I

106TH CONGRESS

1ST SESSION H. R. 1253

To amend the Internal Revenue Code of 1986 to restrict the use of taxexempt financing by governmentally owned electric utilities and to subject

certain activities of such utilities to income tax.

IN THE HOUSE OF REPRESENTATIVES

MARCH 24, 1999

Mr. ENGLISH (for himself, Mr. CRANE, Mr. RAMSTAD, and Mrs. JOHNSON of

Connecticut) introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to restrict

the use of tax-exempt financing by governmentally owned

electric utilities and to subject certain activities of such

utilities to income tax.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. BONDS ISSUED TO FINANCE CERTAIN GOVERN4 MENTAL ELECTRIC OUTPUT FACILITIES

5 TREATED AS PRIVATE ACTIVITY BONDS.

6 (a) GOVERNMENTAL UNITS NO LONGER ELIGIBLE

7 FOR EXCEPTION FROM TERMINATION OF LOCAL FUR8 NISHING PROVISIONS.—Paragraph (3) of section 142(f) of
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1 the Internal Revenue Code of 1986 is amended by adding

2 at the end the following flush sentence:

3 ‘‘For purposes of applying this paragraph to bonds

4 issued after the date of the enactment of this sen5 tence, the term ‘person’ shall not include a govern6 mental unit.’’

7 (b) CERTAIN ISSUES FOR GOVERNMENTAL ELECTRIC

8 OUTPUT FACILITIES TREATED AS PRIVATE ACTIVITY

9 BONDS.—Section 141 of such Code (relating to private

10 activity bonds) is amended by adding at the end the fol11 lowing new subsection:

12 ‘‘(f) ISSUES FOR GOVERNMENTAL ELECTRIC OUT13 PUT FACILITIES.—

14 ‘‘(1) IN GENERAL.—The term ‘private activity

15 bond’ includes any bond issued as part of an issue

16 if any proceeds of the issue are to be used (directly

17 or indirectly) for the construction or acquisition of

18 any governmental electric output facility.

19 ‘‘(2) GOVERNMENTAL ELECTRIC OUTPUT FA20 CILITY; ELECTRIC ENERGY SERVICES.—For purposes

21 of this subsection—

22 ‘‘(A) GOVERNMENTAL ELECTRIC OUTPUT

23 FACILITY.—

24 ‘‘(i) IN GENERAL.—The term ‘govern25 mental electric output facility’ means any
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1 facility (including any generation, trans2 mission, or distribution facility) used or to

3 be used in connection with the furnishing

4 for sale of electric energy services by any

5 governmental utility.

6 ‘‘(ii) EXCEPTION FOR PROPERTY CON7 VERTED TO NONOUTPUT USE.—The term

8 ‘governmental electric output facility’ shall

9 not include any property described in sub10 section (d)(4).

11 ‘‘(B) ELECTRIC ENERGY SERVICES.—The

12 term ‘electric energy services’ includes the fur13 nishing of electric energy.

14 ‘‘(3) EXCEPTION FOR LOCAL GOVERNMENTAL

15 UTILITIES.—

16 ‘‘(A) IN GENERAL.—Paragraph (1) shall

17 be applied by not taking into account any facil18 ity owned by a local governmental utility.

19 ‘‘(B) LOCAL GOVERNMENTAL UTILITY.—

20 For purposes of this subsection, the term ‘local

21 governmental utility’ means any governmental

22 utility if—

23 ‘‘(i) all governmental electric output

24 facilities (other than generation facilities)

25 which—
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1 ‘‘(I) are owned by such utility,

2 and

3 ‘‘(II) are placed in service after

4 the date of the enactment of this sub5 section,

6 are located within the qualified govern7 mental service area of such utility,

8 ‘‘(ii) electric energy services furnished

9 by such utility are sold only to ultimate

10 consumers located within such area, and

11 ‘‘(iii) no governmental electric output

12 facility owned by such utility is designed

13 differently, sized larger, built sooner, or

14 constructed in a more costly manner than

15 is reasonably necessary for ultimate con16 sumers located within such area.

17 ‘‘(C) JOINT ACTION POWER AGENCIES.—

18 For purposes of determining whether a partici19 pant in a joint action power agency meets the

20 requirements of subparagraph (B)—

21 ‘‘(i) such participant shall be treated

22 as owning its share of the governmental

23 electric output facilities owned by such

24 agency, and
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1 ‘‘(ii) the determination of whether the

2 requirements of clause (i) or (iii) of sub3 paragraph (B) are met shall be made by

4 treating the qualified governmental service

5 area of such participant as including such

6 area of all participants in such agency.

