[Federal Register Volume 66, Number 12 (Thursday, January 18, 2001)]
[Rules and Regulations]
[Pages 4661-4671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1412]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR part 1

[TD 8941]
RIN 1545-AX87


Obligations of States and Political Subdivisions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains temporary regulations that provide 
guidance to issuers of tax-exempt bonds for output facilities. This 
document also contains final regulations that provide guidance to 
certain nongovernmental persons that are engaged in the local 
furnishing of electric energy or gas using facilities financed with 
state or local government bonds. These regulations will affect issuers 
of tax-exempt bonds and nongovernmental persons engaged in the local 
furnishing of electric energy or gas after the effective date.
    The text of the temporary regulations also serves as the text of 
the proposed regulations set forth in the notice of proposed rulemaking 
on this subject in the Proposed Rules section of this issue of the 
Federal Register.

DATES: Effective Date: These regulations are effective January 19, 
2001.
    Applicability Date: For dates of applicability, see Secs. 1.141-
15T, 1.142(f)(4)-1(g), and 1.150-5(b).

FOR FURTHER INFORMATION CONTACT: Rose M. Weber (202) 622-3980 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information in this rule has been reviewed and, 
pending receipt and evaluation of public comments, approved by the 
Office of Management and Budget (OMB) under 44 U.S.C. 3507 and assigned 
control number 1545-    .
    The collection of information in this regulation is in 
Sec. 1.142(f)(4)-1. This information is required to enable the IRS to 
identify persons engaged in the local furnishing of electric energy or 
gas that use facilities financed with exempt facility bonds under 
section 142(a)(8) and that expand their service area in a manner 
inconsistent with the requirements of sections 142(a)(8) and (f) who 
have made an election to ensure that those bonds will continue to be 
treated as exempt facility bonds. The data collected will be used by 
the IRS as the mechanism for identifying bonds that will remain tax-
exempt notwithstanding a service area expansion that is inconsistent 
with the requirements of sections 142(a)(8) and (f). The collection of 
information is mandatory. The likely respondents are business 
institutions.
    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S:O Washington, DC 
20224. Comments on the collection of information should be received by 
March 19, 2001. Comments are specifically requested concerning:
    Whether the collection of information is necessary for the proper 
performance of the functions of the Internal Revenue Service, including 
whether the information will have practical utility;
    The accuracy of the estimated burden associated with the collection 
of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the collection of information may 
be minimized, including through the application of automated collection 
techniques or other forms of information technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    Estimated total annual reporting burden is 15 hours.
    Estimated average annual burden hours per respondent is 1 hour.
    Estimated number of respondents is 15.
    Estimated annual frequency of responses is on occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document amends the Income Tax Regulations (26 CFR part 1) 
under section 141 by providing special rules for tax-exempt bonds 
issued for output facilities. This document also amends the Income Tax 
Regulations under section 142(f)(4) by providing rules to make the 
election provided in that section for nongovernmental persons engaged 
in local furnishing of electric energy or gas using facilities financed 
with tax-exempt bonds.
    On January 22, 1998, temporary regulations (TD 8757) (the 1998 
temporary regulations) were published in the Federal Register (63 FR 
3256) to provide guidance under the Internal Revenue Code of 1986 
regarding the application of the private activity bond tests under 
section 141(b)(1) and (2) to output contracts for output facilities; 
the application of the $15 million limit under section 141(b)(4) to 
output facility financings; the election provided in section 142(f)(4) 
for nongovernmental persons engaged in local furnishing of electric 
energy or gas using facilities financed with tax-exempt bonds; and the 
filing location for certain notices and elections. A notice of proposed 
rulemaking (REG-110965-97) cross-referencing the temporary regulations 
was published in the Federal Register on the same day (63 FR 3296). On 
April 28, 1998, the IRS held a public hearing on the proposed 
regulations. Written comments responding to the notice of proposed 
rulemaking were also received. After consideration of all the comments, 
the 1998 temporary regulations are revised by this Treasury decision. 
The new temporary regulations are referred to below as the ``revised 
regulations.'' The revisions are discussed below.

Explanation of Provisions

A. Section 1.141-7T  Special Rules for Output Facilities

1. Benefits and Burdens Test--Transmission Contracts
    Under the 1998 temporary regulations, an agreement to provide firm 
or priority transmission services is generally treated as a take or 
take or pay contract. Commentators suggested that firm or priority 
transmission contracts should not automatically be treated as take or 
take or pay contracts. They recommended that the same standards that 
apply to determine whether generation contracts result in private 
business use, including the requirements contract provisions, should 
also apply to transmission contracts. The revised regulations adopt 
this recommendation by deleting the provision that generally treats all 
contracts for firm or priority transmission service as take or take or 
pay contracts.

[[Page 4662]]

2. Retail Requirements Contracts
    The 1998 temporary regulations provide that a retail requirements 
contract generally meets the benefits and burdens test to the extent it 
obligates the purchaser to make payments that are not contingent on the 
purchaser's output requirements. Commentators requested clarification 
regarding the application of this rule to reasonable contract damages 
and termination provisions. The revised regulations clarify that a 
retail requirements contract does not meet the benefits and burdens 
test by reason of (1) a provision that requires the purchaser to pay 
reasonable and customary damages (including liquidated damages) in the 
event of a default, or (2) a provision that permits the purchaser to 
pay a specified amount to terminate the contract while the purchaser 
has requirements, in each case if the amount of the payment is 
reasonably related to the purchaser's obligation to buy requirements 
that is discharged by the payment.
3. Output Contract Properly Characterized as a Lease
    Under the 1998 temporary regulations, output contracts that provide 
the purchaser with specific rights to control the output of a facility 
or with other specific performance rights to the use of output of the 
facility are generally taken into account under the private business 
tests, even if the benefits and burdens test is not met. Commentators 
requested clarification of the scope of this rule.
    The revised regulations amend the rule and clarify its application 
by specifying that an output contract that is properly characterized as 
a lease for federal income tax purposes is tested under Secs. 1.141-3 
and 1.141-4 to determine whether it is taken into account under the 
private business tests.
4. Special Rule for Facilities With Significant Unutilized Capacity
    The 1998 temporary regulations provide that, if an issuer 
reasonably expects on the issue date that persons that are treated as 
private business users will purchase more than 30 percent of the actual 
output of the facility, the Commissioner may determine the number of 
units produced or to be produced by the facility in one year on a 
reasonable basis other than by reference to nameplate capacity, such as 
the average expected annual output of the facility. The revised 
regulations change the 30 percent threshold to 20 percent.
5. Special Rule for Facilities With a Limited Source of Supply
    Under the 1998 temporary regulations, the available output of a 
facility that is constrained by a limited source of supply must be 
determined by reasonably taking those constraints into account. 
Commentators requested clarification of the meaning of limited source 
of supply. For example, they asked whether the term includes not only 
physical but also economic limitations.
    The revised regulations clarify that a limited source of supply 
includes a physical limitation, such as the flow of water, but not an 
economic limitation, such as the cost of coal or gas.
6. Measurement of Private Business Use
    The 1998 temporary regulations provide that, if an output contract 
results in private business use, the amount of such use generally is 
the capacity that must be reserved for the nongovernmental person under 
prudent reliability standards. Commentators stated that this provision 
is difficult to apply and may overstate the amount of private business 
use. They suggested that the amount of private business use should be 
the amount of output actually purchased under the contract.
    The revised regulations provide that, if an output contract results 
in private business use, the amount of private business use generally 
is the amount of output purchased under the contract.
7. Exception for Small Purchases of Output
    The 1998 temporary regulations provide that output contracts are 
not taken into account under the private business tests if the 
purchaser is not required to make a substantially certain payment in 
any year that is greater than 0.5 percent of the average annual debt 
service on an issue that finances the facility. Some commentators 
suggested that this provision should be amended to take into account 
average annual payments under a contract, rather than payments in any 
one year, and that the provision should apply based on all the 
outstanding bonds for the facility. Other commentators stated that the 
exception should be eliminated as inconsistent with a competitive 
electric industry.
    The revised regulations provide that output contracts are not taken 
into account under the private business tests if the average annual 
payments under the contract that are substantially certain to be made 
do not exceed 0.5 percent of the average annual debt service on all 
outstanding tax-exempt bonds issued to finance the facility.
8. Exception for Short-Term Sales of Output
    The 1998 temporary regulations provide that the exceptions for 
short-term use that apply to other types of arrangements under the 
general private activity bond rules in Sec. 1.141-3 also apply to 
output contracts. Many commentators suggested that these exceptions may 
have limited practical application in the output context and 
recommended that they be expanded to permit contracts of a longer 
duration. These commentators stated that longer-term contracts are 
required in order to transfer substantial benefits of ownership and 
substantial burdens of debt service with respect to an output facility. 
Other commentators suggested that any sale of output by a municipal 
utility outside of its traditional service territory should result in 
private business use.
    The revised regulations provide an exception under which an output 
contract with a nongovernmental person will not be taken into account 
under the private business tests if: (1) the term of the contract, 
including all renewal options, does not exceed one year; (2) the 
compensation under the contract is based on generally applicable and 
uniformly applied rates or represents a negotiated, fair market price; 
and (3) the facility is not financed for a principal purpose of serving 
that nongovernmental person.
9. Special Exception for Sales of Output Attributable to Excess 
Generating Capacity Resulting From Open Access
    The 1998 temporary regulations contain an exception to private 
business use for certain output contracts if: (1) The contract term 
does not exceed three years; (2) the issuer does not utilize tax-exempt 
financing to increase the generating capacity of its system during the 
contract term; (3) the governmental owner offers non-discriminatory, 
open access transmission tariffs under certain rules of the Federal 
Energy Regulatory Commission (FERC) (or comparable provisions of state 
law pursuant to a plan approved by the FERC); (4) all of the output 
sold is attributable to excess capacity resulting from the offer of the 
open access tariffs; (5) the contract mitigates stranded costs 
attributable to the open access tariffs; and (6) any stranded costs 
recovered by the governmental owner are applied as promptly as is 
reasonably practical to redeem tax-exempt bonds in a manner consistent 
with Sec. 1.141-12.
    Comments were received regarding many of the above requirements. In 
particular, many commentators

