Obligations of States and Political Subdivisions

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8757]

RIN 1545-AV46

Obligations of States and Political Subdivisions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations that

provide guidance to state and local governments that issue bonds for

output facilities. This document also contains temporary regulations

that provide guidance to certain nongovernmental persons that are

engaged in the local furnishing of electric energy or gas using

facilities financed with state or local government bonds. These

temporary regulations reflect changes made by the Tax Reform Act of

1986 and the Small Business Job Protection Act of 1996. The temporary

regulations will affect State and local government issuers of

obligations and nongovernmental persons engaged in the local furnishing

of electric energy or gas after the effective date of these

regulations.

The text of these temporary regulations also serves as the text of

the proposed regulations set forth in the notice of proposed rulemaking

on this subject in the Proposed Rules section of this issue of the

Federal Register.

DATES: These regulations are effective January 22, 1998.

For dates of applicability, see Secs. 1.141-15T, 1.142(f)(4)-1T(g),

and 1.150-5T(b) of these regulations.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Allan

Seller (202) 622-3980 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document amends the Income Tax Regulations (26 CFR part 1)

under section 141 by providing special rules for state and local bonds

issued for output facilities. This document also amends the Income Tax

Regulations under section 142(f)(4) by providing rules for

nongovernmental persons engaged in local furnishing of electric energy

or gas using facilities financed with state or local bonds to make the

election provided in that section. Proposed regulations Secs. 1.141-7

and 1.141-8, published on December 30, 1994, (59 FR 67658) addressed

the application of the private activity bond tests under section

141(b)(2) to output contracts for output facilities and the application

of the $15 million limit under section 141(b)(4) to output facility

financings. These sections (the 1994 proposed output regulations) are

withdrawn. Public comments submitted on the 1994 proposed output

regulations, however, have been taken into account in formulating these

temporary regulations.

Explanation of Provisions

A. Section 1.141-7T Special Rules for Output Facilities

1. Basis for Special Rules for Output Facilities

The 1994 proposed output regulations contain special rules for

applying the private business tests to output contracts. Among the

reasons for special rules for output facilities are that

governmentally-owned utilities are often under an open-ended obligation

to assure service to their customers and that general public customers

are ordinarily required to make continuing payments for service. Output

facilities also require special rules because the

[[Page 3257]]

economic benefit provided by these facilities is usually the use of

fungible property, such as electric power or water. The temporary

regulations continue the approach of the proposed regulations, but

contain a number of new provisions, consistent with the general

principles of the existing regulations under Sec. 1.103-7(b)(5), that

take into account changes in the electric industry.

2. The Benefits and Burdens Standard

The 1994 proposed output regulations provide that a contract to

sell output of a financed facility to a nongovernmental person may

cause the private business tests of section 141(b) to be met if it has

the effect of transferring to that nongovernmental person the benefits

of owning the facility and the burdens of paying debt service on the

facility. The temporary regulations adopt this standard, but clarify

its application.

For purposes of the standard, the temporary regulations generally

provide that use of output on a basis different from the general public

has the effect of transferring the benefits of ownership. Similarly,

contracts that provide a substantial certainty that payments for output

will be made under the terms of the contract, other than on a short-

term basis, have the effect of transferring the burden of paying debt

service on a facility. The standard does not require that the burdens

of ownership for general tax purposes be transferred to a

nongovernmental person.

3. Requirements Contracts

The 1994 proposed output regulations provide that take or pay

contracts, take contracts, and certain requirements contracts meet the

benefits and burdens standard. Many commentators, noting that

Sec. 1.103-7(b)(5) does not expressly refer to requirements contracts,

suggested that requirements contracts should never meet the benefits

and burdens standard.

The temporary regulations narrow the rule for requirements

contracts, by providing that a requirements contract meets the benefits

and burdens test only to the extent that the issuer reasonably expects

that it is substantially certain that payments for output will be made

under the contract. Such a requirements contract is in substance

equivalent to a take contract. A retail requirements contract generally

does not meet this standard, unless the contract requires substantial

termination payments or contains other terms that establish substantial

certainty of payment. Whether the payments under a wholesale

requirements contract are substantially certain to be made is

determined on the basis of all the facts and circumstances, taking into

account such factors as whether the purchaser's customer base has

significant indicators of stability, whether the contract covers

historical requirements of the purchaser, and whether the purchaser has

agreed not to construct or acquire other power resources.

4. Special Rule for Output Contracts With Specific Performance Rights

The 1994 proposed output regulations provide that a requirements

contract meets the benefits and burdens standard if the purchaser has

priority rights to the output (or rights to control the allocation of

the available output).

The temporary regulations generally provide that any output

contract that provides the purchaser with specific rights to control

the output or with other specific performance rights to the use of

output of a financed facility meets the benefits and burdens test, even

if the issuer reasonably expects that it is not substantially certain

that payments will be made under the contract. This different standard

applies to output contracts that provide the purchaser with specific

performance rights because those contracts closely resemble leases,

and, thus, provide more substantial rights to the use of a financed

facility.

5. Security Interest Test

The 1994 proposed output regulations do not address how the

security interest test applies to output contracts.

