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Congressional Testimony
September 12, 2001 Testimony
on behalf of The Large Public Power Council John H. Tiencken My name is John Tiencken and I am chief executive officer of the South Carolina Public Service Authority (Santee Cooper). I am appearing today on behalf of the American Public Power Association (APPA) and the Large Public Power Council (LPPC). APPA is the national service organization representing the interests of over 2,000 community-owned public power systems throughout the United States. APPA member systems account for about 15.4 percent of all kilowatt-hour sales to ultimate U.S. consumers, located in some of the nation's largest cities as well as in numerous small and medium-sized communities. Approximately 13.2 percent of the installed generating capacity in the U.S. is owned by publicly-owned utilities. The LPPC is an organization of 22 of the largest public power systems in the United States with members located throughout the country, including Florida, Texas, Arizona, Tennessee, California, New York, Washington, and South Carolina. Its members serve approximately 18 million retail customers and own and operate over 44,000 megawatts of generation and approximately 26,000 circuit miles of transmission lines. LPPC members also include some of the largest issuers of tax-exempt bonds in the country. All members of both organizations are state or local governmental units overseen by elected or appointed public officials. A top priority for public power is reform of the restrictions that arise due to the "private use" rules applicable to tax-exempt bonds in the current tax code. The electric industry and federal policy that governs it has changed dramatically over the past decade, but the private use rules have not been modified sufficiently to accommodate these changes or provide certainty for public power systems that are planning their transmission and generation needs. As they now stand, the private use rules limit our ability to allow full utilization of our electric transmission facilities, to join Regional Transmission Organizations (RTOs), and to use tax-exempt bonds to finance badly-needed improvements to the portions of the transmission grid we own. The private use rules also limit the ability of public power systems faced with competition to negotiate contracts with existing customers and to resell surplus power into the market under longer than one-year contracts. Reform of these rules is urgently needed to enable public power systems to respond to recent energy policies that have been enacted by Congress and ordered by the Federal Energy Regulatory Commission (FERC), and the market changes that have resulted. These reforms are included in S. 972, the Electric Power Industry Tax Modernization Act, which was introduced by Senators Murkowski (R-AK), Jeffords (I-VT), Thompson (R-TN) and Breaux (D-LA) and is supported both by public power systems and investor-owned utilities. In fact, this bill represents a landmark agreement between public power and investor-owned utilities forged at the request of Congress, and all parties believe it strikes an appropriate balance with respect to removing restructuring-related tax impediments. H.R. 4, as passed by the House, addresses private use issues and certain other portions of the agreement, but contains a number of changes in S. 972's private use provisions that frustrate the aim of opening up and expanding the transmission grid. These changes make H.R. 4's private use provisions unworkable - and in some respects, worse than current law - for public power. We urge the Committee to ensure that key private use relief provisions reflected in S. 972 are included in its energy tax legislation, so that we can continue to support industry-wide agreement. In my testimony, I also briefly address incentives for clean and renewable energy resources. Public power believes that there is a role for the federal government in encouraging the development of renewable energy resources and advanced technologies for other fuel sources. To the extent that tax credits or other federal tax incentives are developed, expanded or extended, public power believes that incentives comparable to those available to private developers and investor-owned utilities should also be available to not-for-profit utilities that serve a quarter of the ultimate electricity customers in the nation. A transferable tax credit would be one option that could provide public power systems and rural electric cooperatives with an incentive to invest in renewable energy resources and clean energy technologies. We look forward to working with the Committee to develop workable solutions to this issue. I appreciate the opportunity to provide the views of APPA and LPPC to the Committee. ENERGY POLICY IMPLICATIONS OF PRIVATE USE RESTRICTIONS Before I address the private use issue in more detail, I would like to explain why these tax issues are not just technical problems that keep lawyers and accountants busy. Rather, they deal with one of the key problems we face today in our industry - how to move electric power from generation to load. Almost every area of the country faces electric transmission constraints - bottlenecks in our electric grid that prevent utilities from delivering power where we need it. In some regions, we are unable to consistently deliver available electric power needed to keep the lights on. This is the case in California, where transmission constraints into the State, and between the northern and southern parts of the