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September 3, 1999, Friday, FINAL EDITION

SECTION: NATION/WORLD, Pg. 14

LENGTH: 677 words

HEADLINE: Fairness for tax-sheltered utilities;

BODY:

Deregulating the production and sale of electricity is raising issues that would challenge the wisdom of King Solomon.

One is how to treat the many taxpayer-owned utilities and the tax-exempt bonds they have sold. The proceeds from these bonds have built supply lines and power plants for what has until recently been a protected market.

What happens when these city- and county-owned power companies face competition for their customers, or sell outside their jurisdictions? The risk is growing that their bonds will suddenly become taxable, shocking bondholders and jeopardizing the financial viability of the customer-owned utility. President Clinton proposes protecting the tax-exempt status of existing bonds, which is good, but he would also prohibit the companies from issuing new tax-exempt debt, which doesn't make sense. Florida has wisely taken a cautious approach toward the deregulation of electric utilities, and its municipal utilities, such as those run by Lakeland and Orlando, are in no rush either to expand or to change their tax status.

A better compromise is offered by the Bond Fairness and Protection Act, which has bipartisan sponsorship in the House and Senate. It would allow a city-owned utility to sell electricity to outside customers without jeopardizing the tax-exempt status of its old bonds, but if the utility expanded capacity to compete for additional outside customers, the bonds sold for such expansion would be taxable.

Lakeland, for example, would retain the flexibility to sell electricity to surrounding areas in times of regional shortages without jeopardizing the tax-exempt status of its bonds.

Lakeland got into the electricity business in 1904 and boasts that its residential rates are among the state's lowest. City Finance Director Jerry Reynolds tells us that the city treasury gets an annual dividend from its electric company of about $ 19 million a year, plus the donation of electricity for city uses.

And sometimes its coal-burning plant can produce electricity cheaper than can its neighbors, and so it sells its excess. Such limited sales benefit both the city and the outside customers.

"These guys run good operations," says Joe Garcia, new chairman of the state Public Service Commission.

But because it is usually easier to raise electric rates than to raise taxes, cities typically use electric revenues to subsidize other aspects of government. It is reasonable to place limits on how far their tax-sheltered operations can extend. The Bond Fairness Act strikes a good balance by leaving it up to the cities to decide when or if to expand into new markets. Whatever their decision, it is one locally made after being discussed in public meetings.

Statewide, Florida has 17 customer-owned electric utilities with a total bond debt of $ 6.5 billion. It would not be fair to bondholders to revoke the tax-free status of these bonds. Nor would it be fair to investor-owned utilities to allow these tax-sheltered companies, which pay no income taxes, to issue more tax-free debt to steal customers from a tax-paying utility.

The American Public Power Association warns that without the special protection of this bill, customers of municipal utilities could face higher rates and higher taxes because cities would be forced into a marketplace they might prefer to avoid.

"My constituents are deeply committed to keeping local control of our municipal utility in the hands of their elected representatives here in Orlando," says Orlando Mayor Glenda E. Hood. "The Bond and Fairness Protection Act will protect tax-free financing, enabling my city to keep its promise to its citizens to preserve municipal power without imposing retroactive or new taxes on municipal bonds and utility revenues."

Total deregulation of electricity is a number of years away for Florida. In the meantime, there is no good reason to rob cities of their tax-sheltered utilities and hit bondholders with a surprise tax.

NOTES: EDITORIALS

LOAD-DATE: September 5, 1999