The temporary regulations provide that payments made or to be made

under an output contract pledged as security for an issue are taken

into account under the private security or payment test even if payment

under the contract is not substantially certain. This rule is

appropriate because it is reasonable to presume that payments under a

contract pledged as security for an issue are material to the payment

of debt service on an issue.

6. Use of Nameplate Capacity to Determine Available Output

The 1994 proposed output regulations measure the available output

of a facility by reference to nameplate capacity, but further provide

that, if nameplate capacity or its equivalent is greater than 150

percent of the average expected output, average expected output is used

instead of nameplate capacity. In addition, nameplate capacity is

reduced by scheduled maintenance. Commentators suggested that reference

to nameplate capacity to determine available output is a bright-line,

administrable test, and that the reductions to nameplate capacity in

the 1994 proposed output regulations should be deleted.

The temporary regulations generally provide that nameplate capacity

may be used as a reference to determine available output of a

generating facility. This rule acknowledges that, consistent with

prudent utility practice, governmentally-owned utilities may be

required to acquire or construct facilities with excess capacity for

their current or future reserves. To prevent tax-exempt financings that

are inconsistent with the purposes of section 141, however, the

temporary regulations provide that this rule does not apply if the

issuer reasonably expects on the issue date that nongovernmental

persons that are treated as private business users will purchase 30

percent or more of the actual output of the facility. In such a case,

the Commissioner may determine available output on another reasonable

basis. In addition, the temporary regulations clarify that, if a

limited source of supply constrains the output of a facility (for

example, if seasonal differences in water flow constrain output of a

hydroelectric facility), the available output must be determined by

taking into account these constraints. The temporary regulations also

delete the rule that nameplate capacity is reduced by scheduled

maintenance.

7. Exception for Swapping and Pooling Arrangements

The 1994 proposed output regulations provide that certain

arrangements to swap and pool power do not meet the private business

tests.

The temporary regulations simplify this exception and expand it, so

that it includes swapping arrangements entered into to enhance

reliability of a system.

8. Exceptions for Short-term Sales of Output

The 1994 proposed output regulations provide that 30-day agreements

for spot sales of excess capacity do not result in private business

use.

The temporary regulations provide that the exceptions for short-

term use that apply to other types of arrangements under the general

private activity bond rules in Sec. 1.141-3 also apply to output

contracts. Thus, in general an output contract that is available to the

general public may have a term up to 180 days; an output contract that

is not treated as general public use, but that is offered on the basis

of generally applicable or uniformly applied rates, may have a term of

up to 90 days; and an output

[[Page 3258]]

contract that is specially negotiated may have a term of up to 30 days.

9. Special Exceptions for Sales of Output Attributable to Excess

Generating Capacity Which Mitigate Stranded Costs

The 1994 proposed output regulations provide that a single

nonrenewable contract for a term of not greater than 1 year is not

treated as private business use. Commentators suggested that longer

term, renewable contracts to sell output attributable to excess

generating capacity should be disregarded under the private business

use test. Commentators noted that the excess generating capacity

problem may be exacerbated by the development of open-access regulatory

policies and other factors.

The temporary regulations respond to these special considerations

by providing a more flexible exception for sales of output attributable

to excess generating capacity that results from the offering of

nondiscriminatory, open access tariffs. This exception is also

consistent with the Federal Energy Regulatory Commission policy that

utilities should take reasonable steps to mitigate the imposition of

charges to recover legitimate, prudent, and verifiable stranded costs

associated with providing open access. Under this exception, a contract

to sell excess power is not treated as private business use if the term

of the contract (including all renewal options) is not greater than 3

years, the issuer does not issue tax-exempt bonds to increase the

capacity of its generation system during the term of the contract, the

governmental owner offers non-discriminatory, open access transmission

tariffs pursuant to the FERC rules (or comparable state law provisions

pursuant to a plan approved by the FERC), all of the output sold under

the contract is excess capacity resulting from participation in open

access, the contract mitigates stranded costs of the owner that are

attributable to entry into the open access system, and stranded costs

recovered under the contract by that owner are used to redeem tax-

exempt bonds as promptly as reasonably practical.

10. Special Exceptions for Transmission Facilities

The 1994 proposed output regulations provide special rules for

transmission facilities, which are intended to respond to the

development of regulatory policies that require or encourage open

access to transmission systems. Under these special rules, in general,

the use of transmission facilities is not private business use to the

extent that it results from an order or actions taken in response to

(or to prevent) an anticipated order by the United States that those

facilities be used by a particular nongovernmental person, provided

that the transmission facilities were sized based on the issuer's

reasonable expectations about the amount of wheeling. The 1994 proposed

output regulations contain a number of exceptions to this rule, which

are designed to prevent the tax-exempt financing of facilities

constructed for use by nongovernmental persons. The 1994 proposed

output regulations also provide that an issuer must take remedial

action if more than 20 percent of a transmission facility is so used by

a nongovernmental person.

Commentators suggested that the exceptions for use of transmission

systems should be made more flexible to accommodate the development of

open access regulatory policies. Commentators noted that measurement of

use of a transmission system raises a number of complex technical

issues. For example, capacity or available output may be much more

readily determined for a generating unit than for a transmission

system. Some commentators suggested that all use of a transmission

system pursuant to standard tariffs should be treated as general public

use. Other commentators suggested that any rules addressing open access

required by the FERC should also similarly address open access required

by state public utility commissions.