State, can trigger rolling blackouts. Elsewhere in the country, these constraints keep us from importing low-cost power into high load areas and require instead the use of expensive local generation. The reason we are here today is to explain how federal tax law can be modified to help alleviate transmission constraints that limit the use of public power's existing transmission lines and restrict public power's ability to expand and to improve these lines. These modifications will also allow public power to make its surplus electricity available in the most economic manner. Congress and the Administration are currently examining the nation's energy problems and are looking for ways in which these problems and shortages can be resolved. One of the challenges is the need to expand and repair an outdated network of generation and transmission that is strained to capacity. Comprehensive energy legislation must address the need to increase generation and transmission capacity shortages. Recognizing this challenge, the National Energy Policy Development Group report released earlier this year (the "Cheney Report") focused on the need to encourage competition and open access - predicated on the removal of constraints on the transmission grid. In fact, the Cheney Report describes the transmission system as "the highway system for interstate commerce in electricity." This view of transmission has evolved from a decade of change in the industry, moving from a balkanized system of providing electricity service in individual service areas to a recognition that we are interconnected on one grid. By way of background, eight percent of transmission nationally is owned by public power. In some states, the percentage is much higher. In California, for example, about 25 percent of the transmission is controlled by municipal systems. One of the nation's important goals right now is to ensure that the entire transmission grid (including public power transmission) is fully and efficiently utilized. Uniform rules for access to and use of the transmission grid are essential to full and efficient utilization of existing transmission facilities. Reform of the private use rules will facilitate this. Energy legislation must address the need to increase generation and transmission capacity shortages, and must make the tax code consistent with those goals. Access to the Transmission Grid The current private use rules limit the extent to which state and local governmental units that own transmission facilities financed by tax-exempt bonds are allowed to let non-governmental entities use those facilities. Violation of these rules results in loss of tax-exempt status for the bonds (in some cases retroactively to the date of issuance). The Federal Energy Regulatory Commission (FERC), which regulates investor-owned utilities, has adopted policies to open access to transmission lines to all potential users in a manner that does not allow transmission owners to favor their own sales. This is known as "non-discriminatory" open access transmission. Open access transmission is mandatory for investor-owned utilities subject to FERC jurisdiction, but is largely voluntary for public power systems. However, where public power systems with transmission want to use FERC-jurisdictional transmission facilities subject to open access requirements, they must agree to provide comparable transmission access on their own facilities. In addition, FERC can, on a case-by-case basis, order publicly owned systems to provide transmission access to others. FERC has also adopted policies encouraging formation and membership in RTOs. The essential purpose of these RTOs is to enhance non-discriminatory, open access transmission by coordinating transactions among transmission lines that have historically been owned and operated by different utilities. Carrying out these policies is critically necessary to getting power where we need it on the existing grid. Prior to 1998, the private use rules barred public power from committing to provide full open access transmission and from joining RTOs. Temporary regulations issued by Treasury in 1998 and reissued in 2001, provided partial temporary relief from these rules. But because the rules are only temporary, they do not permit us to make long-term commitments to open access transmission and to RTOs and they frustrate long-term planning. More importantly, regulatory relief is unavailable for transmission facilities financed by recently issued tax-exempt bonds. Legislation is necessary. Under existing law, if these transmission facilities are reasonably expected to be used to provide open access transmission service, tax exempt bonds cannot be used. This means that without legislation, public power systems that issued bonds to finance transmission after open access requirements were established are barred from offering open access transmission and joining RTOs. Moreover, public power systems now in RTOs or now providing open access, cannot continue to provide open access or remain members of RTOs if they use tax-exempt bonds to finance badly-needed transmission upgrades. This is self-defeating. As I previously mentioned, in order to meet our electricity needs, we must expand and modernize the grid as we provide open access to it. Legislation is needed to fix this problem, by providing the same relief to new bond issues as is provided to other transmission owners and by making the relief permanent for both new and existing bonds. S. 972 would provide this relief. Sales Rules Another impediment to opening up the grid under