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suggested that the maximum contract term should be extended beyond 
three years. Some commentators recommended eliminating the prohibition 
on tax-exempt financing to increase capacity during the contract term. 
Others suggested that de minimis capacity increases should be 
permitted. Some commentators suggested that the requirement that a 
contract mitigate stranded costs should be eliminated because the 
purpose of that provision is accomplished by the requirement that all 
of the output sold be attributable to excess capacity from open access 
tariffs. Some commentators recommended deleting the reference to FERC 
approval of state open access plans because the FERC may not approve 
all such plans. Other commentators requested clarification regarding 
the amounts that an issuer must use to redeem bonds. Finally, some 
commentators recommended deleting the exception entirely.
    The revised regulations retain the exception, with certain 
modifications. First, the revised exception permits tax-exempt 
financing during the contract term for property that does not increase 
the generating capacity of the issuer's system by more than three 
percent. Second, the amended exception deletes the reference to FERC 
approval of state open access plans. Third, the revised regulations 
remove the reference to stranded costs. Finally, the revised exception 
clarifies that the amounts that an issuer must use to redeem bonds 
consist of all payments that it receives under the contract, other than 
the portion of such payments that is properly allocable to the payment 
of ordinary and necessary expenses directly attributable to the 
operation and maintenance of the facility (as described in Sec. 1.141-
4(c)(2)(C)).
10. Special Exceptions for Transmission Facilities
    The 1998 temporary regulations do not treat all use of transmission 
facilities pursuant to standard tariffs as general public use, but 
contain certain special exceptions to private business use of 
transmission facilities. Some commentators suggested that use of 
transmission facilities under standard tariffs should be treated as 
general public use, and therefore should never result in private 
business use. The revised regulations do not treat all use of 
transmission facilities pursuant to standard tariffs as general public 
use, but retain and modify the special exceptions, as discussed below.
    The 1998 temporary regulations contain two special exceptions under 
which certain actions with respect to transmission facilities financed 
by an issue are not treated as deliberate actions under Sec. 1.141-
2(d). The first exception provides that the execution of a contract for 
the use of transmission facilities is not treated as a deliberate 
action if the contract is entered into in response to or in 
anticipation of a specific order by the FERC to wheel power under 
sections 211 and 212 of the Federal Power Act (16 U.S.C. 824j and 824k) 
(or a state regulatory authority under comparable provisions of state 
law pursuant to a plan approved by the FERC); the terms of the contract 
are bona fide and arm's-length; and the consideration paid is 
consistent with section 212(a) of the Federal Power Act.
    Commentators suggested eliminating the requirement that orders of 
state regulatory authorities be undertaken pursuant to a FERC-approved 
state open access plan because FERC approval may not be required for 
all such plans. The revised regulations adopt this suggested change.
    The second exception in the 1998 temporary regulations provides 
that an action is not treated as a deliberate action if it is taken to 
implement the offering of non-discriminatory, open access tariffs for 
the use of financed transmission facilities in a manner consistent with 
FERC rules, including the reciprocity conditions of FERC Order No. 888 
(61 FR 21540, May 10, 1996). The exception also applies to orders and 
rules of state regulatory authorities pursuant to a plan approved by 
the FERC that are comparable to certain FERC orders and rules. The 
exception does not apply, however, to the sale, exchange, or other 
disposition of bond-financed transmission facilities to a 
nongovernmental person.
    Commentators recommended that the exception be expanded to apply to 
open access tariffs that are offered under state law provisions that 
are comparable to FERC rules, regardless of whether those provisions 
are promulgated by a state regulatory authority or approved by the 
FERC. The revised regulations adopt this suggested change.
    Commentators also requested clarification regarding the 
circumstances in which an independent system operator (ISO) may be 
treated as a private business user of transmission facilities. Some 
commentators suggested that the operation of transmission facilities by 
an ISO is a quasi-governmental function and thus should never 
constitute private business use. Some commentators requested 
clarification of whether the existing rules for management contracts 
under section 141 may be applied to arrangements for the operation of 
transmission facilities by an ISO.
    The revised regulations do not provide that the operation of bond-
financed transmission facilities by an ISO or other regional 
transmission organization (RTO) is disregarded under section 141. 
However, the existing rules for management contracts under section 141, 
including Revenue Procedure 97-13 (1997-1 C.B. 632), are applicable in 
determining whether an arrangement for the operation of transmission 
facilities by an ISO or other RTO results in private business use, 
including a determination of whether the arrangement is properly 
characterized as a lease for federal income tax purposes. Comments are 
requested on whether additional guidance is needed concerning the 
treatment under section 141 of arrangements for the operation of bond-
financed transmission facilities by an ISO or other RTO.
    The 1998 temporary regulations provide a special transition rule 
for bonds (other than advance refunding bonds) that refund bonds issued 
prior to July 9, 1996 (the effective date of FERC Order No. 888). Under 
this rule, an action taken or to be taken with respect to transmission 
facilities is not taken into account under the reasonable expectations 
test of Sec. 1.141-2(d) if the action is described in one of the two 
special exceptions discussed above and the weighted average maturity of 
the refunding bonds does not exceed the remaining weighted average 
maturity of the prior bonds.
    Commentators recommended that the July 9, 1996 date be changed to a 
date on or after February 23, 1998 (the effective date of the 1998 
temporary regulations). The revised regulations change the cut-off date 
to February 23, 1998.
    Under the 1998 temporary regulations, issuers may apply the special 
exceptions for transmission facilities to any bonds issued before the 
effective date of those regulations. However, issuers may not apply the 
exceptions to refunding bonds issued on or after the effective date, 
unless the refunding bonds are subject to the 1998 temporary 
regulations in their entirety. Commentators suggested that, in order to 
encourage open access, issuers should be permitted to apply the 
exceptions to refunding bonds that are not otherwise subject to the 
regulations. The revised regulations adopt this change.
11. Definition of Transmission Facilities
    The 1998 temporary regulations define transmission facilities to 
include facilities that are necessary to provide

[[Page 4664]]

ancillary services required to be offered as part of open access 
transmission tariffs under FERC rules. Commentators stated that the 
inclusion of ancillary services within the general definition of 
transmission facilities creates unwarranted complexity. They 
recommended that facilities used for ancillary services be treated as 
transmission facilities only for purposes of the special exceptions for 
transmission facilities in the regulations. The revised regulations 
adopt this approach.

