I
106TH CONGRESS
1ST SESSION
H. R. 1253
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.
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 Com-
mittee 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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. BONDS ISSUED TO FINANCE CERTAIN GOVERN-
MENTAL 
ELECTRIC 
OUTPUT 
FACILITIES
TREATED AS PRIVATE ACTIVITY BONDS.
(a) GOVERNMENTAL UNITS NO LONGER ELIGIBLE
FOR EXCEPTION FROM TERMINATION OF LOCAL FUR-
NISHING PROVISIONS.—Paragraph (3) of section 142(f) of
the Internal Revenue Code of 1986 is amended by adding
at the end the following flush sentence:
‘‘For purposes of applying this paragraph to bonds
issued after the date of the enactment of this sen-
tence, the term ‘person’ shall not include a govern-
mental unit.’’
(b) CERTAIN ISSUES FOR GOVERNMENTAL ELECTRIC
OUTPUT FACILITIES TREATED
AS PRIVATE ACTIVITY
BONDS.—Section 141 of such Code (relating to private
activity bonds) is amended by adding at the end the fol-
lowing new subsection:
‘‘(f) ISSUES FOR GOVERNMENTAL ELECTRIC OUT-
PUT FACILITIES.—
‘‘(1) IN GENERAL.—The term ‘private activity
bond’ includes any bond issued as part of an issue
if any proceeds of the issue are to be used (directly
or indirectly) for the construction or acquisition of
any governmental electric output facility.
‘‘(2) GOVERNMENTAL
ELECTRIC
OUTPUT
FA-
CILITY; ELECTRIC ENERGY SERVICES.—For purposes
of this subsection—
‘‘(A) GOVERNMENTAL
ELECTRIC
OUTPUT
FACILITY.—
‘‘(i) IN GENERAL.—The term ‘govern-
mental electric output facility’ means any
facility (including any generation, trans-
mission, or distribution facility) used or to
be used in connection with the furnishing
for sale of electric energy services by any
governmental utility.
‘‘(ii) EXCEPTION FOR PROPERTY CON-
VERTED TO NONOUTPUT USE.—The term
‘governmental electric output facility’ shall
not include any property described in sub-
section (d)(4).
‘‘(B) ELECTRIC ENERGY SERVICES.—The
term ‘electric energy services’ includes the fur-
nishing of electric energy.
‘‘(3) EXCEPTION FOR LOCAL GOVERNMENTAL
UTILITIES.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
be applied by not taking into account any facil-
ity owned by a local governmental utility.
‘‘(B) LOCAL
GOVERNMENTAL
UTILITY.—
For purposes of this subsection, the term ‘local
governmental utility’ means any governmental
utility if—
‘‘(i) all governmental electric output
facilities (other than generation facilities)
which—
‘‘(I) are owned by such utility,
and
‘‘(II) are placed in service after
the date of the enactment of this sub-
section,
are located within the qualified govern-
mental service area of such utility,
‘‘(ii) electric energy services furnished
by such utility are sold only to ultimate
consumers located within such area, and
‘‘(iii) no governmental electric output
facility owned by such utility is designed
differently, sized larger, built sooner, or
constructed in a more costly manner than
is reasonably necessary for ultimate con-
sumers located within such area.
‘‘(C) JOINT ACTION POWER AGENCIES.—
For purposes of determining whether a partici-
pant in a joint action power agency meets the
requirements of subparagraph (B)—
‘‘(i) such participant shall be treated
as owning its share of the governmental
electric output facilities owned by such
agency, and
‘‘(ii) the determination of whether the
requirements of clause (i) or (iii) of sub-
paragraph (B) are met shall be made by
treating the qualified governmental service
area of such participant as including such
area of all participants in such agency.
‘‘(4) EXCEPTION FOR SMALL GOVERNMENTAL
UTILITIES.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
be applied by not taking into account any facil-
ity owned by a small governmental utility.
‘‘(B) SMALL
GOVERNMENTAL
UTILITY.—
For purposes of this subsection, the term ‘small
governmental utility’ means any governmental
utility if—
‘‘(i) as of the issuance date of the
issue, it is reasonably expected that such
utility will furnish electric energy services
for sale to less than 5,000 consumers, and
‘‘(ii) at least 30 percent of its average
gross income during any 3-calendar year
period is from sales to residential con-
sumers.
‘‘(5) EXCEPTION FOR LOCAL DISTRIBUTION FA-
CILITIES.—Paragraph (1) shall be applied by not
taking into account any distribution facility if—
‘‘(A) such facility is located within the
qualified governmental service area of such util-
ity, and
‘‘(B) such facility meets the requirements
of paragraph (3)(B)(iii).
‘‘(6) EXCEPTIONS TO RULES REQUIRING THAT
ULTIMATE CONSUMERS BE LOCATED WITHIN QUALI-
FIED GOVERNMENTAL SERVICE AREA.—
‘‘(A) IN
GENERAL.—For purposes of
clauses (ii) and (iii) of paragraph (3)(B), a sale
shall be treated as being to an ultimate con-
sumer located within a governmental utility’s
qualified governmental service area if such sale
meets—
‘‘(i) the governmental utility exception
of subparagraph (B),
‘‘(ii) the pooling exception of subpara-
graph (C),
‘‘(iii) the existing contract exception
of subparagraph (D),
‘‘(iv) the de minimis exception of sub-
paragraph (E), or
‘‘(v) the transmission exception of
subparagraph (F).
