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Congressional Testimony
July 24, 2001 Testimony
on Behalf of The Large Public Power Council John H. Tiencken My name is John Tiencken and I am the chief executive officer of the South Carolina Public Service Authority ("Santee Cooper"). I appear today on behalf of the Large Public Power Council ("LPPC") to provide comments on the proposed regulations relating to the application of the private activity bond restrictions to public power. We are pleased to have this opportunity to appear before you. LPPC is an organization of 21 of the largest public power systems in the United States with members located throughout the country, including California, New York, Texas, Washington, Florida, Georgia, Nebraska, and South Carolina. Our members serve approximately 18 million retail customers, produce over 11,610,000,000 megawatt hours of generation, and own and operate approximately 26,000 circuit miles of transmission lines. Our members also include some of the largest issuers of tax-exempt bonds in the county and are significantly affected by the IRS' interpretations of the definition of private activity bond. While we have a number of significant concerns about the regulations, we do appreciate the IRS' continuing effort to address the issues that we have raised in the past and, in particular, the changes that were made in the most recent temporary regulations. However, in a number of areas the regulations continue to fall short in dealing with the intent of Congress in 1986, the effects of electric industry deregulation, and the energy crisis affecting the United States. Not only are these regulations causing public power's customers to pay higher rates and receive diminishing services but they are also limiting access to the nation's constrained transmission system, preventing excess electricity from being made available to those in need of it, and limiting public power's ability to finance desperately needed transmission and generation. I would like to focus our comments on three areas: First, the impact of deregulation and the Administration's proposed response to the nation's energy crisis. Second, the portion of the rules relating to generation facilities, including the benefits and burdens test. Finally, I would like to discuss the rules for transmission facilities. Energy Supply and Deregulation As you are probably aware, over the past few years, deregulation of the electric industry has proceeded at a rapid pace. Within the last two weeks, the FERC issued yet another landmark order, this one relating to the required creation of four RTOs covering the entire country. As we have stated in the past, deregulation has led to a number of problems for public power under the private use rules. In particular, the private use rules constrain the ability of public power to use tax-exempt bond financed transmission facilities in open access or as part of ISOs, RTOs, and transcos and leave public power at a tremendous disadvantage in trying to negotiate both with their own customers that have the ability to choose their electric supplier and new customers to whom they try to sell their "lost load." We continue to need private use relief to deal with these issues. Recently, President Bush released the report prepared by Vice President Cheney and the National Energy Policy Development Group (the "Cheney Report"), which included the Secretary of the Treasury. The Cheney Report is serving as the basis for the Administration's response to the nation's energy problems. While I will not summarize the entire report, it is worth noting certain aspects. The Cheney Report calls this the most serious energy shortage since the 1970s and that one of the challenges is the need to expand and repair an outdated network of generation and transmission that is strained to capacity. The Cheney Report stresses that the national energy policy must be comprehensive in scope that, among other things, must address the need to increase generation and transmission capacity shortages. The Report also focuses on the need to continue to promote competition and open access and refers to the transmission system as the highway system for electricity. The Cheney Report also states that forcing utilities to purchase power through short-term sales contributed to California's problems. The Report recommends that President Bush direct the appropriate federal agencies to remove constraints on the transmission grid. In connection with the release of the Report, the President also issued an executive order that directs federal agencies to pay special attention to regulations that significantly affect energy supply and distribution. We believe that the private use regulations are inconsistent with the Cheney Report and contribute to many of the problems described in the Report. We cannot believe that the authors of the Cheney Report would find the types of constraints and uncertainty unnecessarily placed on public power by the temporary regulations to be acceptable. A creative approach should be taken to the revision of the Regulations. This approach would result in: more flexible rules to permit short-term sales of up to 5 years to deal with the problems resulting from reliance on the spot market noted in the Cheney Report; a revision of the rules for open access transmission to permit continued tax-exempt financing and refinancings of facilities used by ISOs, RTOs, and transcos to provide the kind of open access and competition that the Report calls for; and as further described below, a return to the prior interpretation of the benefits and burdens test to permit public power the ability to continue to tax-exempt finance new generation and repair existing generation to provide for the growth in resources that the Cheney Report calls for. This revision of the regulations should be done quickly. In addition to the need for public power to obtain certainty, the Administration has stressed the need for fast action on energy issues. Waiting until the temporary regulations are set to expire will not help achieve these goals. In addition, it is time for the regulations to be finalized. It is impossible for public power to do long-term planning or make commitments to ISOs and RTOs when the basic rules under which it operates are scheduled to expire within a relatively short time period. In connection with the finalization of the regulations, we urge the Treasury and the IRS to conduct a thorough review of the Code, the legislative history, the prior regulations, and the comments received. We strongly believe that more than just a few technical "tweaks" are required. We believe that the regulations contain dramatic changes to the rules and are significantly more restrictive than the rules that applied prior to 1998, particularly the new interpretation of the benefits and burdens test. Further, these changes are inconsistent with the changes made by the Tax Reform Act of 1986 and the related legislative history, which provided that unless specific changes were indicated, Congess did not intend that any changes to prior law be made. The prior regulations contained rules that were clearly understood and consistently interpreted by the IRS and public power. Those rules were put in place in connection with the original enactment of the industrial development bond limitations and had been in place for over twenty years. Changing those rules, where there is no clear Congressional directive to do so and where the new rules are less clear, is the wrong way to regulate and is inconsistent with Treasury's recent statements in favor of tax simplification. Generation With respect to generation, our overriding concern with the specific provisions of the regulations continues to be the abandonment of the benefits and burdens test of