The temporary regulations broaden the exceptions for use of

transmission facilities, but do not treat all use of transmission

facilities pursuant to standard tariffs as general public use. Under

Sec. 1.141-2(d), an action taken in response to a specific FERC order

to wheel power under sections 211 and 212 of the Federal Power Act (16

U.S.C. 824j and 824k) would otherwise qualify for an exception from the

deliberate action rule because it is taken in response to a regulatory

directive made by the federal government. The temporary regulations

additionally provide that an action taken in anticipation of such an

order is not a deliberate action.

The temporary regulations also provide a special exception for

transmission facilities pursuant to which an action is not treated as a

deliberate action if it is taken to implement the offering of non-

discriminatory, open access for the use of financed transmission

facilities in a manner consistent with FERC rules, including

reciprocity conditions of FERC Order No. 888 (61 FR 21540, May 10,

1996), pursuant to a plan approved by the FERC. The special exception

also applies to orders and rules of state regulatory authorities

pursuant to a plan approved by the FERC that are comparable to certain

FERC orders and rules. This exception does not apply, however, to the

sale, exchange, or other disposition of bond-financed transmission

facilities to a nongovernmental person.

Section 1.141-2(d)(1) provides that an issue is an issue of private

activity bonds if the issuer reasonably expects, as of the issue date,

that the issue will meet either the private business tests or the

private loan financing test or if the issuer takes a deliberate action,

subsequent to the issue date, that causes the conditions of either the

private business tests or the private loan financing test to be met.

Thus, reasonable expectations about private business use of

transmission facilities under non-discriminatory, open-access tariffs,

must be taken into account on the issue date of bonds financing those

facilities. A special transition rule applies to bonds (other than

advance refunding bonds) that refund bonds issued prior to July 9, 1996

(the effective date of FERC Order No. 888). Because an issuer is in

general not required to apply the temporary regulations to refunding

bonds issued after the effective date that do not have a weighted

average maturity longer than the remaining weighted average maturity of

the refunded bonds, the special transition rule will apply only if the

issuer chooses to apply the temporary regulations. Whether bonds issued

after July 9, 1996, to finance output facilities met the reasonable

expectations test of section 141 because of the possibility of actions

taken to implement open access tariffs is appropriately determined on a

facts and circumstances basis.

These special rules for transmission facilities are appropriate

because of the unique statutory and regulatory regime that applies to

transmission facilities.

B. Section 1.141-8T $15 Million Limitation for Output Facilities

1. Clarification of Computation of Nonqualified Amount

The 1994 proposed output regulations provide guidance on the

special $15 million limitation on output facilities of section

141(b)(4). In general, this limitation is based on the ``nonqualified

amount'' of an issue or issues that finance a single project.

The temporary regulations clarify that, in determining the total

nonqualified amount for issues

[[Page 3259]]

financing a project, the nonqualified amount is first determined on an

issue-by-issue basis, and that these amounts are then aggregated. The

temporary regulations also provide a simpler method for determining how

much the nonqualified amount of an issue is reduced when principal of

the issue is paid. Under this method, the nonqualified amount of an

issue is reduced by the ratio of adjusted issue price over issue price.

C. Section 1.142(f)(4)-1T Manner of Making Election to Terminate Tax-

exempt Bond Financing

Section 142(f)(4) permits a person engaged in the local furnishing

of electric energy or gas that uses facilities financed with exempt

facility bonds under section 142(a)(8) and that expands its service

area in a manner inconsistent with the requirements of sections

142(a)(8) and 142(f) to make an election to ensure that those bonds

will continue to be treated as exempt facility bonds. In order to make

the election the person engaged in local furnishing must, among other

things, agree to redeem all outstanding bonds that financed the

facilities not later than 6 months after the later of the earliest date

on which the bonds may be redeemed or the date of the election. The

temporary regulations set forth the required time and manner of making

this election. In general, the election must be made on or before the

90th day after the later of (i) the date of the service area expansion

or (ii) the effective date of the temporary regulations.

D. Sec. 1.150-5T Filing Notices and Elections

The temporary regulations specify that notices and elections under

section 142(f)(4)(B) and Sec. 1.141-12(d)(3) must be filed with the

Chief, Employee Plans and Exempt Organizations Division of the

appropriate key district office.

E. Need for Temporary Regulations and Request for Public Comments

Congress passed the Federal Energy Act of 1992 to encourage

deregulation of the electric power industry. Since that time, the

Federal Energy Regulatory Commission and various states have adopted

policies to open up access to transmission facilities. Treasury and the

IRS are aware that these initiatives are causing rapid changes in the

electric power industry, and have received many comments asking for

immediate guidance under section 141 regarding the effect on the tax-

exempt status of bonds of certain restructuring transactions necessary

for utilities to participate in a deregulated electric utility

environment. For example, several comments state that the restructuring

initiatives in various states and regions may not proceed until

Treasury and the IRS clarify the extent to which municipal utilities

may transfer control of certain assets financed with tax-exempt bonds

to an independent system operator. Based on these considerations, it

has been determined that immediate regulatory guidance is necessary to

ensure efficient administration of the tax laws.