‘‘(B) GOVERNMENTAL
UTILITY
EXCEP-
TION.—A sale of electric energy services meets
the governmental utility exception of this sub-
paragraph if the sale is by a governmental util-
ity with a qualified governmental service area to
another governmental utility for resale solely to
ultimate consumers located within the qualified
governmental service area of the purchasing
governmental utility.
‘‘(C) POOLING
EXCEPTION.—A sale of
electric energy services meets the pooling excep-
tion of this subparagraph if—
‘‘(i) the sale is by a governmental util-
ity with a qualified governmental service
area to a person for the resale of the elec-
tric energy services,
‘‘(ii) such sale is—
‘‘(I) pursuant to a pooling or
swap arrangement to a person that
owns distribution facilities for dis-
tribution through those facilities,
‘‘(II) pursuant to a regional
transmission group or other similar
arrangement to a person that owns
distribution facilities for distribution
through those facilities, or
‘‘(III) for the emergency transfer
of electric energy services, and
‘‘(iii) the dollar amount of the pooling
sales by the governmental utility during a
calendar year does not exceed the dollar
amount of the pooling purchases by such
utility during such year.
‘‘(D) EXISTING CONTRACT EXCEPTION.—A
sale of electric energy services meets the exist-
ing contract exception of this subparagraph if
the sale is pursuant to—
‘‘(i) a binding contract in effect on the
date of the enactment of this subsection, or
‘‘(ii) a renewal of such a contract but
only if such renewal is at the sole option
of the purchaser.
‘‘(E) DE MINIMIS EXCEPTION.—A sale of
electric energy services meets the de minimis
exception of this subparagraph if—
‘‘(i) the sale is by a governmental util-
ity with a qualified governmental service
area to a person who owns any electric en-
ergy distribution facility for distribution
and resale by such person through such fa-
cility,
‘‘(ii) all of the governmental electric
output facilities of such utility meet the re-
quirements of paragraph (3)(B)(iii), and
‘‘(iii) the aggregate dollar amount of
the sales described in clause (i) during any
calendar year (other than sales which meet
the requirements of any other subpara-
graph of this paragraph) does not exceed
10 percent of the average of the dollar
amounts of the governmental utility’s sales
of electric energy services of the same type
as the sale during the 3 preceding calendar
years.
‘‘(F) TRANSMISSION EXCEPTION.—A sale
of electric energy services meets the trans-
mission exception of this subparagraph if the
only electric energy services provided by the
governmental utility with respect to such sale
are provided by—
‘‘(i) any transmission or distribution
facility placed in service before the date of
the enactment of this subsection,
‘‘(ii) any distribution facility which
meets the requirements of paragraph (5),
or
‘‘(iii) any transmission or distribution
facility which meets the requirements of
clauses (i) and (iii) of paragraph (3)(B).
If electric energy is sold in connection with the
sale of any transmission or distribution service,
the sale of such service meets the requirements
of this subparagraph only if the sale of the elec-
tric energy is to ultimate consumers located
within the qualified governmental service area
of such utility.
‘‘(7) 
QUALIFIED
GOVERNMENTAL
SERVICE
AREA.—For purposes of this subsection—
‘‘(A) IN
GENERAL.—The term ‘qualified
governmental service area’ means, with respect
to any governmental utility, the area—
‘‘(i)(I) in which such utility has the
obligation to supply electric energy services
to ultimate consumers, or
‘‘(II) if such utility has no such obli-
gation, which is coincident to an electric
distribution system of such utility and im-
mediately adjacent thereto, and
‘‘(ii) which is claimed openly as a
service area by such utility without a com-
peting claim or dispute.
‘‘(B) OBLIGATION TO SUPPLY.— For pur-
poses of subparagraph (A)(i), a governmental
utility shall be considered to have an obligation
to provide service only if an explicit requirement
of law imposes on such utility the obligation to
provide retail electric service to any person
within the area who requests such service and
who meets the terms and conditions applicable
to all other similarly situated consumers.
‘‘(8) OTHER
DEFINITIONS.—For purposes of
this subsection—
‘‘(A) GOVERNMENTAL UTILITY.—
‘‘(i) IN GENERAL.—The term ‘govern-
mental utility’ means any governmental
unit which is engaged in the activity or
business of the selling, generating, trans-
mitting, or distributing electric energy.
‘‘(ii) CONTROLLED GROUPS.—A gov-
ernmental unit and all related persons of
such unit shall be treated as 1 person
which is a governmental utility if such
unit, or any such person, is engaged in any
activity or business referred to in clause
(i).
‘‘(B) RELATED
PERSON.—The term ‘re-
lated person’ means a group of related persons
(within the meaning of section 144(a)(3)),
which includes a governmental unit, and shall
include a taxable person, owned or controlled,
in whole or in part, by a governmental unit.
