News Analysis

Fortnightly Magazine - March 15 1998
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THE U.S. TREASURY DEPARTMENT HAS ISSUED RULES that will allow all public power systems to participate in independent system operators without risk of losing the tax-exempt status of their bonds.

Investor-owned utilities are not happy. According to the Edison Electric Institute, the regulations significantly expand the ability of large government-owned electric utilities to use federal subsidies to compete against private utilities.

Meanwhile, the American Public Power Association is pleased that the rules passed Jan. 21 will allow public power systems to participate in ISOs and offer open access without jeopardizing the tax-exempt status of bonds. But APPA does not believe the rules go far enough to allow public power systems to fully participate in the emerging competitive markets (em a view that several other public power entities share.

Tax-Exempt Facility Financing

Public power systems are allowed to use tax-exempt bonds to finance utility facilities because they are owned and controlled by state and local governments. But the U.S. Constitution limits the issuance of tax-exempt debt to ensure that public credit is not used for private purposes. The limit on government bonds came from the Tax Reform Act of 1986, which was further tightened by Congress, so that private use may not exceed the lesser of either 10 percent or $15 million for a single project. Violations of private-use regulations can result in loss of tax exemption for bondholders and force recall of the bonds.

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