(B) ELECTION.--An issuer making the election under section 141(f) of the Internal Revenue Code of 1986, as added by subsection (b), shall not be liable under any contract in effect on the date of enactment of this Act for any claim arising from having made the election.
Explanation of S. 386
Interest on bonds issued by state and local governments is generally exempt from Federal income taxes. One exception to this general rule relates to bonds that finance output facilities used in a private business. In the case of such facilities, if the contractual arrangements for sale of the output transfer the benefits and burdens of ownership of the facility to private parties, the use is treated as a private business use and the bonds issued to finance the facility may not be tax-exempt. If at the time of issuance the issuer reasonably expected that the private business use rules would be violated or the issuer thereafter on the bonds is retroactively taxable to date of issuance.
There has been significant uncertainty as to how these private business use rules apply to public power systems in the emerging competitive wholesale and retail electricity markets. In particular, questions have been raised as to whether such systems may (1) provide open access transmission services, (2) contractually commit their transmission systems to an Independent System Operator (ISO), (3) open their distribution facilities to retail competition, or (4) lower prices to particular customers to meet competition.
This legislation would amend the Internal Revenue Code of 1986 to make two modifications to the private business use rules as they apply to electric facilities: (1) to clarify the application of the existing private business use rules in the new competitive environment, and (2) to make the private business use rules inapplicable to existing tax-
1. Clarification of Existing Private Business Use Rules.--Subsection (a) of section 2 of the bill amends section 141 (b)(6) of the Code to make it clear that the following activities (referred to as ``permitted open access transactions'') do not result in a private business use and will not make otherwise tax-exempt bonds taxable:
(a) Providing open access transmission service consistent with Federal Energy Regulatory Commission (FERC) Order No. 888 or with State open transmission access rules.
(b) Joining a FERC approved ISO, regional transmission group (RTG), power exchange, or providing service in accordance with an ISO, RTG, or power exchange tariff.
(c) Providing open access distribution services to competing retail sellers of electricity.
(d) If open access transmission or distribution services are offered, contracting for sale or power at non-tariff rates with on-system purchasers or existing off-system purchasers.
Treasury by regulation could add to the list of permitted open access transactions.
2. Election to Terminate Issuing Future Tax-Exempt Debt.--Subsection (b) of section 2 amends section 141 of the Code to permit a public power system to elect to terminate issuing new tax-exempt bonds.
(a) Termination Election--Under new Code section 141(f)(1), if a public power system elects to terminate issuance of new tax-exempt bonds, it may then undertake transactions that are not otherwise permissible under the private business use rules (as amended above) without endangering the tax-exempt status of its existing bonds. Specifically, if the issuer makes an irrevocable termination election under this provision, then (subject to the exceptions discussed below) no tax-exempt bond may be issued on or after the date of such election with respect to an electric output facility, and no tax-exempt bond that was issued before the date of enactment will be treated as a private activity bond. This treatment continues for so long as such facility continues to be owned by a governmental unit.
Essentially, making this termination election will eliminate the possibility of a private business use challenge to existing tax-exempt debt. If a utility does not make the election, its existing tax-exempt debt for electric generation facilities would continue to be subject to applicable private business use rules and the marketing constraints thereunder.
(B) Exceptions to Termination.--Under section 141(f)(2) even if a public power system made the suspension or termination election, it could continue to issue tax-exempt bonds for the following purposes: for transmission and distribution facilities used to provide open access transmission and distribution services; for ``qualified bonds'' as defined in section 141 (e) of the Code (which are not currently subject to private business use restrictions); for eligible refunding bonds (bonds that refinance existing bonds but do not extend their average maturity); and for bonds issued to finance repairs of, or environmentally-related equipment for, electrical output facilities, so long as the capacity of the facility is not increased over a de minimis amount.
3. Effective Dates.--Subsection (c) makes the provisions of the bill effective on date of enactment, but an issuer may elect to make the private business use rules as clarified by the bill applicable retroactively to 1996 (when FERC issued its Order No. 888). Paragraph (2) of subsection (c) makes it clear that the provisions of the bill apply to bonds issued under the Internal Revenue Code of 1954 as well as the Internal Revenue Code of 1986. This subsection also makes clear that any activity that was not a private business use prior to the enactment of the bill will not be deemed to be a private business use by reason of the bill's enactment. In addition, an issuer making the election under the bill will not be liable under any contract in effect on the date of enactment of the bill for any contract claim arising from having made the election.