‘‘(C) POOLING SALES AND PURCHASES.—
‘‘(i) 
POOLING
SALES.—The 
term
‘pooling sales’ means sales by the utility
which are treated as described in subpara-
graph (A) of section 141(f)(6) solely by
reason of subparagraph (C) thereof.
‘‘(ii) 
POOLING
PURCHASES.—The
term ‘pooling purchases’ means purchases
by the utility in a sale which is a pooling
sale by another utility.’’
(c) TREATMENT OF PRE-EFFECTIVE DATE BONDS
FINANCING TRANSMISSION AND DISTRIBUTION FACILI-
TIES.—
(1) IN
GENERAL.—Paragraph (6) of section
141(b) of such Code is amended by adding at the
end the following new subparagraph:
‘‘(C) SPECIAL RULES RELATING TO CER-
TAIN OUTPUT FACILITIES.—For purposes of the
first sentence of subparagraph (A), with respect
to bonds issued on or before the date of the en-
actment of this subparagraph, the term ‘private
business use’ shall not include use by a person
of a transmission or distribution facility of a
governmental utility if—
‘‘(i) such use is provided as part of a
comprehensive statewide or regional open-
access regime mandated or encouraged by
a Federal or State regulatory entity, or
‘‘(ii)(I) such use results from the
turnover of operational control (in whole or
in part) of, but not an ownership interest
in, a transmission facility by a govern-
mental utility to an independent system
operator,
‘‘(II) such facility is used by the inde-
pendent system operator to provide trans-
mission services and specified ancillary
services on an open-access nondiscrim-
inatory basis,
‘‘(III) the independent system oper-
ator meets the principles set forth in Fed-
eral Energy Regulatory Commission Order
No. 888 and/or any successor provision,
‘‘(IV) the governmental utility follows
comparable rules in opening up its quali-
fied governmental service area (as defined
in section 141(f)(7)) to retail competition
as are applicable to other owners of dis-
tribution facilities (other than govern-
mental utilities) within the State in which
the governmental utility is located, and
‘‘(V) the independent system operator
does not own any electric distribution fa-
cilities.’’
(2) CONFORMING AMENDMENT.—Subsection (b)
of section 141 of such Code is amended by adding
at the end the following new paragraph:
‘‘(10) SPECIAL RULES RELATING TO THE PRI-
VATE SECURITY OR PAYMENT TEST.—In calculating
the private security or payment test of paragraph
(2), no payments for use described in paragraph
(6)(C) shall be treated as payments in respect of
property, or borrowed money, used or to be used for
a private business use.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to obligations issued after the date
of the enactment of this Act.
SEC. 2. TAXATION OF INCOME FROM CERTAIN ACTIVITIES
OF GOVERNMENTAL UTILITY.
(a) IN GENERAL.—Section 115 of the Internal Rev-
enue Code of 1986 (relating to income of States and mu-
nicipalities) is amended—
(1) by striking ‘‘Gross income’’ and inserting
‘‘(a) GENERAL RULE.—Gross income’’, and
(2) by adding at the end the following new sub-
section:
‘‘(b) EXCEPTION
FOR
CERTAIN GOVERNMENTAL
UTILITIES.—
‘‘(1) IN
GENERAL.—Subsection (a) shall not
apply to any gross income derived by any govern-
mental utility from sales of electric energy services—
‘‘(A) to persons not within a qualified gov-
ernmental service area of such utility, and
‘‘(B) to persons for resale if such resale is
to persons outside such service area.
Any amount included in gross income by reason of
the preceding sentence shall be treated as gross in-
come derived from an unrelated trade or business
under section 512(a)(1), and such utility shall be
treated as an organization described in section
511(a)(2).
‘‘(2) EXCEPTIONS.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply to any income derived from any
sale—
‘‘(i) which is treated under section
141(f)(6) as made to ultimate consumers
located within the qualified governmental
service area of the utility, or
‘‘(ii) by any small governmental util-
ity.
‘‘(B) SPECIAL RULE FOR POOLING EXCEP-
TION.—For purposes of applying subparagraph
(A)(i), subparagraph (C) of section 141(f)(6)
shall be applied without regard to clause (iii)
thereof but subsection (b)(1) shall apply to
pooling sales to the extent that the dollar
amount of such sales by the governmental util-
ity during a calendar year exceeds the dollar
amount of the pooling purchases by such utility
during such year.
‘‘(C) DE MINIMIS EXCEPTION.—For pur-
poses of applying subparagraph (A)(i), subpara-
graph (E) of section 141(f)(6) shall apply only
if the governmental utility is a local govern-
mental utility.
‘‘(3) SPECIAL RULE FOR DETERMINING DEPRE-
CIATION.—In the case of a governmental utility
whose gross income is subject to tax under this
chapter by reason of this subsection, the adjustment
under section 1016(a)(3) for any period before the
date of the enactment of this subsection shall be
treated as being at the fastest rate permitted under
this title for such period.
‘‘(4) DEFINITIONS.—Terms used in this sub-
section which are also used in section 141(f) shall
have the respective meanings given such terms by
such section.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to amounts received or accrued
after the date of the enactment of this Act.
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