B. Section 1.141-8T $15 Million Limitation for Output Facilities

    Under the 1998 temporary regulations, property that replaces 
existing property is treated as part of the same project as the 
replaced property unless, among other things, the bonds that finance 
the replaced property have a weighted average maturity that is not 
greater than 120 percent of the reasonably expected economic life of 
the replaced property.
    One commentator noted that it is not common to allocate bonds that 
finance output facilities to the specific assets that comprise those 
facilities, and thus it may be difficult to determine whether this 120 
percent requirement is met. The revised regulations amend this rule so 
that it applies to the entire output facility of which the replaced 
property is a part, rather than the specific asset being replaced.

C. Need for Temporary Regulations and Request for Public Comments

    Congress passed the Energy Policy Act of 1992 to encourage 
restructuring of the electric power industry. Since that time, the FERC 
and many states have adopted policies to open up access to transmission 
facilities. Treasury and the IRS are aware that these initiatives are 
causing rapid changes in the electric power industry.
    The 1998 temporary regulations were published in order to provide 
immediate guidance under section 141 regarding the effect on the tax-
exempt status of bonds of certain restructuring transactions necessary 
for utilities to participate in a restructured electric utility 
industry. Treasury and the IRS are aware, however, that restructuring 
efforts are evolving and uncertain, and that new types of arrangements 
may be developed to implement restructuring.
    Accordingly, the revised regulations are published in both 
temporary and proposed form in order to continue to provide guidance on 
which issuers can rely in evaluating their participation in open access 
regimes, while providing the opportunity for public comment with 
respect to developments in the electric power industry that have 
occurred since the publication of the 1998 temporary regulations. The 
revised regulations are published in temporary form with the 
expectation that the Treasury and the IRS will reexamine them in light 
of new developments within the next three years.
    Comments are invited on whether further guidance is needed to 
address the new types of contractual arrangements that are arising in 
the electric power industry. In particular, comments are invited on 
whether additional guidance is needed to address the proper treatment 
under section 141 of output contracts for the use of transmission and 
distribution facilities under open access, and output contracts for 
ancillary services that are necessary to maintain the reliability of a 
transmission grid. Comments are also requested on the impact of FERC 
Order No. 2000 (65 FR 810, January 6, 2000) on tax-exempt bonds issued 
by public power systems, including whether additional guidance is 
needed regarding the proper treatment under section 141 of arrangements 
for the operation of bond-financed transmission facilities by an ISO or 
other RTO that satisfies the requirements of Order 2000.

Effective Dates

    Sections 1.141-7T and 1.141-8T are applicable to bonds sold on or 
after January 19, 2001. Section 1.142(f)(4)-1 applies to elections made 
on or after January 19, 2001. Section 1.150-5 applies to notices and 
elections filed on or after January 19, 2001.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations.
    It is hereby certified that the collection of information in these 
regulations will not have a significant impact on a substantial number 
of small entities. This certification is based upon the fact that in 
the years 1987 through 1997 a total of only 80 different state or local 
government issuers of exempt facility bonds issued under section 142(f) 
for facilities for the local furnishing of electric energy or gas filed 
information returns with the IRS under section 149(e). Further, an 
election under section 142(f)(4) is in no event required to be filed 
with the Internal Revenue Service more than once. Therefore, a 
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Internal Revenue Code, these temporary regulations will be submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

    The principal authors of these regulations are Bruce M. Serchuk, 
and Rose M. Weber, Office of Chief Counsel (Tax-exempt and Government 
Entities), Internal Revenue Service, and Stephen J. Watson, Office of 
Tax Legislative Counsel, Department of the Treasury. However, other 
personnel from the IRS and Treasury Department participated in their 
development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:


    Authority: 26 U.S.C. 7805 * * *


    Par. 2. Section 1.141-0 is amended by revising the entire entries 
for Secs. 1.141-7T, 1.141-8T and 1.141-15T to read as follows:


Sec. 1.141-0  Table of contents.

* * * * *
  

Sec. 1.141-7T  Special Rules for Output Facilities (Temporary).

(a) Overview.
(b) Definitions.
(1) Available output.
(2) Measurement period.
(3) Sale at wholesale.
(4) Take contract and take or pay contract.
(5) Transmission facilities.
(6) Nonqualified amount.
(c) Output contracts.
(1) General rule.
(2) Benefits and burdens test.
(3) Take contract or take or pay contract.
(4) Requirements contracts.
(5) Output contract properly characterized as a lease.
(d) Measurement of private business use.
(e) Measurement of private security or payment.

[[Page 4665]]

(f) Exceptions for certain contracts.
(1) Small purchases of output.
(2) Swapping and pooling arrangements.
(3) Short-term output contracts.
(4) Special 3-year exception for sales of output attributable to 
excess generating capacity resulting from participation in open 
access.
(5) Special exceptions for transmission facilities.
(6) Certain conduit parties disregarded.
(g) Allocations of output facilities and systems.
(1) Facts and circumstances analysis.
(2) Illustrations.
(3) Transmission contracts.
(4) Allocation of payments.
(h) Examples.

Sec. 1.141-8T  $15 Million Limitation for Output Facilities 
(Temporary).

(a) In general.
(1) General rule.
(2) Reduction in $15 million output limitation for outstanding 
issues.
(3) Benefits and burdens test applicable.
(b) Definition of project.
(1) General rule.
(2) Separate ownership.
(3) Generating property.
(4) Transmission.
(5) Subsequent improvements.
(6) Replacement property.
(c) Examples.
* * * * *

Sec. 1.141-15T  Effective Dates (Temporary).

(a) through (e) [Reserved].
(f) Effective dates for certain regulations relating to output 
facilities.
(1) General rule.
(2) Transition rule for requirement contracts.
(3) Elective application of 1998 temporary regulations.
(g) Refunding bonds.
(h) Permissive retroactive application.
(i) Permissive retroactive application of certain regulations 
pertaining to output contracts.
* * * * *

    Par. 3. Section 1.141-7T is revised to read as follows:


Sec. 1.141-7T  Special Rules for Output Facilities (Temporary).