the private use rules is how those rules deal with power sales from tax-exempt financed generation to non-governmental entities. Providing open access transmission service exposes transmission owners to competition, because their wholesale customers can switch to other suppliers. Transmission owners will not voluntarily provide this service if they will lose sales to existing customers and, because of private use limitations, are unable to sell that power to other new customers. To protect against or mitigate such losses, these public power systems need to be allowed to negotiate rates for sales of power, something they cannot do under current private use rules. S. 972 modernizes the private use sales rules to remove this disincentive to open access transmission by permitting negotiated sales to existing customers and by providing a reasonable transition period during which sales can be made to replace lost customers. Provisions such as these also enhance our ability to sell our surplus power under long-term contracts. The experience in California over the last 18 months has taught all of us that long-term contracts are key to disciplining market power and market volatility and ensuring that customers receive reliable and economic service. Public power systems have surplus power that can be sold into wholesale markets under long-term contracts. However, the private use rules significantly restrict our ability to do so. The current temporary regulations impose a one-year limit on power sales made to non-governmental entities. Multi-year contracts allow purchasers to ride out wholesale electric price run-ups. The private use rules should be liberalized to allow for greater flexibility in contract timeframes. The provisions in S. 972 will liberalize theses rules for public power systems that offer voluntary open access transmission and/or open retail access. In particular, public power systems that lose load because of open access transmission can make replacement sales for up to a seven-year term under the bill. Long-term contracts are also permitted for certain sales to existing customers. CURRENT LEGISLATIVE PROPOSALS S. 972 APPA and LPPC support S. 972, the Electric Power Industry Tax Modernization Act. S. 972 represents a landmark effort to accommodate the often-divergent positions of public power and investor-owned utilities on a range of federal tax issues. S. 972 would remove federal tax impediments that hamper effective use of the transmission grid and expansion of generation and transmission capacity. With respect to the "private use" rules that apply to public powers' electric facilities financed by tax-exempt bonds: S. 972 allows any public power system to elect to terminate issuing new tax-exempt bonds to finance most generation facilities, in return for an exemption from "private use" rules for its existing tax-exempt bonds. Private use rules that remain applicable to non-electing systems are modernized in order to permit such systems to provide open access transmission and distribution services, to join regional transmission organizations (RTOs), and - if they provide open access services - to make certain sales free of the private use rules to retain and replace existing customers' electric loads. S. 972 restricts the use of tax-exempt bonds to finance transmission lines not necessary to serve public power systems' electric loads or to finance start-up utilities' distribution facilities. S. 972 also provides relief to investor-owned utilities (1) by allowing taxable entities to sell or spin off transmission facilities to independent FERC-approved RTOs without recognition of gain, (2) by excluding contributions-in-aid-of construction (CIAC) for electric transmission and distribution facilities from gross income, and (3) by modifying federal income tax treatment of nuclear decommissioning funds. Major Changes Made by H.R. 4 On August 1, 2001, the House passed H.R. 4, which incorporates many of the private use provisions of S. 972 and its House counterpart, H.R. 1459. However, modifications to key provisions of S. 972 and H.R. 1459 have rendered the private use relief under H.R. 4 unworkable for public power. I will not attempt to address all of our concerns at this time but will instead highlight a few that are most problematic. Local Transmission Exception H.R. 4: Narrows the scope of local transmission facilities that could be constructed with tax-exempt financing so that transmission facilities must be both within the issuer's distribution area and necessary to serve its native load. Upgrades or improvements must be necessary to serve native load and ordered by a state agency or RTO. This presents a significant problem because not all public power systems have distribution areas; even those that do have distribution areas need transmission outside those areas; and state agencies and RTOs often may not have any role in ordering a transmission upgrade or improvement. Load Loss H.R. 4: Requires that in order for a "load loss" sale to be made to a new customer, the loss of the old customer must be "attributable to open access." S. 972 had a "bright line" rule for computing the amount of lost load. H.R. 4's requirement, on the other hand, is likely to be administratively infeasible because of the difficulty in determining exactly what caused the load loss - open access requirements, market conditions, high fuel costs or other factors. Joint Action Agencies H.R. 4: Delays the applicability of the "permitted sales" rules to joint action agencies until the IRS issues regulations. The IRS, however, is