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News Analysis

Fortnightly Magazine - March 15 1998

notes that the new rules for retail sales of power from generation output facilities financed with tax-exempt debt are complicated and will be subject to further interpretation. For example, a contract available to the public may have a maximum term of 180 days without jeopardizing the tax-exempt status of the bonds; a non-public-use contract offered at uniform rates may run for 90 days; and a negotiated contract for 30 days.

Dick Johnson, general manager of Snohomish Public Utility District, said the new rules are "perhaps even worse with regard to the existing and new retail customers, the regulations force public power utilities to try to shoehorn customers into limited contracts of the terms of only a few months. And I'm referring specifically to the 90-day limitation."

Stranded Costs and Existing Customers

The rules also state that when a public power entity is left with excess generating capacity due to customer losses, a contract to sell excess power is not treated as a private business use if: (1) the contract's term (including all renewal options) is less than three years, (2) the issuer does not issue tax-exempt bonds to increase the capacity of its generation system during the contract's term, (3) open access transmission is offered under FERC rules, (4) all output is excess capacity due to open access, (5) the contract mitigates stranded costs of the owner attributable to entry into the open access system, and (6) stranded costs recovered under the contract by that owner are used to redeem tax-exempt bonds as quickly as possible.

But according to Dick Johnson, while the rules provide helpful mechanisms for selling excess generation, one problem remains: Flexibility only results after customers move their energy purchasers to another supplier.

Jerry Jordan, of the California Municipal Association, voiced concern with the three-year term limit. He said that if a customer leaves the system and the public power entity has to sell excess generation, it might not prove beneficial to be limited to a three-year term.

Not The Final Fix

The private-use regulations have been promulgated by the Treasury both as temporary rules that will expire in three years and a venue for soliciting comments and proposing changes.

Senate Energy and Natural Resources Committee Chairman Frank Murkowski (R-Alaska) has introduced S.1483, which proposes public power entities willing to forego future use of tax-exempt financing would have no change in the tax status of their outstanding debt if they enter competitive markets. Outstanding bonds subject to private-use restrictions could be retired over an extended period, rather than face retroactive taxation. APPA opposes the bill.

More interpretation is needed. Moody's noted that while the rules allow for additional flexibility, they continue to constrain municipal electric utilities from fully participating in retail choice programs because in certain instances the bonds will become taxable. Moody's pointed out that how Treasury interprets the rules in individual cases will become important.

The Edison Electric Institute plans to join the fray by offering written comments to Treasury, and plans to participate in April hearings. "We are up to the challenge of competition with public