    (a) Overview. This section provides special rules to determine 
whether arrangements for the purchase of output from an output facility 
cause an issue of bonds to meet the private business tests. For this 
purpose, unless otherwise stated, water facilities are treated as 
output facilities. Sections 1.141-3 and 1.141-4 generally apply to 
determine whether other types of arrangements for use of an output 
facility cause an issue to meet the private business tests.
    (b) Definitions. For purposes of this section and Sec. 1.141-8T, 
the following definitions and rules apply:
    (1) Available output. The available output of a facility financed 
by an issue is determined by multiplying the number of units produced 
or to be produced by the facility in one year by the number of years in 
the measurement period of that facility for that issue.
    (i) Generating facilities. The number of units produced or to be 
produced by a generating facility in one year is determined by 
reference to its nameplate capacity or the equivalent (or where there 
is no nameplate capacity or the equivalent, its maximum capacity), 
which is not reduced for reserves, maintenance or other unutilized 
capacity.
    (ii) Transmission and other output facilities--(A) In general. For 
transmission, cogeneration, and other output facilities, available 
output must be measured in a reasonable manner to reflect capacity.
    (B) Electric transmission facilities. Measurement of the available 
output of all or a portion of electric transmission facilities may be 
determined in a manner consistent with the reporting rules and 
requirements for transmission networks promulgated by the Federal 
Energy Regulatory Commission (FERC). For example, for a transmission 
network, the use of aggregate load and load share ratios in a manner 
consistent with the requirements of the FERC may be reasonable. In 
addition, depending on the facts and circumstances, measurement of the 
available output of transmission facilities using thermal capacity or 
transfer capacity may be reasonable.
    (iii) Special rule for facilities with significant unutilized 
capacity. If an issuer reasonably expects on the issue date that 
persons that are treated as private business users will purchase more 
than 20 percent of the actual output of the facility financed with the 
issue, the Commissioner may determine the number of units produced or 
to be produced by the facility in one year on a reasonable basis other 
than by reference to nameplate capacity, such as the average expected 
annual output of the facility. For example, the Commissioner may 
determine the available output of a financed peaking electric 
generating unit by reference to the reasonably expected annual output 
of that unit if the issuer reasonably expects, on the issue date of 
bonds that finance the unit, that an investor-owned utility will 
purchase more than 20 percent of the actual output of the facility 
during the measurement period under a take or pay contract, even if the 
amount of output purchased is less than 10 percent of the available 
output determined by reference to nameplate capacity. The reasonably 
expected annual output of the generating facility must be consistent 
with the capacity reported for prudent reliability purposes.
    (iv) Special rule for facilities with a limited source of supply. 
If a limited source of supply constrains the output of an output 
facility, the number of units produced or to be produced by the 
facility must be determined by reasonably taking into account those 
constraints. For this purpose, a limited source of supply shall include 
a physical limitation (for example, flow of water), but not an economic 
limitation (for example, cost of coal or gas). For example, the 
available output of a hydroelectric unit must be determined by 
reference to the reasonably expected annual flow of water through the 
unit.
    (2) Measurement period. The measurement period of an output 
facility financed by an issue is determined under Sec. 1.141-3(g).
    (3) Sale at wholesale. For purposes of this section, a sale at 
wholesale means a sale of output to any person for resale.
    (4) Take contract and take or pay contract. A take contract is an 
output contract under which a purchaser agrees to pay for the output 
under the contract if the output facility is capable of providing the 
output. A take or pay contract is an output contract under which a 
purchaser agrees to pay for the output under the contract, whether or 
not the output facility is capable of providing the output.
    (5) Transmission facilities--(i) In general. Transmission 
facilities are facilities for the transmission or distribution of 
output.
    (ii) Special rule for ancillary services. For purposes of paragraph 
(f)(5), transmission facilities include facilities necessary to provide 
ancillary services required to be offered as part of open access 
transmission tariffs under rules promulgated by the FERC under sections 
205 and 206 of the Federal Power Act (16 U.S.C. 824d and 824e). Thus, 
if a facility also serves another function (for example, a facility 
that provides for operating reserves for transmission and also provides 
generation) an allocable portion of the facility is treated as a 
transmission facility for purposes of paragraph (f)(5) of this section.
    (6) Nonqualified amount. The nonqualified amount with respect to an 
issue is determined under section 141(b)(8).
    (c) Output contracts--(1) General rule. The purchase by a 
nongovernmental person of available output of an output facility 
(output contract) financed with the proceeds of an issue is taken into 
account under the private business tests if the purchase has the effect 
of transferring substantial benefits of owning the facility and 
substantial burdens of paying the debt service on

[[Page 4666]]

bonds used (directly or indirectly) to finance the facility (the 
benefits and burdens test). See paragraph (c)(5) of this section for 
the treatment of an output contract that is properly characterized as a 
lease for Federal income tax purposes. See paragraphs (d) and (e) of 
this section for rules regarding measuring the use of, and payments of 
debt service for, an output facility for determining whether the 
private business tests are met. See also Sec. 1.141-8T for rules for 
when an issue that finances an output facility (other than a water 
facility) meets the private business tests because the nonqualified 
amount of the issue exceeds $15 million.
    (2) Benefits and burdens test--(i) Benefits of ownership. An output 
contract transfers substantial benefits of owning a facility if the 
contract gives the purchaser (directly or indirectly) rights to 
capacity of the facility on a basis that is preferential to the rights 
of the general public.
    (ii) Burdens of paying debt service. An output contract transfers 
substantial burdens of paying debt service on an issue to the extent 
that the issuer reasonably expects that it is substantially certain 
that payments will be made under the terms of the contract 
(disregarding default, insolvency, or other similar circumstances). For 
example, an output contract is treated as transferring burdens of 
paying debt service on an issue if payments must be made upon contract 
termination.
    (iii) Payments pursuant to pledged contract. Payments made or to be 
made under the terms of an output contract that is pledged as security 
for an issue are taken into account under the private business tests 
even if the issuer reasonably expects that it is not substantially 
certain that payments will be made under the contract (disregarding 
default, insolvency, or other similar circumstances). For this purpose, 
an output contract is pledged as security only if the bond documents 
provide that the pledged contract cannot be substantially amended 
without the consent of bondholders or a trustee for the bondholders. 
This paragraph (c)(2)(iii) applies to pledges made on or after February 
23, 1998, with respect to bonds that are subject to this section.
    (3) Take contract or take or pay contract. The benefits and burdens 
test is met if a nongovernmental person agrees pursuant to a take 
contract or a take or pay contract to purchase available output of a 
facility.
    (4) Requirements contracts--(i) In general. A requirements contract 
under which a nongovernmental person agrees to purchase all or part of 
its output requirements is taken into account under the private 
business tests only to the extent that, based on all the facts and 
circumstances, the contract meets the benefits and burdens test. See 
Sec. 1.141-15T(f)(2) for special effective dates for the application of 
this paragraph (c)(4) to issues financing facilities subject to 
requirements contracts.
    (ii) Significant factors. Significant factors that tend to 
establish that the benefits and burdens test is met under the rule set 
forth in paragraph (c)(4)(i) of this section include, but are not 
limited to--
    (A) The purchaser's customer base has significant indicators of 
stability, such as large size, diverse composition, and a substantial 
residential component;
    (B) The contract covers historical requirements of the purchaser, 
rather than only projected requirements that are in addition to 
historical requirements; and
    (C) The purchaser agrees not to construct or acquire other power 
resources to meet the requirements covered by the contract.
    (iii) Special rule for retail requirements contracts. In general, a 
requirements contract that is not a sale at wholesale (a retail 
requirements contract) does not meet the benefits and burdens test 
because the obligation to make payments on the contract is contingent 
on the output requirements of a single user. Such a requirements 
contract in general meets the benefits and burdens test, however, to 
the extent that it contains contractual terms that obligate the 
purchaser to make payments that are not contingent on the output 
requirements of the purchaser or that obligate the purchaser to have 
output requirements. For example, a requirements contract with an 
industrial purchaser meets the benefits and burdens test if the 
purchaser enters into additional contractual obligations with the 
issuer or another governmental unit not to cease operations. A retail 
requirements contract does not meet the benefits and burdens test by 
reason of a provision that requires the purchaser to pay reasonable and 
customary damages (including liquidated damages) in the event of a 
default, or a provision that permits the purchaser to pay a specified 
amount to terminate the contract while the purchaser has requirements, 
in each case if the amount of the payment is reasonably related to the 
purchaser's obligation to buy requirements that is discharged by the 
payment.
    (5) Output contract properly characterized as a lease. 
Notwithstanding any other provision of this section, an output contract 
that is properly characterized as a lease for Federal income tax 
purposes shall be tested under the rules contained in Secs. 1.141-3 and 
1.141-4 to determine whether it is taken into account under the private 
business tests.
    (d) Measurement of private business use. If an output contract 
results in private business use under this section, the amount of 
private business use generally is the amount of output purchased under 
the contract.
    (e) Measurement of private security or payment. The measurement of 
payments made or to be made by nongovernmental persons under output 
contracts as a percent of the debt service of an issue is determined 
under the rules provided in Sec. 1.141-4.
    (f) Exceptions for certain contracts--(1) Small purchases of 
output. An output contract is not taken into account under the private 
business tests if the average annual payments under the contract that 
are substantially certain to be made under paragraph (c)(2)(ii) of this 
section do not exceed 0.5 percent of the average annual debt service on 
all outstanding tax-exempt bonds issued to finance the facility, 
determined as of the effective date of the contract.
    (2) Swapping and pooling arrangements. An agreement that provides 
for swapping or pooling of output by one or more governmental persons 
and one or more nongovernmental persons does not result in private 
business use of the output facility owned by the governmental person to 
the extent that--
    (i) The swapped output is reasonably expected to be approximately 
equal in value (determined over periods of one year or less); and
    (ii) The purpose of the agreement is to enable each of the parties 
to satisfy different peak load demands, to accommodate temporary 
outages, to diversify supply, or to enhance reliability in accordance 
with prudent reliability standards.
    (3) Short-term output contracts. An output contract with a 
nongovernmental person is not taken into account under the private 
business tests if--
    (i) The term of the contract, including all renewal options, is not 
longer than 1 year;
    (ii) The contract either is a negotiated, arm's-length arrangement 
that provides for compensation at fair market value, or is based on 
generally applicable and uniformly applied rates; and
    (iii) The output facility is not financed for a principal purpose 
of providing that facility for use by that nongovernmental person.

