‘‘(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 ‘relat-
ed 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 opera-
tor 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)(4)) 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 Reve-
nue 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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