The regulations are published in both temporary and proposed form

to provide immediate guidance on which issuers can rely in evaluating

their participation in open access regimes, while providing the

opportunity for public comment. In addition, Treasury and the IRS

believe that providing guidance on the effect of open access

participation is more appropriately accomplished by regulation than by

private letter ruling. Treasury and the IRS are also aware, however,

that restructuring efforts are evolving and uncertain, and that new

types of arrangements may be developed to implement restructuring. Many

of the issues that will arise may need to be addressed legislatively.

Accordingly, the regulations are published in temporary form with the

expectation the Treasury and the IRS will reexamine them in light of

new developments within the next three years.

Comments are invited on whether further guidance is needed to

address the new types of contractual arrangements that are arising in

the electric power industry. In particular, comments are invited on

whether there are any instances in which an option of a nongovernmental

purchaser to purchase output of a bond-financed facility should not be

taken into account as private business use.

Effective Dates

Sections 1.141-7T and 1.141-8T are applicable to bonds issued on or

after February 23, 1998.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It has also been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

does not apply to these regulations.

It is hereby certified that the provisions of these regulations

that impose a collection of information requirement on small entities

do not have a significant impact on a substantial number of small

entities. This certification is based upon the fact that in the years

1987 through 1993 a total of only 61 different state or local

government issuers of exempt facility bonds issued under section 142(f)

for facilities for the local furnishing of electric energy or gas filed

information returns with the Internal Revenue Service under section

149(e). Further, an election under section 142(f)(4) is in no event

required to be filed with the Internal Revenue Service more than once.

Therefore, a Regulatory Flexibility Analysis under the Regulatory

Flexibility Act (5 U.S.C. Chapter 6) is not required. Pursuant to

section 7805(f) of the Internal Revenue Code, these temporary

regulations will be submitted to the Chief Counsel for Advocacy of the

Small Business Administration for comment on its impact on small

business.

Drafting Information

The principal authors of these regulations are Michael G. Bailey

and Allan Seller, Office of Assistant Chief Counsel (Financial

Institutions & Products), and Nancy M. Lashnits, formerly of that

office. However, other personnel from IRS and the Treasury Department

participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.141-0 is amended by removing the entries for

Secs. 1.141-7 and 1.141-8 and adding entries to the table in numerical

order to read as follows:

Sec. 1.141-0 Table of contents.

* * * * *

Sec. 1.141-7T Special rules for output facilities (temporary).

(a) Overview.

(b) Definitions.

(1) Available output.

(2) Measurement period.

(3) Sale at wholesale.

(4) Stranded costs.

(5) Take contract and take or pay contract.

(6) Transmission facilities.

(7) Nonqualified amount.

(c) Output contracts.

[[Page 3260]]

(1) General rule.

(2) Benefits and burdens test.

(3) Take contract or take or pay contract.

(4) Requirements contracts.

(5) Contract with specific performance rights.

(d) Measurement of private business use.

(e) Measurement of private security or payment.

(f) Exceptions for certain contracts.

(1) Small purchases of output.

(2) Swapping and pooling arrangements.

(3) Short-term output contracts.

(4) Special 3-year exception for sales of output attributable to

excess generating capacity resulting from participation in open

access.

(5) Special exceptions for transmission facilities.

(6) Certain conduit parties disregarded.

(g) Allocations of output facilities and systems.

(1) Facts and circumstances analysis.

(2) Illustrations.

(3) Transmission contracts.

(4) Allocation of payments.

(h) Examples.

Sec. 1.141-8T $15 million limitation for output facilities

(temporary).

(a) In general.

(1) General rule.

(2) Reduction in $15 million output limitation for outstanding

issues.

(3) Benefits and burdens test applicable.

(b) Definition of project.

(1) General rule.

(2) Separate ownership.

(3) Generating property.

(4) Transmission.

(5) Subsequent improvements.

(6) Replacement property.

(c) Examples.

* * * * *

Sec. 1.141-15T Effective dates (temporary).

(a) through (e) [Reserved].

(f) Effective dates for certain regulations relating to output

facilities.

(1) General rule.

(2) Transition rule for requirement contracts.

(g) Refunding bonds.

(h) Permissive retroactive application.

(i) Permissive retroactive application of certain regulations

pertaining to output contracts.

* * * * *

Par. 3. Section 1.141-2 is amended by adding a sentence at the end

of paragraph (d)(3)(ii)(B) to read as follows:

Sec. 1.141-2 Private activity bond tests.

* * * * *

(d) * * *

(3) * * *

(ii) * * *

(B) * * * See Sec. 1.141-7T(f)(5).

* * * * *

Secs. 1.141-7 and 1.141-8 [Removed]

Par. 3a. Sections 1.141-7 and 1.141-8 are removed.

Par. 4. Sections 1.141-7T and 1.141-8T are added to read as

follows:

Sec. 1.141-7T Special rules for output facilities (temporary).

(a) Overview. This section provides special rules to determine

whether arrangements for purchases of output from an output facility

cause an issue of bonds to meet the private business tests. For this

purpose, unless otherwise stated, water facilities are treated as

output facilities. Section 1.141-3 generally applies to determine

whether other types of arrangements for use of an output facility cause

an issue to meet the private business tests.

