Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations 4661

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.

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 §§ 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 § 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) crossreferencing 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.

4662 Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations

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 §§ 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 shortterm use that apply to other types of

arrangements under the general private

activity bond rules in § 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 longerterm 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 taxexempt 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 § 1.141–12.

Comments were received regarding

many of the above requirements. In

particular, many commentators

Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations 4663

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 taxexempt 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 § 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 § 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 quasigovernmental 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 bondfinanced 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 § 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

4664 Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations

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 §§ 1.141–

7T, 1.141–8T and 1.141–15T to read as

follows:

§ 1.141–0 Table of contents.

* * * * *

§ 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.

Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations 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.

§ 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.

* * * * *

§ 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:

§ 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 § 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 § 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

4666 Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations

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 § 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

§ 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

§§ 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 § 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.

Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations 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 § 1.141–

4(c)(2)(C)) are applied as promptly as is

reasonably practical to redeem taxexempt bonds that financed the output

facility in a manner consistent with

§ 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 § 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 nondiscriminatory, open access. An action

is not treated as a deliberate action

under § 1.141–2(d) if it is taken to

implement the offering of nondiscriminatory, 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 § 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

4668 Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations

funding are generally allocated under

the rules in § 1.141–4(c).

(h) Examples. The following examples

illustrate the application of this section:

Example 1. Joint ownership. Z, an investorowned 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 ×

24 hours × 365 days × 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 × 24 hours

× 365 days × 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 § 1.141–8T.

Example 3. Allocation of existing contracts

to new facilities. Power Authority K, a

political subdivision created by the

legislature in State × 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 nondiscriminatory 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.

Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations 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 §§ 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

§ 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 §§ 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

§ 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:

§ 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 § 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 § 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

4670 Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations

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:

§ 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 § 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, §§ 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 § 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:

§ 1.141–15T Effective dates (temporary).

(a) through (e) [Reserved]. For further

guidance see § 1.141–15.

(f) Effective dates for certain

regulations relating to output facilities—

(1) General rule. Except as otherwise

provided in this section, §§ 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 §§ 1.141–7T and 1.141–8T, § 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 §§ 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 §§ 1.141–7T and 1.141–8T.

(g) Refunding bonds in general.

Except as otherwise provided in

paragraph (h) or (i) of this section,

§§ 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

§§ 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

Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations 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 § 1.141–15(d) or

(e) or paragraph (i) of this section,

§§ 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 § 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:

§ 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.

§ 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:

§ 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.

§ 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 § 602.101, paragraph (b) is

amended by adding an entry in

numerical order to the table to read as

follows:

§ 602.101 OMB control numbers.

* * * * *

(b) * * *

CFR part or section where

identified and described

Current OMB

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

DEPARTMENT OF THE INTERIOR

Office of Surface Mining Reclamation

and Enforcement

30 CFR Part 931

[NM–041–FOR]

New Mexico Regulatory Program

AGENCY: Office of Surface Mining

Reclamation and Enforcement, Interior.

ACTION: Final rule, approval of

amendment.

SUMMARY: The Office of Surface Mining

Reclamation and Enforcement (OSM) is