NLC Urges Tax Protection for Municipally-Owned Utilities: Would Affect 1000 Localities

Article excerpt

NLC urged the federal government to modify its proposed tax rules to ensure that the more than 1,000 localities that operate or own their own electric utilities can continue to provide services to their businesses and citizens with municipal tax-exempt bond financing as states and the federal government restructure the nation's electric utility industry.

"The financing of public purpose facilities, including public power, through the issuance of tax-exempt debt is a critical component of the ability of the nation's municipal governments' abilities to serve the public infrastructure and service needs of their citizens," the comments read.

"It is an important part of the concept of federalism, mirroring the federal government's exemption from state and local taxes on its debt."

The comments refer to the Internal Revenue Service's (IRS) proposed Temporary and Proposed Regulations with regard to the authority of municipalities to issue municipal bonds in compliance with state and federal laws affecting the supply of electrical energy.

The U.S. Treasury early this year had 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 restructuring 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 over $70 billion worth of outstanding municipal bonds. Current federal laws set a federal trigger or cap on the amount of nongovernmental 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.

NLC wrote that cities appreciated the effort of the IRS to provide guidance in response to the concerns of the nation's cities and towns to ensure a transformation to a restructured electric utility industry. …