not likely to issue regulations for a number of years. In the meantime, the joint action agency would not be able to sell output related to lost load and make other sales to wholesale customers. There are numerous joint action agencies and agency members throughout the country, and they are already affected by open access requirements. To enact legislation but delay relief for a large portion of the industry is unworkable. Election Mechanism H.R. 4: One exception to the requirement that an electing system forego new bonds for generation is that a public power system could continue to refund bonds. H.R. 4 eliminates the exception that permits a system to refund bonds. Without this exception, the election mechanism that is designed to facilitate competition will be unattractive to public power systems, who may choose not to use the election rather than face restrictions on their ability to refund bonds. A more detailed analysis of these four points is attached to my testimony. We urge the Committee to provide effective relief from the current private use restrictions. TAX INCENTIVES FOR RENEWABLE ENERGY AND ADVANCED TECHNOLOGIES Due to the current energy situation, Congress, the Administration and the utility sector are examining the need to increase our energy supply, address clean air issues and further diversify our fuel sources. In part, this could be accomplished through increased incentives for production from renewable energy and technologically advanced and cleaner energy resources. Today, I want to address the need to ensure that tax incentives for these resources are made available for the benefit of public power and rural electric cooperative customers. Renewable energy resources should be a necessary element of the national energy supply. They have significantly less impact on the environment than other fuels, are increasingly cost competitive and are a potentially important future resource. While we should increasingly utilize renewable resources, we must also continue use of abundant, conventional fuel sources to ensure reliable and cost effective delivery of energy. Specifically, coal remains an abundant, low-cost fuel that generates almost half of U.S. electricity. The challenge facing the future use of coal is to convert it into a cleaner, more efficient resource and to lessen the environmental impacts associated with its use. Advanced technologies are currently being developed that may reduce emissions and improve efficiencies for coal-fired power plants. Unfortunately, renewable resources and advanced technologies are often more expensive to construct and operate than traditional energy technologies. As a result, the federal government encourages the development of some of these more costly technologies through tax incentives and other measures. Public power believes that there is a continued need for federal incentives for renewable energy production and that the federal government plays a key role in encouraging the development and commercial deployment of advanced technologies. Public power leads the entire industry in renewable energy production as a percentage of our overall generating capacity, owning almost twice the amount of non-hydro renewable capacity (as a percentage of total capacity) as investor-owned utilities. We support clean energy and diverse portfolios of fuel choices that stabilize rates. However, our commitment amounts to less than one percent of our aggregate generating capacity. Certainly there is much more that can be developed, and tax credits for all sectors of the energy industry can help. Investment tax credits and production tax credits for certain types of renewable energy sources currently exist in the tax code. Congress has proposed extending these credits to include new categories of renewables, clean energy sources such as clean coal, and efficient technologies. However, the current tax credits are not available to public power systems or rural electric cooperatives, which serve 25% of the nation's electricity load. A tax incentive that is applicable to all sectors, not just to investor-owned utilities, will serve to encourage maximum investment in these next generation technologies and energy sources. To this end, we support efforts to develop some form of tradable or transferable tax credit to encourage development of renewable energy resources and next generation technologies. CONCLUSION Reform of the private use provisions will assist us in meeting the national need to use our existing transmission grid more effectively, to expand it where necessary, to accommodate new generation, and to make surplus power more readily available under long-term contracts. And, to further bolster the availability of diverse generation supplies, Congress should ensure that any tax incentives available for clean coal, renewable or technologically advanced energy resources are available to all sectors of the utility industry. In this way, all consumers may enjoy the benefits of a more diverse fuel supply and cleaner air. We look forward to working with the Committee and its staff in developing the technical rules to accomplish these objectives. I appreciate the opportunity to testify on these important issues and will be happy to answer any questions the Committee may have. ATTACHMENT SIGNIFICANT CHANGES IN H.R. 4 TO THE PRIVATE USE PROVISIONS OF Transmission Facilities S. 972 permits issuance of tax-exempt bonds to finance for construction of transmission facilities, if the construction is: These categories provide public power systems with the flexibility they need