(b) Definitions. For purposes of this section and Sec. 1.141-8T,

the following definitions and rules apply:

(1) Available output. The available output of a facility financed

by an issue is determined by multiplying the number of units produced

or to be produced by the facility in one year by the number of years in

the measurement period of that facility for that issue.

(i) Generating facilities. The number of units produced or to be

produced by a generating facility in one year is determined by

reference to its nameplate capacity or the equivalent (or where there

is no nameplate capacity or the equivalent, its maximum capacity),

which is not reduced for reserves or other unutilized capacity.

(ii) Transmission and other output facilities. (A) In general. For

transmission, cogeneration, and other output facilities, available

output must be measured in a reasonable manner to reflect capacity.

(B) Electric transmission facilities. Measurement of the available

output of all or a portion of electric transmission facilities may be

determined in a manner consistent with the reporting rules and

requirements for transmission networks promulgated by the Federal

Energy Regulatory Commission (FERC). For example, for a transmission

network, the use of aggregate load and load share ratios in a manner

consistent with the requirements of the FERC may be reasonable. In

addition, depending on the facts and circumstances, measurement of the

available output of transmission facilities using thermal capacity or

transfer capacity may be reasonable.

(iii) Special rule for facilities acquired or constructed primarily

for use by private business users. If an issuer reasonably expects on

the issue date that persons that are treated as private business users

will purchase more than 30 percent of the actual output of the facility

financed with the issue, the Commissioner may determine the number of

units produced or to be produced by the facility in one year on a

reasonable basis other than by reference to nameplate capacity, such as

the average expected annual output of the facility. For example, the

Commissioner may treat the reasonably expected annual output of a

financed peaking electric generating unit as the available output of

that unit if the issuer reasonably expects, on the issue date of bonds

that finance the unit, that an investor-owned utility will purchase 30

percent of the actual output of the facility under a take or pay

contract, even if the amount of output purchased is less than 10

percent of the available output determined by reference to nameplate

capacity. The reasonably expected annual output of the generating

facility must be consistent with the capacity reported for prudent

reliability purposes.

(iv) Special rule for facilities with a limited source of supply.

If a limited source of supply constrains the output of an output

facility, the number of units produced or to be produced by the

facility must be determined by reasonably taking into account those

constraints. For example, the available output of a hydroelectric unit

must be determined by reference to the reasonably expected annual flow

of water through the unit.

(2) Measurement period. The measurement period of an output

facility financed by an issue is determined under Sec. 1.141-3(g).

(3) Sale at wholesale. For purposes of this section, a sale at

wholesale means a sale of output to any person for resale.

(4) Stranded costs. For purposes of this section, stranded costs

means stranded costs as defined in 18 CFR 35.26 and costs that an

issuer incurred to provide service to a wholesale or retail customer

that subsequently becomes, in whole or in part, an unbundled

transmission customer and that an issuer is authorized to recover by

the FERC or a state regulatory authority.

(5) Take contract and take or pay contract. A take contract is an

output contract under which a purchaser agrees to pay for the output

under the contract if the output facility is capable of providing the

output. A take or pay contract is an output contract under which a

purchaser agrees to pay for the output under the contract, whether or

not the output facility is capable of providing the output.

(6) Transmission facilities. Transmission facilities are facilities

for the transmission or distribution of output. Transmission facilities

include facilities necessary to provide ancillary services required to

be offered as part of open access transmission tariffs under rules

promulgated by the FERC under sections 205 and 206 of the Federal

[[Page 3261]]

Power Act (16 U.S.C. 824d and 824e). Thus, if a facility also serves

another function (for example, a facility that provides for operating

reserves for transmission and also provides generation) an allocable

portion of the facility is treated as a transmission facility.

(7) Nonqualified amount. The nonqualified amount with respect to an

issue is determined under section 141(b)(8).

(c) Output contracts--(1) General rule. The purchase by a

nongovernmental person of the available output of an output facility

(output contract) financed with the proceeds of an issue is taken into

account under the private business tests if the purchase has the effect

of transferring substantial benefits of owning the facility and

substantial burdens of paying the debt service on bonds used (directly

or indirectly) to finance the facility (the benefits and burdens test).

See paragraph (c)(5) of this section for other output contract

arrangements that are taken into account under the private business

tests. See also Sec. 1.141-8T for rules for when an issue that finances

an output facility (other than a water facility) meets the private

business tests because the nonqualified amount of the issue exceeds $15

million.

(2) Benefits and burdens test--(i) Benefits of ownership. An output

contract transfers substantial benefits of owning a facility if the

contract gives the purchaser (directly or indirectly) rights to

capacity of the facility on a basis that is preferential to the rights

of the general public.

(ii) Burdens of paying debt service. An output contract transfers

substantial burdens of paying debt service on an issue to the extent

that the issuer reasonably expects that it is substantially certain

that payments will be made under the terms of the contract

(disregarding default, insolvency, or other similar circumstances). For

example, an output contract is treated as transferring burdens of

paying debt service on an issue if payments must be made upon contract

termination.