7 ‘‘(4) EXCEPTION FOR SMALL GOVERNMENTAL

8 UTILITIES.—

9 ‘‘(A) IN GENERAL.—Paragraph (1) shall

10 be applied by not taking into account any facil11 ity owned by a small governmental utility.

12 ‘‘(B) SMALL GOVERNMENTAL UTILITY.—

13 For purposes of this subsection, the term ‘small

14 governmental utility’ means any governmental

15 utility if—

16 ‘‘(i) as of the issuance date of the

17 issue, it is reasonably expected that such

18 utility will furnish electric energy services

19 for sale to less than 5,000 consumers, and

20 ‘‘(ii) at least 30 percent of its average

21 gross income during any 3-calendar year

22 period is from sales to residential con23 sumers.
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1 ‘‘(5) EXCEPTION FOR LOCAL DISTRIBUTION FA2 CILITIES.—Paragraph (1) shall be applied by not

3 taking into account any distribution facility if—

4 ‘‘(A) such facility is located within the

5 qualified governmental service area of such util6 ity, and

7 ‘‘(B) such facility meets the requirements

8 of paragraph (3)(B)(iii).

9 ‘‘(6) EXCEPTIONS TO RULES REQUIRING THAT

10 ULTIMATE CONSUMERS BE LOCATED WITHIN QUALI11 FIED GOVERNMENTAL SERVICE AREA.—

12 ‘‘(A) IN GENERAL.—For purposes of

13 clauses (ii) and (iii) of paragraph (3)(B), a sale

14 shall be treated as being to an ultimate con15 sumer located within a governmental utility’s

16 qualified governmental service area if such sale

17 meets—

18 ‘‘(i) the governmental utility exception

19 of subparagraph (B),

20 ‘‘(ii) the pooling exception of subpara21 graph (C),

22 ‘‘(iii) the existing contract exception

23 of subparagraph (D),

24 ‘‘(iv) the de minimis exception of sub25 paragraph (E), or
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1 ‘‘(v) the transmission exception of

2 subparagraph (F).

3 ‘‘(B) GOVERNMENTAL UTILITY EXCEP4 TION.—A sale of electric energy services meets

5 the governmental utility exception of this sub6 paragraph if the sale is by a governmental util7 ity with a qualified governmental service area to

8 another governmental utility for resale solely to

9 ultimate consumers located within the qualified

10 governmental service area of the purchasing

11 governmental utility.

12 ‘‘(C) POOLING EXCEPTION.—A sale of

13 electric energy services meets the pooling excep14 tion of this subparagraph if—

15 ‘‘(i) the sale is by a governmental util16 ity with a qualified governmental service

17 area to a person for the resale of the elec18 tric energy services,

19 ‘‘(ii) such sale is—

20 ‘‘(I) pursuant to a pooling or

21 swap arrangement to a person that

22 owns distribution facilities for dis23 tribution through those facilities,

24 ‘‘(II) pursuant to a regional

25 transmission group or other similar
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1 arrangement to a person that owns

2 distribution facilities for distribution

3 through those facilities, or

4 ‘‘(III) for the emergency transfer

5 of electric energy services, and

6 ‘‘(iii) the dollar amount of the pooling

7 sales by the governmental utility during a

8 calendar year does not exceed the dollar

9 amount of the pooling purchases by such

10 utility during such year.

11 ‘‘(D) EXISTING CONTRACT EXCEPTION.—A

12 sale of electric energy services meets the exist13 ing contract exception of this subparagraph if

14 the sale is pursuant to—

15 ‘‘(i) a binding contract in effect on the

16 date of the enactment of this subsection, or

17 ‘‘(ii) a renewal of such a contract but

18 only if such renewal is at the sole option

19 of the purchaser.

20 ‘‘(E) DE MINIMIS EXCEPTION.—A sale of

21 electric energy services meets the de minimis

22 exception of this subparagraph if—

23 ‘‘(i) the sale is by a governmental util24 ity with a qualified governmental service

25 area to a person who owns any electric en-
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1 ergy distribution facility for distribution

2 and resale by such person through such fa3 cility,

4 ‘‘(ii) all of the governmental electric

5 output facilities of such utility meet the re6 quirements of paragraph (3)(B)(iii), and

7 ‘‘(iii) the aggregate dollar amount of

8 the sales described in clause (i) during any

9 calendar year (other than sales which meet

10 the requirements of any other subpara11 graph of this paragraph) does not exceed

12 10 percent of the average of the dollar

13 amounts of the governmental utility’s sales

14 of electric energy services of the same type

15 as the sale during the 3 preceding calendar

16 years.

