WASHINGTON (October 19, 1999) - Federal tax policy should not favor one group of competitors over another, the Edison Electric Institute told Senate lawmakers today, outlining principles the association believes should underpin any policies aimed at integrating public power into competitive electricity market.

"Expanding federal tax preferences for municipal utilities will distort competition and grow government in newly competitive electric markets," EEI President Thomas R. Kuhn said, urging Congress to find an equitable solution to the tax advantages current law extends to municipal utilities.

"The shareholder-owned electric utilities I represent serve about three-quarters of the nation and pay nearly $10 billion in federal income taxes," Kuhn said, noting that in contrast, municipal utilities serve approximately 15 percent of the nation's electricity and receive more than $6 billion per year in subsidies through preferences and tax exemptions. Moreover, municipal utilities in 22 of the 23 states that have embraced competition are using those advantages to support aggressive marketing efforts outside of their service territories while refusing their own customers the benefits of competition, he said.

Finding a reasonable compromise will be a tough balancing act, Kuhn acknowledged, saying that any legislation should not harm the more than 2,200 municipally owned utilities that want to serve their customers, but neither should it provide unfair tax rules that only benefit aggressive munis interested in selling excess power beyond their service territory while keeping their own systems closed to competition.

Two bills currently on the table take approaches that strike an appropriate balance, Kuhn told members of the Senate Finance Committee's Long-Term Growth and Debt Reduction Subcommittee, pointing to legislation authorized by the Clinton administration and a bill put forward by Rep. Phillip English (R-Pa.). The administration bill would subject all competitors to equitable tax policy by eliminating new tax-exempt bonds for generation and transmission facilities, he noted. The English bill takes a similarly reasonable approach - it would eliminate tax-exempt financing for new facilities in competitive markets while preserving the benefit for munis that choose not to go outside their service territories, Kuhn explained.

On the other hand, legislation put forward by Rep. J.D. Hayworth (R-Ariz.) and Sen. Slade Gorton (R-Wash.) fails to achieve a reasonable compromise, Kuhn argued. It would expand favored tax treatment for munis and would not include a requirement that munis offer retail competition as a condition for receiving relief of private use restrictions, he contended. It also would allow munis to use new tax-exempt financing for new transmission and distribution facilities outside their service territories and even leave room for munis to use tax-exempt bonds for many generation purposes, he said.

Kuhn also noted that since the Hayworth-Gorton measure is not part of a comprehensive electricity bill that addresses other federal rules affecting competitive power markets, it isn't linked with needed provisions that level the playing field between public power and its competitors in other ways. For example, public power's transmission facilities should be subject to the same FERC rules as private utilities, he explained.

Addressing the issue of public power tax advantages is a crucial part of putting all players on equal footing in competitive markets, Kuhn emphasized. Allowing munis to make millions of dollars selling electricity into neighboring competitive markets while keeping their own territories closed is unfair to muni customers, unfair to other electricity suppliers and unfair to American taxpayers who are subsidizing the activity, he insisted.

EEI stands ready to work with all parties toward an equitable resolution, he concluded.

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Edison Electric Institute (EEI) is the association of United States investor-owned electric utilities and industry affiliates and associates worldwide. Its domestic members generate approximately three-quarters of all the electricity generated by electric utilities in the country and service about 70 percent of all ultimate customers in the nation.

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