(iii) Payments pursuant to pledged contract. Payments made or to be

made under the terms of an output contract that is pledged as security

for an issue are taken into account under the private business tests

even if the issuer reasonably expects that it is not substantially

certain that payments will be made under the contract (disregarding

default, insolvency, or other similar circumstances). For this purpose,

an output contract is pledged as security only if the bond documents

provide that the pledged contract cannot be substantially amended

without the consent of bondholders or a trustee for the bondholders.

(3) Take contract or take or pay contract--(i) In general. The

benefits and burdens test is met if a nongovernmental person agrees

pursuant to a take contract or a take or pay contract to purchase the

available output of a facility. See paragraphs (d) and (e) of this

section for rules regarding measuring the use of, and payments on debt

service for, an output facility for determining whether the private

business tests are met.

(ii) Transmission contracts. In the case of a transmission

facility, an agreement to provide firm or priority transmission

services is generally treated as a take contract or a take or pay

contract. The extent to which transmission services are interruptible

is an important factor indicating that a contract for transmission

services is not treated as a take contract or a take or pay contract.

(4) Requirements contracts--(i) In general. A requirements contract

under which a nongovernmental person agrees to purchase all or part of

its output requirements is taken into account under the private

business tests only to the extent that, based on all the facts and

circumstances, the contract meets the benefits and burdens test. See

Sec. 1.141-15T(f)(3) for special effective dates for the application of

this paragraph (c)(4) to issues financing facilities subject to

requirements contracts.

(ii) Significant factors. Significant factors that tend to

establish that the benefits and burdens test is met under the rule set

forth in paragraph (c)(4)(i) of this section include--

(A) The purchaser's customer base has significant indicators of

stability, such as large size, diverse composition, and a substantial

residential component;

(B) The contract covers historical requirements of the purchaser,

rather than only projected requirements that are in addition to

historical requirements; and

(C) The purchaser agrees not to construct or acquire other power

resources to meet the requirements covered by the contract.

(iii) Special rule for retail requirements contracts. In general, a

requirements contract that is not a sale at wholesale does not meet the

benefits and burdens test because the obligation to make payments on

the contract is contingent on the output requirements of a single user.

Such a requirements contract in general meets the benefits and burdens

test, however, to the extent that it contains contractual terms that

obligate the purchaser to make payments that are not contingent on the

output requirements of the purchaser (such as significant termination

payments) or that obligate the purchaser to have output requirements.

For example, a requirements contract with an industrial purchaser meets

the benefits and burdens test if the purchaser enters into additional

contractual obligations with the issuer or another governmental unit

not to cease operations.

(5) Contract with specific performance rights. An output contract

that provides the purchaser with specific rights to control the output

of a facility or with other specific performance rights to the use of

output of a facility is generally taken into account under the private

business tests, even if the benefits and burdens test is not met.

Payments made and to be made under such a contract are generally taken

into account under the private payment test, even if the issuer does

not reasonably expect that it is substantially certain that payments

will be made under the contract (disregarding default, insolvency, or

other similar circumstances). A customer's normal entitlement to

receive utility service (for example, an entitlement to reasonable

protection against blackouts in times of high demand through rotating

the effects of blackouts) is not treated as a specific performance

right for this purpose.

(d) Measurement of private business use. If an output contract

results in private business use under this section, the amount of

private business use generally is the capacity that must be reserved

for the nongovernmental person under prudent reliability standards. For

example, in the case of a take contract for a peaking electric

generating unit, under which a nongovernmental person has priority

rights to use capacity at any time for the entire term of the bonds,

but under which the total energy purchases are limited in any one year

to 10 percent of annual available output (determined by reference to

nameplate capacity), the amount of private business use is the amount

of capacity that must be reserved for that nongovernmental person under

prudent reliability standards, which may be as much as 100 percent.

(e) Measurement of private security or payment. The measurement of

payments made or to be made by nongovernmental persons under output

contracts as a percent of the debt service of an issue is determined

under the rules provided in Sec. 1.141-4.

(f) Exceptions for certain contracts--(1) Small purchases of

output. An

[[Page 3262]]

output contract is not taken into account under the private business

tests if the purchaser is not required under the contract to make a

payment that is substantially certain to be made under paragraph

(c)(2)(ii) of this section in any year greater than 0.5 percent of the

average annual debt service on an issue that finances the output

facility.

(2) Swapping and pooling arrangements. An agreement that provides

for swapping or pooling of output by one or more governmental persons

and one or more nongovernmental persons does not result in private

business use of the output facility owned by the governmental person to

the extent that--

(i) The swapped output is reasonably expected to be approximately

equal in value (determined over periods of one year or less); and

(ii) The purpose of the agreement is to enable each of the parties

to satisfy different peak load demands, to accommodate temporary

outages, to diversify supply, or to enhance reliability in accordance

with prudent reliability standards.

(3) Short-term output contracts. The exceptions for short-term

arrangements provided in Sec. 1.141-3 (c) and (d)(3) apply to output

contracts. For example, a spot sale for use for a period of 90 days on

the basis of rates that are generally applicable and uniformly applied

generally does not result in private business use, and a spot sale for

use for a period of 30 days on the basis of rates that are specially

negotiated generally does not result in private business use.

(4) Special 3-year exception for sales of output attributable to

excess generating capacity resulting from participation in open access.