the prior regulations, under which private activity bond status resulted from a sale of output only if that sale transferred the benefits of ownership of the facility and the burdens of paying the debt service on the related bonds. The new interpretation of this long-standing approach to the private use analysis is significantly limiting public power's flexibility at a time when greater flexibility is critical. A key example of this is the treatment of wholesale requirements contracts under the regulations. Over a period of almost 20 years, beginning in 1971 and extending well past the 1986 Act, my utility received a series of three private letter rulings approving wholesale requirements contracts. The first of these rulings was written at the time that the original IDB regulations were finalized. Those regulations and these rulings are clear that the benefits and burdens test does not cause a requirements contract to result in private use. Yet the new regulations seem to reverse this result with the imposition of a facts and circumstances test that, we believe, will result in every wholesale requirements contract giving rise to private use. At a minimum, the transitional rule for these contracts should be revised to permit the types of changes that are a necessity in a deregulated environment. A similar problem results from the rule that the burdens of debt service test is satisfied if the issuer reasonably expects that there is a substantial certainty that payments will be made under a contract. We always expect to get paid when we sell power. Another critical issue in the generation area is the special rule for sales of lost load. We appreciate the efforts that have been made to deal with lost load but urge you to provide public power with a rule that works. First, three years is too short a period for permitted sales, particularly when the rule is conditioned on amounts derived from the sale being used to redeem tax-exempt bonds. Second, this rule should not be limited to situations where the customer is already lost; public power should be able to negotiate to retain its historic customers. As mentioned, the Cheney Report confirms what public power has been saying for several years: forcing utilities to rely on short term sales is harmful to the industry and its customers. While we appreciate the new rule permitting sales of up to 1 year, we believe that a 5 year safe harbor is consistent with the benefits and burdens test particularly when we are only talking about sales to customers other than those for whom the facility was financed. As an example, for a facility financed 15 years ago to meet the expected needs of a system's own customers, what policy is served by restricting sales of unexpected excess capacity to one year? Transmission The portion of the regulations dealing with transmission provides significant relief for issuers of outstanding tax-exempt bonds that financed transmission and we appreciate these provisions. We urge that such relief be made applicable to advance refunding bonds and bonds that extend the average life of the refunded bond consistent with the 120 percent maturity limit typically used by the IRS and Congress. In addition, for current refundings that do not involve an extension of maturity, we see no policy reason to limit the relief to refundings of bonds issued before 1998. Unfortunately, the regulations fall short when it comes to issuance of new bonds for transmission facilities. As the Cheney Report indicates, we desperately need to repair, expand, and improve the transmission system and the transmission grid needs to be opened up to complete deregulation. The regulations impede these goals for public power. Guidance is needed relating to public power systems' participation in ISOs, RTOs, and transcos. The IRS' statement that such entities may qualify under the management contract safe harbors, is helpful but insufficient: specific guidance is needed and may need to include special safe harbors for participation in these types of entities. For example, from a tax policy standpoint, the transfer of operating control to an ISO should not be problematic. The IRS already has special management contract rules for public power facilities and should not feel constrained to provide additional rules. In addition to rules to deal with ISOs, RTOs, and transcos, flexible guidance is needed for the IOUs, coops, and power marketers that will use public power systems' transmission under open access regimes. One approach would be to recognize, as the Cheney Report does, that the transmission system is the highway system for electricity and treat the use of this system as a form of general public use. Since the legislative history refers to swaps and pooling arrangements as general public use, there is no reason that open access use of transmission cannot also be treated as general public use. Alternatively, a flexible safe harbor for output contracts of up to 5 years would provide necessary relief for most transactions. An effective anti-abuse rule should be sufficient to address any resulting tax policy concerns. The LPPC also urges that the IRS issue regulations to deal with several subjects that are not adequately dealt with under the existing regulations. First, allocation rules are needed to deal with situations where tax-exempt bonds and other sources of capital are used to finance a facility. Second, the regulatory remedial action rules are, in some cases, unnecessarily punitive and should provide additional forms of remedial action. Guidance in these areas should be provided at the first opportunity. Conclusion The revision of the Regulations offers the Treasury Department a new opportunity to act on the recommendations in the Cheney Report, the policies behind the President's Executive Order and the continuing industry. The Treasury Department can take significant steps in this direction without sacrificing tax policy or acting inconsistently with the Code and legislative history. The benefits and burdens test, as it existed in the past, provides the Treasury Department with the flexibility to make meaningful changes in the regulations that are responsive to the recommendations in the Cheney Report and would be consistent with the Tax Reform Act of 1986. The Treasury Department should revise the Regulations to return to the benefits and burdens test contained in the prior regulations. Under this approach, public power would be permitted to: enter into both wholesale and retail requirement contracts, as had been the case prior to 1998; and enter into sales of power over a term that does not result in a transfer of the benefits of owning the electric facility and the burdens of paying debt service on the related bonds, with the adoption of a reasonable safe harbor for contracts with terms of up to 5 years; The Treasury Department should adopt a more flexible rule for sales of lost load that takes into account the dramatically changing industry circumstances and recognizes that such rules are, in fact, merely variations of the remedial action rules written in the context of these changed circumstances. The rules for transmission facilities should be revised to provide that participation in open access regimes including ISOs, RTOs, and transcos is merely an industry specific form of general public use with respect to what the Cheney Report calls our high-way system for interstate commerce to permit existing transmission, repairs and improvements to existing transmission, and new transmission to continue to be financed by public power with tax-exempt bonds. Finally, we hope that the IRS and Treasury will work with us to develop solutions to the issues that we have raised. Thank you and I would be pleased to answer questions. ### |
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