to continue to serve their own customers and maintain and improve transmission lines. At the same time, they are designed to bar issuance of tax-exempt bonds for "merchant" transmission facilities -- transmission facilities that are used for private, competitive enterprises and not for public power customers. H.R. 4 narrows the scope of transmission facilities that could be constructed with tax-exempt financing so that transmission facilities must be (1) necessary to serve public power native load and (2) either within the issuer's distribution area or as an improvement or addition to existing facilities ordered by a state agency or RTO. These requirements present significant problems because not all public power systems have distribution areas, and state agencies and RTOs often may not have authority to order an upgrade or improvement. For example, a number of the larger public power systems, including joint action agencies, are generation and transmission utilities that provide wholesale electricity and transmission services to other public power systems, but do not have distribution areas. Any transmission project they wish to finance with tax-exempt bonds, even if necessary to serve wholesale native load, will have to be an "addition or improvement" to existing facilities and ordered by an RTO or state agency. Entirely new facilities to serve native load do not qualify, nor could a system not a member of an RTO and not subject to state regulations ever use tax-exempt bonds to finance transmission. This is more restrictive than existing law. Even if a publicly-owned utility possesses a distribution area, the changes in H.R. 4 are problematic. In many instances, a utility that serves a city owns generation outside of its city-wide "distribution area," and must build transmission to connect that generation. In that case, under H.R. 4 any improvements or additions to transmission facilities outside of distribution areas must be necessary to serve native load and ordered by an RTO or state agency. Moreover, new lines outside distribution area (that are not additions or improvements) could never be financed with tax-exempt bonds. This is unworkable for public power systems because not all systems are members of RTOs, and public power systems are not generally regulated by state agencies - rather, they are local units of government. Thus improvements or additions made to better serve a public power system's own customers will often fall outside of the purview of an RTO or state agency. These bodies will not necessarily have a role in ordering these upgrades. This also is more restrictive than existing law. Load Loss S. 972 enables public power systems who offer open transmission access to sell power to new, "replacement" customers for a 7-year period when old customers depart, without violating private use restrictions. These provisions are intended to mitigate stranded costs that occur in a competitive environment when public power systems offer open access transmission. S. 972 laid out a "bright line" formula for determining the amount of load loss, rather than requiring that the load loss be attributable to open access, because it may be impossible to determine whether open access requirements, market conditions, high fuel costs or other factors caused the loss of a customer. H.R. 4 requires that in order for a load loss sale to be made to a new customer, the loss of the old customer must be "attributable to open access." Rather than the "bright line" test provided by S. 972, H.R 4 appears to require proof of a causal connection which will make it difficult to use the load loss provisions in the current market environment. Without further clarification, the H.R. 4 standard may create confusion in the tax-exempt bond market or may lead to disputes between bond issuers and the IRS. Joint Action Agencies S. 972 includes special provisions to make permitted sales transaction rules apply to "joint action agencies" and their members. (Joint action agencies are generation and transmission utilities that provide wholesale electricity and transmission services to their members, which are government-owned utilities.) H.R. 4 delays the applicability of permitted sales transaction rules to joint action agencies until the IRS issues regulations. The IRS, however, is not likely to issue regulations for a number of years. In the meantime, the joint action agency would not be able to sell output related to lost load to its members or to make sales under the bill to wholesale native load purchasers. There are numerous joint action agencies and agency members throughout the country, and they are already affected by open access requirements. Election Mechanism S. 972 permits issuers to elect to give up the right to use tax-exempt bonds for generation facilities (subject to certain exceptions) in exchange for an exemption from private use rules for their outstanding bonds. One of the exceptions to the requirement to forego new tax-exempt bonds for generation would permit a public power system to continue to refund outstanding bonds without running afoul of private use restrictions (so long as there is no increase in the average maturity of the refunded bonds). H.R. 4 eliminates the exception that permits a system to refund bonds. Without this exception, the election mechanism that is designed to facilitate competition will be unattractive to public power systems, who may choose not to use the election rather than face restrictions on their ability to refund bonds. ### |
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