The purchase of output of an output facility (not including a water

facility) by a nongovernmental person is not treated as private

business use if all of the following requirements are met:

(i) The term of the contract is not longer than 3 years, including

all renewal options.

(ii) The issuer does not make expenditures to increase the

generating capacity of its system during the term of the contract that

are, or will be, financed with proceeds of tax-exempt bonds.

(iii) The governmental owner offers non-discriminatory, open access

transmission tariffs for use of its transmission system pursuant to

rules promulgated by the FERC under sections 205 and 206 of the Federal

Power Act (16 U.S.C. 824d and 824e) (or comparable provisions of state

law pursuant to a plan approved by the FERC).

(iv) All of the output sold under the contract is attributable to

excess capacity resulting from the offer of the non-discriminatory,

open access transmission tariffs referred to in paragraph (f)(5)(ii) of

this section.

(v) The contract mitigates stranded costs of the governmental owner

that are attributable to the offer of the non-discriminatory, open

access transmission tariffs referred to in paragraph (f)(5)(ii) of this

section.

(vi) Any stranded costs recovered by the governmental owner

(including amounts recovered under the contract) with respect to the

output facility under rules promulgated by the FERC under the Federal

Power Act (or comparable provisions of state law) are applied as

promptly as is reasonably practical to redeem tax-exempt bonds that

financed that facility in a manner consistent with Sec. 1.141-12.

(5) Special exceptions for transmission facilities--(i) Mandated

wheeling. Entering into a contract for the use of transmission

facilities financed by an issue is not treated as a deliberate action

under Sec. 1.141-2(d) if--

(A) The contract is entered into in response to (or in anticipation

of) an order by the United States under sections 211 and 212 of the

Federal Power Act (16 U.S.C. 824j and 824k) (or a state regulatory

authority under comparable provisions of state law pursuant to a plan

approved by the FERC); and

(B) The terms of the contract are bona fide and arm's length, and

the consideration paid is consistent with the provisions of section

212(a) of the Federal Power Act.

(ii) Actions taken to implement non-discriminatory, open access. An

action is not treated as a deliberate action under Sec. 1.141-2(d) if

it is taken to implement the offering of non-discriminatory, open

access tariffs for the use of transmission facilities financed by an

issue in a manner consistent with rules promulgated by the FERC under

sections 205 and 206 of the Federal Power Act (16 U.S.C. 824d and 824e)

(or by a state regulatory authority under comparable provisions of

state law pursuant to a plan approved by the FERC). This paragraph

(f)(5)(ii) does not apply, however, to the sale, exchange, or other

disposition of transmission facilities to a nongovernmental person.

(iii) Application to reasonable expectations test to certain

current refunding bonds. An action taken or to be taken with respect to

transmission facilities refinanced by an issue is not taken into

account under the reasonable expectations test of Sec. 1.141-2(d) if--

(A) The action is described in paragraph (f)(5) (i) or (ii) of this

section;

(B) The bonds of the issue are current refunding bonds that,

directly or indirectly, refund bonds issued before July 9, 1996; and

(C) The weighted average maturity of the refunding bonds is not

greater than the remaining weighted average maturity of those prior

bonds.

(6) Certain conduit parties disregarded. A nongovernmental person

acting solely as a conduit for the exchange of output among

governmentally owned and operated utilities is disregarded in

determining whether the private business tests are met with respect to

financed facilities owned by a governmental person. Use of property by

a power marketer in the trade or business of purchasing and reselling

power, however, is taken into account under the private business tests.

(g) Allocations of output facilities and systems--(1) Facts and

circumstances analysis. Whether output sold under an output contract is

allocated to a particular facility (for example, a generating unit), to

the entire system of the seller of that output (net of any uses of that

system output allocated to a particular facility), or to a portion of a

facility is based on all the facts and circumstances. Significant

factors to be considered in determining the allocation of an output

contract to financed property are the following:

(i) The extent to which it is physically possible to deliver output

to or from a particular facility or system.

(ii) The terms of a contract relating to the delivery of output

(such as delivery limitations and options or obligations to deliver

power from additional sources).

(iii) Whether a contract is entered into as part of a common plan

of financing for a facility.

(iv) The method of pricing output under the contract, such as the

use of market rates rather than rates designed to pay debt service of

tax-exempt bonds used to finance a particular facility.

(2) Illustrations. The following illustrate the factors set forth

in paragraph (g)(1) of this section:

(i) Physical possibility. Output from a generating unit that is fed

directly into a low voltage distribution system of the owner of that

unit and that cannot physically leave that distribution system

generally must be allocated to those receiving electricity through that

distribution system. Output may be allocated without regard to physical

limitations, however, if exchange or similar agreements provide output

to a purchaser where, but for the exchange

[[Page 3263]]

agreements, it would not be possible for the seller to provide output

to that purchaser.

(ii) Contract terms relating to performance. A contract to provide

a specified amount of electricity from a system, but only when at least

that amount of electricity is being generated by a particular unit, is

allocated to that unit. For example, a contract to buy 20 MW of system

power with a right to take up to 40 percent of the actual output of a

specific 50 MW facility whenever total system output is insufficient to

meet all of the seller's obligations generally is allocated to the

specific facility rather than to the system.