17 ‘‘(F) TRANSMISSION EXCEPTION.—A sale

18 of electric energy services meets the trans19 mission exception of this subparagraph if the

20 only electric energy services provided by the

21 governmental utility with respect to such sale

22 are provided by—

23 ‘‘(i) any transmission or distribution

24 facility placed in service before the date of

25 the enactment of this subsection,
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1 ‘‘(ii) any distribution facility which

2 meets the requirements of paragraph (5),

3 or

4 ‘‘(iii) any transmission or distribution

5 facility which meets the requirements of

6 clauses (i) and (iii) of paragraph (3)(B).

7 If electric energy is sold in connection with the

8 sale of any transmission or distribution service,

9 the sale of such service meets the requirements

10 of this subparagraph only if the sale of the elec11 tric energy is to ultimate consumers located

12 within the qualified governmental service area

13 of such utility.

14 ‘‘(7) QUALIFIED GOVERNMENTAL SERVICE

15 AREA.—For purposes of this subsection—

16 ‘‘(A) IN GENERAL.—The term ‘qualified

17 governmental service area’ means, with respect

18 to any governmental utility, the area—

19 ‘‘(i)(I) in which such utility has the

20 obligation to supply electric energy services

21 to ultimate consumers, or

22 ‘‘(II) if such utility has no such obli23 gation, which is coincident to an electric

24 distribution system of such utility and im25 mediately adjacent thereto, and
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1 ‘‘(ii) which is claimed openly as a

2 service area by such utility without a com3 peting claim or dispute.

4 ‘‘(B) OBLIGATION TO SUPPLY.— For pur5 poses of subparagraph (A)(i), a governmental

6 utility shall be considered to have an obligation

7 to provide service only if an explicit requirement

8 of law imposes on such utility the obligation to

9 provide retail electric service to any person

10 within the area who requests such service and

11 who meets the terms and conditions applicable

12 to all other similarly situated consumers.

13 ‘‘(8) OTHER DEFINITIONS.—For purposes of

14 this subsection—

15 ‘‘(A) GOVERNMENTAL UTILITY.—

16 ‘‘(i) IN GENERAL.—The term ‘govern17 mental utility’ means any governmental

18 unit which is engaged in the activity or

19 business of the selling, generating, trans20 mitting, or distributing electric energy.

21 ‘‘(ii) CONTROLLED GROUPS.—A gov22 ernmental unit and all related persons of

23 such unit shall be treated as 1 person

24 which is a governmental utility if such

25 unit, or any such person, is engaged in any
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1 activity or business referred to in clause

2 (i).

3 ‘‘(B) RELATED PERSON.—The term ‘re4 lated person’ means a group of related persons

5 (within the meaning of section 144(a)(3)),

6 which includes a governmental unit, and shall

7 include a taxable person, owned or controlled,

8 in whole or in part, by a governmental unit.

9 ‘‘(C) POOLING SALES AND PURCHASES.—

10 ‘‘(i) POOLING SALES.—The term

11 ‘pooling sales’ means sales by the utility

12 which are treated as described in subpara13 graph (A) of section 141(f)(6) solely by

14 reason of subparagraph (C) thereof.

15 ‘‘(ii) POOLING PURCHASES.—The

16 term ‘pooling purchases’ means purchases

17 by the utility in a sale which is a pooling

18 sale by another utility.’’

19 (c) TREATMENT OF PRE-EFFECTIVE DATE BONDS

20 FINANCING TRANSMISSION AND DISTRIBUTION FACILI21 TIES.—

22 (1) IN GENERAL.—Paragraph (6) of section

23 141(b) of such Code is amended by adding at the

24 end the following new subparagraph:
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1 ‘‘(C) SPECIAL RULES RELATING TO CER2 TAIN OUTPUT FACILITIES.—For purposes of the

3 first sentence of subparagraph (A), with respect

4 to bonds issued on or before the date of the en5 actment of this subparagraph, the term ‘private

6 business use’ shall not include use by a person

7 of a transmission or distribution facility of a

8 governmental utility if—

9 ‘‘(i) such use is provided as part of a

10 comprehensive statewide or regional open11 access regime mandated or encouraged by