[[Page 4667]]

    (4) Special 3-year exception for sales of output attributable to 
excess generating capacity resulting from participation in open access. 
The purchase of output of an electric generating facility by a 
nongovernmental person is not treated as private business use if all of 
the following requirements are met:
    (i) The term of the contract is not longer than 3 years, including 
all renewal options.
    (ii) The issuer does not make expenditures to increase the 
generating capacity of its system during the term of the contract that 
are, or will be, financed with proceeds of tax-exempt bonds (other than 
expenditures for property that does not increase the generating 
capacity of the system by more than 3 percent).
    (iii) The governmental owner offers non-discriminatory, open access 
transmission tariffs for use of its transmission system pursuant to 
rules promulgated by the FERC under sections 205 and 206 of the Federal 
Power Act (16 U.S.C. 824d and 824e) (or comparable provisions of state 
law).
    (iv) All of the output sold under the contract is attributable to 
excess capacity resulting from the offer of the non-discriminatory, 
open access transmission tariffs referred to in paragraph (f)(5)(iii) 
of this section.
    (v) All payments received by the governmental owner under the 
contract (other than the portion of such payments described in 
Sec. 1.141-4(c)(2)(C)) are applied as promptly as is reasonably 
practical to redeem tax-exempt bonds that financed the output facility 
in a manner consistent with Sec. 1.141-12.
    (5) Special exceptions for transmission facilities--(i) Mandated 
wheeling. Entering into a contract for the use of transmission 
facilities financed by an issue is not treated as a deliberate action 
under Sec. 1.141-2(d) if--
    (A) The contract is entered into in response to (or in anticipation 
of) an order by the United States under sections 211 and 212 of the 
Federal Power Act (16 U.S.C. 824j and 824k) (or a state regulatory 
authority under comparable provisions of state law); and
    (B) The terms of the contract are bona fide and arm's length, and 
the consideration paid is consistent with the provisions of section 
212(a) of the Federal Power Act.
    (ii) Actions taken to implement non-discriminatory, open access. An 
action is not treated as a deliberate action under Sec. 1.141-2(d) if 
it is taken to implement the offering of non-discriminatory, open 
access tariffs for the use of transmission facilities financed by an 
issue in a manner consistent with rules promulgated by the FERC under 
sections 205 and 206 of the Federal Power Act (16 U.S.C. 824d and 824e) 
(or comparable provisions of state law). This paragraph (f)(5)(ii) does 
not apply, however, to the sale, exchange, or other disposition of 
transmission facilities to a nongovernmental person.
    (iii) Application of reasonable expectations test to certain 
current refunding bonds. An action taken or to be taken with respect to 
transmission facilities refinanced by an issue is not taken into 
account under the reasonable expectations test of Sec. 1.141-2(d) if--
    (A) The action is described in paragraph (f)(5)(i) or (ii) of this 
section;
    (B) The bonds of the issue are current refunding bonds that, 
directly or indirectly, refund bonds originally issued before February 
23, 1998; and
    (C) The weighted average maturity of the refunding bonds is not 
greater than the remaining weighted average maturity of those prior 
bonds.
    (6) Certain conduit parties disregarded. A nongovernmental person 
acting solely as a conduit for the exchange of output among 
governmentally owned and operated utilities is disregarded in 
determining whether the private business tests are met with respect to 
financed facilities owned by a governmental person. Use of property by 
a power marketer in the trade or business of purchasing and reselling 
power, however, is taken into account under the private business tests.
    (g) Allocations of output facilities and systems--(1) Facts and 
circumstances analysis. Whether output sold under an output contract is 
allocated to a particular facility (for example, a generating unit), to 
the entire system of the seller of that output (net of any uses of that 
system output allocated to a particular facility), or to a portion of a 
facility is based on all the facts and circumstances. Significant 
factors to be considered in determining the allocation of an output 
contract to financed property are the following:
    (i) The extent to which it is physically possible to deliver output 
to or from a particular facility or system.
    (ii) The terms of a contract relating to the delivery of output 
(such as delivery limitations and options or obligations to deliver 
power from additional sources).
    (iii) Whether a contract is entered into as part of a common plan 
of financing for a facility.
    (iv) The method of pricing output under the contract, such as the 
use of market rates rather than rates designed to pay debt service of 
tax-exempt bonds used to finance a particular facility.
    (2) Illustrations. The following illustrate the factors set forth 
in paragraph (g)(1) of this section:
    (i) Physical possibility. Output from a generating unit that is fed 
directly into a low voltage distribution system of the owner of that 
unit and that cannot physically leave that distribution system 
generally must be allocated to those receiving electricity through that 
distribution system. Output may be allocated without regard to physical 
limitations, however, if exchange or similar agreements provide output 
to a purchaser where, but for the exchange agreements, it would not be 
possible for the seller to provide output to that purchaser.
    (ii) Contract terms relating to performance. A contract to provide 
a specified amount of electricity from a system, but only when at least 
that amount of electricity is being generated by a particular unit, is 
allocated to that unit. For example, a contract to buy 20 MW of system 
power with a right to take up to 40 percent of the actual output of a 
specific 50 MW facility whenever total system output is insufficient to 
meet all of the seller's obligations generally is allocated to the 
specific facility rather than to the system.
    (iii) Common plan of financing. A contract entered into as part of 
a common plan of financing for a facility generally is allocated to the 
facility if debt service for the issue of bonds is reasonably expected 
to be paid, directly or indirectly, from payments substantially certain 
to be made under the contract (disregarding default, insolvency, or 
other similar circumstances).
    (iv) Pricing method. Pricing based on the capital and generating 
costs of a particular turbine tends to indicate that output under the 
contract is properly allocated to that turbine.
    (3) Transmission contracts. Whether use under an output contract 
for transmission is allocated to a particular facility or to a 
transmission network is based on all the facts and circumstances, in a 
manner similar to paragraphs (g)(1) and (2) of this section. In 
general, the method used to determine payments under a contract is a 
more significant contract term for this purpose than nominal contract 
path. In general, if reasonable and consistently applied, the 
determination of use of transmission facilities under an output 
contract may be based on a method used by third parties, such as 
reliability councils.
    (4) Allocation of payments. Payments for output provided by an 
output facility financed with two or more sources of

[[Page 4668]]

funding are generally allocated under the rules in Sec. 1.141-4(c).
    (h) Examples. The following examples illustrate the application of 
this section:

    Example 1. Joint ownership. Z, an investor-owned electric 
utility, and City H agree to construct an electric generating 
facility of a size sufficient to take advantage of the economies of 
scale. H will issue $50 million of its 24-year bonds, and Z will use 
$100 million of its funds for construction of a facility they will 
jointly own as tenants in common. Each of the participants will 
share in the ownership, output, and operating expenses of the 
facility in proportion to its contribution to the cost of the 
facility, that is, one-third by H and two-thirds by Z. H's bonds 
will be secured by H's ownership interest in the facility and by 
revenues to be derived from its share of the annual output of the 
facility. H will need only 50 percent of its share of the annual 
output of the facility during the first 20 years of operations. It 
agrees to sell 10 percent of its share of the annual output to Z for 
a period of 20 years pursuant to a contract under which Z agrees to 
take that power if available. The facility will begin operation, and 
Z will begin to receive power, 4 years after the H bonds are issued. 
The measurement period for the property financed by the issue is 20 
years. H also will sell the remaining 40 percent of its share of the 
annual output to numerous other private utilities under contracts of 
one year or less that satisfy the exception under paragraph (f)(3) 
of this section. No other contracts will be executed obligating any 
person to purchase any specified amount of the power for any 
specified period of time. No person (other than Z) will make 
payments substantially certain to be made (disregarding default, 
insolvency, or other similar circumstances) under paragraph (c)(2) 
of this section that will result in a transfer of substantial 
burdens of paying debt service on bonds used directly or indirectly 
to provide H's share of the facilities. The bonds are not private 
activity bonds, because H's one-third interest in the facility is 
not treated as used by the other owners of the facility. Although 10 
percent of H's share of the annual output of the facility will be 
used in the trade or business of Z, a nongovernmental person, under 
this section, that portion constitutes not more than 10 percent of 
the available output of H's ownership interest in the facility.
    Example 2. Requirements contract treated as take contract. (i) 
City J issues 20-year bonds to acquire an electric generating 
facility having a reasonably expected economic life substantially 
greater than 20 years and a nameplate capacity of 100 MW. The 
available output of the facility under paragraph (b)(1) of this 
section is approximately 17,520,000 MWh (100 MW  x  24 hours  x  365 
days  x  20 years). On the issue date, J enters into a contract with 
T, an investor-owned utility, to provide T with all of its power 
requirements for a period of 10 years, commencing on the issue date. 
J reasonably expects that T will actually purchase an average of 30 
MW over the 10-year period. Based on all of the facts and 
circumstances, including the size, diversity, and composition of T's 
customer base, J reasonably expects that it is substantially certain 
(disregarding default, insolvency, or other similar circumstances) 
that T will actually purchase only an average of 26 MW over the 10-
year period. The contract is a requirements contract that must be 
taken into account under the private business tests pursuant to 
paragraph (c)(4) of this section because it provides T with 
substantial benefits of ownership (rights to capacity) and obligates 
T with substantial burdens of making payments that the issuer 
reasonably expects are substantially certain.
    (ii) Under paragraph (d) of this section, the amount of 
reasonably expected private business use under this contract is 
approximately 15 percent (30 MW  x  24 hours  x  365 days  x  10 
years, or 2,628,000 MWh) of the available output. Accordingly, the 
issue meets the private business use test. J reasonably expects that 
the amount to be paid for an average of 26 MW of power (less the 
operation and maintenance costs directly attributable to generating 
that 26 MW of power), will be more than 10 percent of debt service 
on the issue on a present-value basis. The payment for 26 MW of 
power is an amount that J reasonably expects is substantially 
certain to be made under paragraph (c)(2) of this section. 
Accordingly, the issue meets the private security or payment test 
because J reasonably expects that it is substantially certain that 
payment of more than 10 percent of the debt service will be 
indirectly derived from payments by T. The bonds are private 
activity bonds under paragraph (c) of this section. Further, if 15 
percent of the sale proceeds of the issue is greater than $15 
million and the issue meets the private security or payment test 
with respect to the $15 million output limitation, the bonds are 
also private activity bonds under section 141(b)(4). See Sec. 1.141-
8T.
    Example 3. Allocation of existing contracts to new facilities. 
Power Authority K, a political subdivision created by the 
legislature in State  x  to own and operate certain power generating 
facilities, sells all of the power from its existing facilities to 
four private utility systems under contracts executed in 1999, under 
which the four systems are required to take or pay for specified 
portions of the total power output until the year 2029. Existing 
facilities supply all of the present needs of the four utility 
systems, but their future power requirements are expected to 
increase substantially beyond the capacity of K's current generating 
system. K issues 20-year bonds in 2004 to construct a large 
generating facility. As part of the financing plan for the bonds, a 
fifth private utility system contracts with K to take or pay for 15 
percent of the available output of the new facility. The balance of 
the output of the new facility will be available for sale as 
required, but initially it is not anticipated that there will be any 
need for that power. The revenues from the contract with the fifth 
private utility system will be sufficient to pay less than 10 
percent of the debt service on the bonds (determined on a present 
value basis). The balance, which will exceed 10 percent of the debt 
service on the bonds, will be paid from revenues derived from the 
contracts with the four systems initially from sale of power 
produced by the old facilities. The output contracts with all the 
private utilities are allocated to K's entire generating system. See 
paragraphs (g)(1) and (2) of this section. Thus, the bonds meet the 
private business use test because more than 10 percent of the 
proceeds will be used in the trade or business of a nongovernmental 
person. In addition, the bonds meet the private security or payment 
test because payment of more than 10 percent of the debt service, 
pursuant to underlying arrangements, will be derived from payments 
in respect of property used for a private business use.
    Example 4. Allocation to displaced resource. Municipal utility 
MU, a political subdivision, purchases all of the electricity 
required to meet the needs of its customers (1,000 MW) from B, an 
investor-owned utility that operates its own electric generating 
facilities, under a 50-year take or pay contract. MU does not 
anticipate that it will require additional electric resources, and 
any new resources would produce electricity at a higher cost to MU 
than its cost under its contract with B. Nevertheless, B encourages 
MU to construct a new generating plant sufficient to meet MU's 
requirements. MU issues obligations to construct facilities that 
will produce 1,000 MW of electricity. MU, B, and I, another 
investor-owned utility, enter into an agreement under which MU 
assigns to I its rights under MU's take or pay contract with B. 
Under this arrangement, I will pay MU, and MU will continue to pay 
B, for the 1,000 MW. I's payments to MU will at least equal the 
amounts required to pay debt service on MU's bonds. In addition, 
under paragraph (g)(1)(iii) of this section, the contract among MU, 
B, and I is entered into as part of a common plan of financing of 
the MU facilities. Under all the facts and circumstances, MU's 
assignment to I of its rights under the original take or pay 
contract is allocable to MU's new facilities under paragraph (g) of 
this section. Because I is a nongovernmental person, MU's bonds are 
private activity bonds.
    Example 5. Transmission facilities transferred to regional 
transmission organization. (i) In 2001, the public utilities 
commission of State C adopts a plan for restructuring its electric 
power industry. The plan fosters competition by providing both 
wholesale and retail customers with non-discriminatory access to 
transmission facilities within the State. The plan provides that 
investor-owned utilities will transfer operating control over all of 
their transmission assets to a regional transmission organization 
(RTO), which is a nongovernmental person that will operate those 
combined assets as a single, state-wide system. Municipally-owned 
utilities are eligible for, but are not required to participate in, 
the open access system implemented by the RTO. The functions of the 
RTO include control of transmission access and pricing, scheduling 
transmission, control area operations, and settlements and billing. 
The RTO's compensation under its operating agreement with 
transmission owners is based on a share of net profits from 
operating the facilities. The restructuring plan is approved by the 
FERC pursuant to sections 205 and 206 of the Federal Power Act.

[[Page 4669]]

    (ii) In 1994, City D had issued bonds to finance improvements to 
its transmission system. In 2001, D transfers operating control of 
its transmission system to the RTO pursuant to the restructuring 
plan. At the same time, D chooses to apply the private activity bond 
regulations of Secs. 1.141-1 through 1.141-15 to the 1994 bonds. The 
operation of the financed facilities by the RTO results in private 
business use under Sec. 1.141-3. Under the special exception in 
paragraph (f)(5) of this section, however, the transfer of control 
is not treated as a deliberate action. Accordingly, the transfer of 
control does not cause the 1994 bonds to meet the private activity 
bond tests.
    Example 6. Current refunding. The facts are the same as in 
Example 5 of this paragraph (h), and in addition D issues bonds in 
2003 to currently refund the 1994 bonds. The weighted average 
maturity of the 2003 bonds is not greater than the remaining 
weighted average maturity of the 1994 bonds. D chooses to apply the 
private activity bond regulations of Secs. 1.141-1 through 1.141-15 
to the refunding bonds. In general, reasonable expectations must be 
separately tested on the date that refunding bonds are issued under 
Sec. 1.141-2(d). Under the special exception in paragraph (f)(5) of 
this section, however, the transfer of the financed facilities to 
the RTO need not be taken into account in applying the reasonable 
expectations test to the refunding bonds.

    Par. 4. Section 1.141-8T is revised to read as follows:


Sec. 1.141-8T  $15 million limitation for output facilities 
(temporary).

