Treasury Offers Guidance for Municipal Utilities

Article excerpt

The U.S. Treasury last week issued long-awaited, temporary rules to provide guidance to state and local governments to clarify how municipally-owned electric utilities can participate in an electric utility-deregulated market without jeopardizing either existing Outstanding tax-exempt municipal bonds or their authority to issue future such bonds.

The rules, which would last for three years, are important to cities that own or operate their own power utilities as a growing number of states act on electric utility restucturing legislation and as Congress begins to consider legislation which would affect municipal tax-exempt authority.

The proposed rules would change existing so-called "private use" rules affecting more than $70 billion worth of outstanding municipal bonds. Current federal laws set a federal trigger or cap on the amount of non-governmental use or electric consumption of a municipality's facilities or power output a city may provide before losing its tax-exempt municipal bond authority. Generally, the new rules would replace the existing so-called "private use" IRS rules to protect the tax-exempt status of municipalities which opened their service areas and/or transmission facilities in a manner to permit nondiscriminatory open access.

The rules would continue to bar cities from issuing tax-exempt municipal bonds for the purpose of expanding utility services to compete outside current boundaries.

Key changes in the new rules would preserve a city's tax-exempt authority:

* where an independent System operator (ISO) operated. managed, or ran - but did not own - a municipal utility's transmission lines;

* where a city sold excess generation capacity created through an open access market through non-renewable contracts of no longer than three years; or

* where cities entered into certain kinds of short term contracts to supply power to private users.

The rules do not, however, remove the threat of pending federal legislation or free cities and towns to move forward under the Treasury regulations. Unless and until Congress acts to modify, reject, or otherwise act on pending legislation in the Senate, the so-called Murkowski bill. S. 1483, municipally-owned utilities will face severe obstacles in complying with state legislation and retaining their tax-exempt status.

NLC and a number of governors had taken the lead in urging the Clinton administration to issue revised rules to help protect cities in California and other states where deregulation has already been enacted or is in process. The new rules go beyond the existing safe harbor rules to provide more flexible limits to define private use. The issue is especially important where federal or state mandates might require cities to open up their transmission lines to investor-owned utilities or for cities that have stranded costs as a result of state or federal deregulation actions and mandates, or cities which have opened up their system so that current residential and business consumers can purchase electricity from outside, investor-owned utilities.

Under current federal law, if a public power municipality has "private use" in excess of the Code's limits as a result of a deliberate action by the city issuer, the issuer must take remedial action. Permitted remedial actions include redemption of the portion of the outstanding tax-exempt bonds or, if the bonds cannot be redeemed within 90 days of the change of use, immediately defeasing those bonds followed by redemption at the first call date. The rules issued last week would replace rules proposed by the Internal Revenue Service (IRS) in 1994 to adjust for a deregulated market.

The federal regulations, which were published in the January 22, 1998 Federal Register, are intended to give direction to municipal utilities with regard to how they can participate through independent system operators in "open access" plans requiring competition in the wholesale power market in a way to avoid jeopardizing the tax status of either outstanding municipal bonds or the city's authority to issue new bonds. …