12 a Federal or State regulatory entity, or

13 ‘‘(ii)(I) such use results from the

14 turnover of operational control (in whole or

15 in part) of, but not an ownership interest

16 in, a transmission facility by a govern17 mental utility to an independent system

18 operator,

19 ‘‘(II) such facility is used by the inde20 pendent system operator to provide trans21 mission services and specified ancillary

22 services on an open-access nondiscrim23 inatory basis,

24 ‘‘(III) the independent system oper25 ator meets the principles set forth in Fed-
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1 eral Energy Regulatory Commission Order

2 No. 888 and/or any successor provision,

3 ‘‘(IV) the governmental utility follows

4 comparable rules in opening up its quali5 fied governmental service area (as defined

6 in section 141(f)(7)) to retail competition

7 as are applicable to other owners of dis8 tribution facilities (other than govern9 mental utilities) within the State in which

10 the governmental utility is located, and

11 ‘‘(V) the independent system operator

12 does not own any electric distribution fa13 cilities.’’

14 (2) CONFORMING AMENDMENT.—Subsection (b)

15 of section 141 of such Code is amended by adding

16 at the end the following new paragraph:

17 ‘‘(10) SPECIAL RULES RELATING TO THE PRI18 VATE SECURITY OR PAYMENT TEST.—In calculating

19 the private security or payment test of paragraph

20 (2), no payments for use described in paragraph

21 (6)(C) shall be treated as payments in respect of

22 property, or borrowed money, used or to be used for

23 a private business use.’’.
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1 (d) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to obligations issued after the date

3 of the enactment of this Act.

4 SEC. 2. TAXATION OF INCOME FROM CERTAIN ACTIVITIES

5 OF GOVERNMENTAL UTILITY.

6 (a) IN GENERAL.—Section 115 of the Internal Rev7 enue Code of 1986 (relating to income of States and mu8 nicipalities) is amended—

9 (1) by striking ‘‘Gross income’’ and inserting

10 ‘‘(a) GENERAL RULE.—Gross income’’, and

11 (2) by adding at the end the following new sub12 section:

13 ‘‘(b) EXCEPTION FOR CERTAIN GOVERNMENTAL

14 UTILITIES.—

15 ‘‘(1) IN GENERAL.—Subsection (a) shall not

16 apply to any gross income derived by any govern17 mental utility from sales of electric energy services—

18 ‘‘(A) to persons not within a qualified gov19 ernmental service area of such utility, and

20 ‘‘(B) to persons for resale if such resale is

21 to persons outside such service area.

22 Any amount included in gross income by reason of

23 the preceding sentence shall be treated as gross in24 come derived from an unrelated trade or business

25 under section 512(a)(1), and such utility shall be
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1 treated as an organization described in section

2 511(a)(2).

3 ‘‘(2) EXCEPTIONS.—

4 ‘‘(A) IN GENERAL.—Paragraph (1) shall

5 not apply to any income derived from any

6 sale—

7 ‘‘(i) which is treated under section

8 141(f)(6) as made to ultimate consumers

9 located within the qualified governmental

10 service area of the utility, or

11 ‘‘(ii) by any small governmental util12 ity.

13 ‘‘(B) SPECIAL RULE FOR POOLING EXCEP14 TION.—For purposes of applying subparagraph

15 (A)(i), subparagraph (C) of section 141(f)(6)

16 shall be applied without regard to clause (iii)

17 thereof but subsection (b)(1) shall apply to

18 pooling sales to the extent that the dollar

19 amount of such sales by the governmental util20 ity during a calendar year exceeds the dollar

21 amount of the pooling purchases by such utility

22 during such year.

23 ‘‘(C) DE MINIMIS EXCEPTION.—For pur24 poses of applying subparagraph (A)(i), subpara25 graph (E) of section 141(f)(6) shall apply only
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1 if the governmental utility is a local govern2 mental utility.

3 ‘‘(3) SPECIAL RULE FOR DETERMINING DEPRE4 CIATION.—In the case of a governmental utility

5 whose gross income is subject to tax under this

6 chapter by reason of this subsection, the adjustment

7 under section 1016(a)(3) for any period before the

8 date of the enactment of this subsection shall be

9 treated as being at the fastest rate permitted under

10 this title for such period.

11 ‘‘(4) DEFINITIONS.—Terms used in this sub12 section which are also used in section 141(f) shall

13 have the respective meanings given such terms by

14 such section.’’

15 (b) EFFECTIVE DATE.—The amendments made by

16 this section shall apply to amounts received or accrued

17 after the date of the enactment of this Act.

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