    (a) In general--(1) General rule. Section 141(b)(4) provides a 
special private activity bond limitation (the $15 million output 
limitation) for issues 5 percent or more of the proceeds of which are 
to be used to finance output facilities (other than a facility for the 
furnishing of water). Under this rule, an issue consists of private 
activity bonds under the private business tests of section 141(b)(1) 
and (2) if the nonqualified amount with respect to output facilities 
financed by the proceeds of the issue exceeds $15 million. The $15 
million output limitation applies in addition to the private business 
tests of section 141(b)(1) and (2). Under section 141(b)(4) and 
paragraph (a)(2) of this section, the $15 million output limitation is 
reduced in certain cases. Specifically, an issue meets the test in 
section 141(b)(4) if both of the following tests are met:
    (i) More than $15 million of the proceeds of the issue to be used 
with respect to an output facility are to be used for a private 
business use. Investment proceeds are disregarded for this purpose if 
they are not allocated disproportionately to the private business use 
portion of the issue.
    (ii) The payment of the principal of, or the interest on, more than 
$15 million of the sales proceeds of the portion of the issue used with 
respect to an output facility is (under the terms of the issue or any 
underlying arrangement) directly or indirectly--
    (A) Secured by any interest in an output facility used or to be 
used for a private business use (or payments in respect of such an 
output facility); or
    (B) To be derived from payments (whether or not to the issuer) in 
respect of an output facility used or to be used for a private business 
use.
    (2) Reduction in $15 million output limitation for outstanding 
issues--(i) General rule. In determining whether an issue 5 percent or 
more of the proceeds of which are to be used with respect to an output 
facility consists of private activity bonds under the $15 million 
output limitation, the $15 million limitation on private business use 
and private security or payments is applied by taking into account the 
aggregate nonqualified amounts of any outstanding bonds of other issues 
5 percent or more of the proceeds of which are or will be used with 
respect to that output facility or any other output facility that is 
part of the same project.
    (ii) Bonds taken into account. For purposes of this paragraph 
(a)(2), in applying the $15 million output limitation to an issue (the 
later issue), a tax-exempt bond of another issue (the earlier issue) is 
taken into account if--
    (A) That bond is outstanding on the issue date of the later issue;
    (B) That bond will not be redeemed within 90 days of the issue date 
of the later issue in connection with the refunding of that bond by the 
later issue; and
    (C) 5 percent or more of the sale proceeds of the earlier issue 
financed an output facility that is part of the same project as the 
output facility that is financed by 5 percent or more of the sale 
proceeds of the later issue.
    (3) Benefits and burdens test applicable--(i) In general. In 
applying the $15 million output limitation, the benefits and burdens 
test of Sec. 1.141-7T applies, except that ``$15 million'' is 
substituted for ``10 percent'', or ``5 percent'' as appropriate.
    (ii) Earlier issues for the project. If bonds of an earlier issue 
are outstanding and must be taken into account under paragraph (a)(2) 
of this section, the nonqualified amount for that earlier issue is 
multiplied by a fraction, the numerator of which is the adjusted issue 
price of the earlier issue as of the issue date of the later issue, and 
the denominator of which is the issue price of the earlier issue. Pre-
issuance accrued interest as defined in Sec. 1.148-1(b) is disregarded 
for this purpose.
    (b) Definition of project--(1) General rule. For purposes of 
paragraph (a)(2) of this section, project has the meaning provided in 
this paragraph. Facilities that are functionally related and 
subordinate to a project are treated as part of that same project. 
Facilities having different purposes or serving different customer 
bases are not ordinarily part of the same project. For example, the 
following are generally not part of the same project--
    (i) Generation and transmission facilities;
    (ii) Separate facilities designed to serve wholesale customers and 
retail customers; and
    (iii) A peaking unit and a baseload unit.
    (2) Separate ownership. Except as otherwise provided in this 
paragraph (b)(2), facilities that are not owned by the same person are 
not part of the same project. If different governmental persons act in 
concert to finance a project, however (for example as participants in a 
joint powers authority), their interests are aggregated with respect to 
that project to determine whether the $15 million output limitation is 
met. In the case of undivided ownership interests in a single output 
facility, property that is not owned by different persons is treated as 
separate projects only if the separate interests are financed--
    (i) With bonds of different issuers; and
    (ii) Without a principal purpose of avoiding the limitation in this 
section.
    (3) Generating property--(i) Property on same site. In the case of 
generation and related facilities, project means property located at 
the same site.
    (ii) Special rule for generating units. Separate generating units 
are not part of the same project if one unit is reasonably expected, on 
the issue date of each issue that finances the units, to be placed in 
service more than 3 years before the other. Common facilities or 
property that will be functionally related to more than one generating 
unit must be allocated on a reasonable basis. If a generating unit 
already is constructed or is under construction (the first unit) and 
bonds are to be issued to finance an additional generating unit (the 
second unit), all costs for any common facilities paid or incurred 
before the earlier of the issue date of bonds to finance the second 
unit or the commencement of construction of the second unit are 
allocated to the first unit. At the time that bonds are issued to 
finance the second unit (or, if earlier, upon commencement of 
construction of

[[Page 4670]]

that unit), any remaining costs of the common facilities may be 
allocated between the first and second units so that in the aggregate 
the allocation is reasonable.
    (4) Transmission. In the case of transmission facilities, project 
means functionally related or contiguous property. Separate 
transmission facilities are not part of the same project if one 
facility is reasonably expected, on the issue date of each issue that 
finances the facilities, to be placed in service more than 2 years 
before the other.
    (5) Subsequent improvements--(i) In general. An improvement to 
generating or transmission facilities that is not part of the original 
design of those facilities (the original project) is not part of the 
same project as the original project if the construction, 
reconstruction, or acquisition of that improvement commences more than 
3 years after the original project was placed in service and the bonds 
issued to finance that improvement are issued more than 3 years after 
the original project was placed in service.
    (ii) Special rule for transmission facilities. An improvement to 
transmission facilities that is not part of the original design of that 
property is not part of the same project as the original project if the 
issuer did not reasonably expect the need to make that improvement when 
it commenced construction of the original project and the construction, 
reconstruction, or acquisition of that improvement is mandated by the 
federal government or a state regulatory authority to accommodate 
requests for wheeling.
    (6) Replacement property. For purposes of this section, property 
that replaces existing property of an output facility is treated as 
part of the same project as the replaced property unless--
    (i) The need to replace the property was not reasonably expected on 
the issue date or the need to replace the property occurred more than 3 
years before the issuer reasonably expected (determined on the issue 
date of the bonds financing the property) that it would need to replace 
the property; and
    (ii) The bonds that finance (and refinance) the output facility 
have a weighted average maturity that is not greater than 120 percent 
of the reasonably expected economic life of the facility.
    (c) Example. The application of the provisions of this section is 
illustrated by the following example:

    Example. (i) Power Authority K, a political subdivision, intends 
to issue a single issue of tax-exempt bonds at par with a stated 
principal amount and sale proceeds of $500 million to finance the 
acquisition of an electric generating facility. No portion of the 
facility will be used for a private business use, except that L, an 
investor-owned utility, will purchase 10 percent of the output of 
the facility under a take contract and will pay 10 percent of the 
debt service on the bonds. The nonqualified amount with respect to 
the bonds is $50 million.
    (ii) The maximum amount of tax-exempt bonds that may be issued 
for the acquisition of an interest in the facility in paragraph (i) 
of this Example is $465 million (that is, $450 million for the 90 
percent of the facility that is governmentally owned and used plus a 
nonqualified amount of $15 million).


    Par. 5. Section 1.141-15 is amended by revising paragraphs (c), (d) 
and (e) to read as follows:


Sec. 1.141-15  Effective dates.

* * * * *
    (c) Refunding bonds. Sections 1.141-1 through 1.141-6(a), 1.141-9 
through 1.141-14, 1.145-1 through 1.145-2, 1.150-1(a)(3) and the 
definition of bond documents contained in Sec. 1.150-1(b) do not apply 
to any bonds issued on or after May 16, 1997, to refund a bond to which 
those sections do not apply unless--
    (1) The refunding bonds are subject to section 1301 of the Tax 
Reform Act of 1986 (100 Stat. 2602); and
    (2)(i) The weighted average maturity of the refunding bonds is 
longer than--
    (A) The weighted average maturity of the refunded bonds; or
    (B) In the case of a short-term obligation that the issuer 
reasonably expects to refund with a long-term financing (such as a bond 
anticipation note), 120 percent of the weighted average reasonably 
expected economic life of the facilities financed; or
    (ii) A principal purpose for the issuance of the refunding bonds is 
to make one or more new conduit loans.
    (d) Permissive application of regulations. Except as provided in 
paragraph (e) of this section, Secs. 1.141-1 through 1.141-6(a), 1.141-
9 through 1.141-14, 1.145-1 through 1.145-2, 1.150-1(a)(3) and the 
definition of bond documents contained in Sec. 1.150-1(b) may be 
applied in whole, but not in part, to actions taken before February 23, 
1998, with respect to--
    (1) Bonds that are outstanding on May 16, 1997, and subject to 
section 141; or
    (2) Refunding bonds issued on or after May 16, 1997 that are 
subject to section 141.
    (e) Permissive application of certain sections. The following 
sections may each be applied to any bonds--
    (1) Section 1.141-3(b)(4);
    (2) Section 1.141-3(b)(6); and
    (3) Section 1.141-12.

