TALLAHASSEE MAYOR CITES URGENCY IN MODERNIZING ‘PRIVATE USE’ TAX LAWS

WASHINGTON, D.C., Oct. 19, 1999 — Out of date federal tax laws are hindering creation of a competitive electricity market, penalizing communities financially, and creating uncertainty for bond holders, Mayor Scott Maddox of Tallahassee, Fla., today told the Senate Finance Committee’s Subcommittee on Long-Term Growth, Debt and Deficit Reduction during a hearing on tax implications of electric utility industry restructuring.

Speaking on behalf of the American Public Power Association, which represents the interests of more than 2,000 community-owned, not-for-profit electric utilities, Mayor Maddox asked subcommittee members to "embrace with confidence and speed" S. 386/H.R. 721, The Bond Fairness and Protection Act. The identical bills would allow communities with public power systems to exert local control over decisions about how to use their tax-exempt bonding authority. Bipartisan support for these bills continues to increase, Mayor Maddox said, with 30 cosponsors in the Senate and 87 in the House.

Mayor Maddox pointed out that temporary "private use" regulations will expire in

14 months. Their temporary nature, coupled with Congressional inaction, creates a severe problem for public power communities, whose existing tax-exempt bonds could become retroactively taxable to the date of issuance.

Under current tax law, electric utilities owned and operated by state and local governments issue tax-exempt bonds to finance their capital investments. The bonds are subject to rules in the federal tax code designed to prevent private parties from benefiting from lower-cost tax-exempt financing. With the burgeoning of a restructured electric utility industry, the rules now prevent public power systems from opening their transmission or distribution lines to investor-owned electric utilities and power marketers, and from transferring control of transmission facilities to independent grid management organizations. They also severely limit public power systems’ ability to sell power to individual customers on negotiated terms.

"Both problems discourage community-owned utilities from embracing electricity deregulation and form a barrier to open and efficient electricity markets at both the wholesale and retail levels," Maddox said.

He said investor-owned electric utilities are circulating a great deal of misinformation about the goals of S. 386/H.R. 721 in order to depict the bills as giving license to public power systems to sell power into distant markets. "The purpose of S.386 is to prevent existing tax-free bonds from becoming retroactively taxable and raising rates…," Mayor Maddox said. "I am here today because as a Mayor I do not want to raise electric rates for the city of Tallahassee nor do I want to see our bondholders placed in a situation where their investments are not what they bargained for. Moreover, I would like to keep the decision making at the local level in my community."

Passage of S. 386/H.R. 721 is urgently needed because it assures a fair and reasonable resolution to the private use problem that respects the inherent rights of units of local government, Mayor Maddox said. The bills would allow each community to "elect" to obtain relief from private use limits, but forego the right to issue tax-exempt bonds for new generation facilities in the future.

Mayor Maddox said that H.R. 1253, sponsored by Rep. Philip English (R-PA), does not address the issue of reconciling federal tax law with state restructuring actions, but instead is designed to increase public power rates and eliminate it as an industry competitor. The Clinton Administration’s S. 1048 tackles the private use problem, but offers a solution that doesn’t allow for local control and unjustifiably eliminates tax-exempt financing for transmission.

Public power is not the only sector of the electric utility industry that is attempting to reconcile federal tax laws and state restructuring initiatives, Mayor Maddox said. Investor-owned electric utilities are seeking to bring rules on nuclear decommissioning funds up to date, and rural electric cooperatives are pushing for changes in restrictions on their tax status. "We believe it is imperative for Congress to provide tax equity between all sectors of the industry and urge Congress to address all these issues simultaneously," Mayor Maddox stated.

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