    Par. 6. Section 1.141-15T is revised to read as follows:


Sec. 1.141-15T  Effective dates (temporary).

    (a) through (e) [Reserved]. For further guidance see Sec. 1.141-15.
    (f) Effective dates for certain regulations relating to output 
facilities--(1) General rule. Except as otherwise provided in this 
section, Secs. 1.141-7T and 1.141-8T apply to bonds sold on or after 
January 19, 2001, that are subject to section 1301 of the Tax Reform 
Act of 1986 (100 Stat. 2602).
    (2) Transition rule for requirements contracts. For bonds otherwise 
subject to Secs. 1.141-7T and 1.141-8T, Sec. 1.141-7T(c)(4) applies to 
output contracts entered into on or after February 23, 1998. An output 
contract is treated as entered into on or after that date if its term 
is extended, the parties to the contract change, or other material 
terms are amended on or after that date. For purposes of this paragraph 
(f)(2)--
    (i) The extension of the term of a contract causes the contract to 
be treated as entered into on the first day of the additional term;
    (ii) The exercise by a party of a legally enforceable right that 
was provided under a contract before February 23, 1998, on terms that 
were fixed and determinable before such date, is not treated as an 
amendment of the contract. For example, the exercise by a purchaser 
after February 23, 1998 of a renewal option that was provided under a 
contract before that date, on terms identical to the original contract, 
is not treated as an amendment of the contract; and
    (iii) An amendment that reduces the term of a contract, or the 
amount of requirements covered by a contract, is not, in and of itself, 
material.
    (3) Elective application of 1998 temporary regulations. For an 
issue sold on or after January 19, 2001, and before February 15, 2001, 
an issuer may apply the provisions of Secs. 1.141-7T and 1.141-8T in 
effect prior to January 19, 2001 (26 CFR part 1, revised April 1, 2000) 
in whole, but not in part, in lieu of applying Secs. 1.141-7T and 
1.141-8T.
    (g) Refunding bonds in general. Except as otherwise provided in 
paragraph (h) or (i) of this section, Secs. 1.141-7T and 1.141-8T do 
not apply to any bonds sold on or after January 19, 2001, to refund a 
bond to which Secs. 1.141-7T and 1.141-8T do not apply unless--
    (1) The refunding bonds are subject to section 1301 of the Tax 
Reform Act of 1986 (100 Stat. 2602); and
    (2)(i) The weighted average maturity of the refunding bonds is 
longer than--
    (A) The weighted average maturity of the refunded bonds; or
    (B) In the case of a short-term obligation that the issuer 
reasonably

[[Page 4671]]

expects to refund with a long-term financing (such as a bond 
anticipation note), 120 percent of the weighted average reasonably 
expected economic life of the facilities financed; or
    (ii) A principal purpose for the issuance of the refunding bonds is 
to make one or more new conduit loans.
    (h) Permissive retroactive application. Except as provided in 
Sec. 1.141-15(d) or (e) or paragraph (i) of this section, Secs. 1.141-1 
through 1.141-6, 1.141-7T through 1.141-8T, 1.141-9 through 1.141-14, 
1.145-1 through 1.145-2, 1.150-1(a)(3) and the definition of bond 
documents contained in Sec. 1.150-1(b) may be applied in whole, but not 
in part to--
    (1) Outstanding bonds that are sold before January 19, 2001, and 
subject to section 141; or
    (2) Refunding bonds sold on or after January 19, 2001, that are 
subject to section 141.
    (i) Permissive application of certain regulations pertaining to 
output contracts. Section 1.141-7T(f)(4) and (5) may be applied to any 
bonds.

    Par. 7. Section 1.142(f)(4)-1 is added to read as follows:


Sec. 1.142(f)(4)-1  Manner of making election to terminate tax-exempt 
bond financing.

    (a) Overview. Section 142(f)(4) permits a person engaged in the 
local furnishing of electric energy or gas (a local furnisher) that 
uses facilities financed with exempt facility bonds under section 
142(a)(8) and that expands its service area in a manner inconsistent 
with the requirements of sections 142(a)(8) and (f) to make an election 
to ensure that those bonds will continue to be treated as exempt 
facility bonds. The election must meet the requirements of paragraphs 
(b) and (c) of this section.
    (b) Time for making election--(1) In general. An election under 
section 142(f)(4)(B) must be filed with the Internal Revenue Service on 
or before 90 days after the date of the service area expansion that 
causes bonds to cease to meet the requirements of sections 142(a)(8) 
and (f).
    (2) Date of service area expansion. For the purposes of this 
section, the date of the service area expansion is the first date on 
which the local furnisher is authorized to collect revenue for the 
provision of service in the expanded area.
    (c) Manner of making election. An election under section 
142(f)(4)(B) must be captioned ``ELECTION TO TERMINATE TAX-EXEMPT BOND 
FINANCING'', must be signed under penalties of perjury by a person who 
has authority to sign on behalf of the local furnisher, and must 
contain the following information--
    (1) The name of the local furnisher;
    (2) The tax identification number of the local furnisher;
    (3) The complete address of the local furnisher;
    (4) The date of the service area expansion;
    (5) Identification of each bond issue subject to the election, 
including the complete name of each issue, the tax identification 
number of each issuer, the report number of the information return 
filed under section 149(e) for each issue, the issue date of each 
issue, the CUSIP number (if any) of the bond with the latest maturity 
of each issue, the issue price of each issue, the adjusted issue price 
of each issue as of the date of the election, the earliest date on 
which the bonds of each issue may be redeemed, and the principal amount 
of bonds of each issue to be redeemed on the earliest redemption date;
    (6) A statement that the local furnisher making the election agrees 
to the conditions stated in section 142(f)(4)(B); and
    (7) A statement that each issuer of the bonds subject to the 
election has received written notice of the election.
    (d) Effect on section 150(b). Except as provided in paragraph (e) 
of this section, if a local furnisher files an election within the 
period specified in paragraph (b) of this section, section 150(b) does 
not apply to bonds identified in the election during and after that 
period.
    (e) Effect of failure to meet agreements. If a local furnisher 
fails to meet any of the conditions stated in an election pursuant to 
paragraph (c)(6) of this section, the election is invalid.
    (f) Corresponding provisions of the Internal Revenue Code of 1954. 
Section 103(b)(4)(E) of the Internal Revenue Code of 1954 set forth 
corresponding requirements for the exclusion from gross income of the 
interest on bonds issued for facilities for the local furnishing of 
electric energy or gas. For the purposes of this section any reference 
to sections 142(a)(8) and (f) of the Internal Revenue Code of 1986 
includes a reference to the corresponding portion of section 
103(b)(4)(E) of the Internal Revenue Code of 1954.
    (g) Effective dates. This section applies to elections made on or 
after January 19, 2001.


Sec. 1.142(f)(4)-1T  [Removed]

    Par. 8. Section 1.142(f)(4)-1T is removed.

    Par. 9. Section 1.150-5 is added to read as follows:


Sec. 1.150-5  Filing notices and elections.

    (a) In general. Notices and elections under the following sections 
must be filed with the Internal Revenue Service, 1111 Constitution 
Avenue, NW, Attention: T:GE:TEB:O, Washington, DC 20224 or such other 
place designated by publication of a notice in the Internal Revenue 
Bulletin--
    (1) Section 1.141-12(d)(3);
    (2) Section 1.142(f)(4)-1; and
    (3) Section 1.142-2(c)(2).
    (b) Effective dates. This section applies to notices and elections 
filed on or after January 19, 2001.


Sec. 1.150-5T  [Removed]

    Par. 10. Section 1.150-5T is removed.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 11. The authority for part 602 continues to read as follows:


    Authority: 26 U.S.C. 7805.

    Par. 12 . In Sec. 602.101, paragraph (b) is amended by adding an 
entry in numerical order to the table to read as follows:


Sec. 602.101  OMB control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
1.142(f)(4)-1...........................................       1545-1730
 
                  *        *        *        *        *
------------------------------------------------------------------------


Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: January 10, 2001.
Jonathan Talisman,
Assistant Secretary of the Treasury.
[FR Doc. 01-1412 filed 1-17-01; 8:45 am]
BILLING CODE 4830-01-P