(iii) Common plan of financing. A contract entered into as part of

a common plan of financing for a facility generally is allocated to the

facility if debt service for the issue of bonds is reasonably expected

to be paid, directly or indirectly, from payments substantially certain

to be made under the contract (disregarding default, insolvency, or

other similar circumstances).

(iv) Pricing method. Pricing based on the capital and generating

costs of a particular turbine tends to indicate that output under the

contract is properly allocated to that turbine.

(3) Transmission contracts. Whether use under an output contract

for transmission is allocated to a particular facility or to a

transmission network is based on all the facts and circumstances, in a

manner similar to paragraphs (g) (1) and (2) of this section. In

general, the method used to determine payments under a contract is a

more significant contract term for this purpose than nominal contract

path. In general, if reasonable and consistently applied, the

determination of use of transmission facilities under an output

contract may be based on a method used by third parties, such as

reliability councils.

(4) Allocation of payments. Payments for output provided by an

output facility financed with two or more sources of funding are

generally allocated under the rules in Sec. 1.141-4(c).

(h) Examples. The following examples illustrate the application of

this section:

Example 1. Joint ownership. Z, an investor-owned electric

utility, and City H agree to construct an electric generating

facility of a size sufficient to take advantage of the economies of

scale. H will issue $50 million of its 25-year bonds, and Z will use

$100 million of its funds for construction of a facility they will

jointly own as tenants in common. Each of the participants will

share in the ownership, output, and operating expenses of the

facility in proportion to its contribution to the cost of the

facility, that is, one-third by H and two-thirds by Z. H's bonds

will be secured by H's ownership interest in the facility and by

revenues to be derived from its share of the annual output of the

facility. H will need only 50 percent of its share of the annual

output of the facility during the first 20 years of operations. It

agrees to sell 10 percent of its share of the annual output to Z for

a period of 20 years pursuant to a contract under which Z agrees to

take that power if available. The facility will begin operation, and

Z will begin to receive power, 4 years after the H bonds are issued.

The measurement period for the property financed by the issue is 21

years. H also will sell the remaining 40 percent of its share of the

annual output to numerous other private utilities under contracts of

90 days or less entered into under a prevailing rate schedule,

including demand charges. No contracts will be executed obligating

any person other than Z to purchase any specified amount of the

power for any specified period of time. No person (other than Z)

will make payments substantially certain to be made (disregarding

default, insolvency, or other similar circumstances) under paragraph

(c)(2) of this section that will result in a transfer of substantial

burdens of paying debt service on bonds used directly or indirectly

to provide H's share of the facilities. The bonds are not private

activity bonds, because H's one-third interest in the facility is

not treated as used by the other owners of the facility. Although 10

percent of H's share of the annual output of the facility will be

used in the trade or business of Z, a non-governmental person, under

the rule in paragraph (c) of this section, that portion constitutes

not more than 10 percent of the available output of H's ownership

interest in the facility.

Example 2. Requirements contract treated as take contract. (i)

City J issues 20-year bonds to acquire an electric generating

facility having a reasonably expected economic life substantially

greater than 20 years and a nameplate capacity of 100 MW. The

available output of the facility under paragraphs (b)(1) of this

section is approximately 17,520,000 MWh. On the issue date, J enters

into a contract with T, an investor-owned utility, to provide T with

all of its power requirements for a period of 10 years, commencing

on the issue date. J reasonably expects that T will actually

purchase an average of 20 MW over the 10-year period. Based on all

of the facts and circumstances, including the size, diversity, and

composition of T's customer base, J reasonably expects that it is

substantially certain (disregarding default, insolvency, or other

similar circumstances) that T will actually purchase only an average

of 16 MW over the 10-year period. The contract is a requirements

contract that must be taken into account under the private business

tests pursuant to paragraph (c)(4) of this section because it

provides T with substantial benefits of ownership (rights to

capacity) and obligates T with substantial burdens of making

payments that the issuer reasonably expects are substantially

certain.

(ii) J is required to reserve for T's use 40 MW of capacity in

accordance with prudent reliability standards. Under paragraph (d)

of this section, the amount of private business use under this

contract, therefore, is approximately 20 percent (40 MW x 24 hours

x 365 days x 10 years, or 3,504,000 MWh) of the available

output. Accordingly, the issue meets the private business use test.

J reasonably expects that the amount to be paid for an average of 16

MW of power (less the operation and maintenance costs directly

attributable to generating that 16 MW of power), will be more than

10 percent of debt service on the issue on a present-value basis.

The payment for 16 MW of power is an amount that J reasonably

expects is substantially certain to be made under paragraph (c)(2)

of this section. Accordingly, the issue meets the private security

or payment test because J reasonably expects that it is

substantially certain that payment of more than 10 percent of the

debt service will be indirectly derived from payments by T. The

bonds are private activity bonds under paragraph (c) of this

section. Further, if 20 percent of the sale proceeds of the issue is

greater than $15 million and the issue meets the private security or

payment test with respect to the $15 million output limitation, the

bonds are also private activity bonds under section 141(b)(4). See

Sec. 1.141-8T.

Example 3. Allocation of existing contracts to new facilities.

Power Authority K, a political subdivision created by the

legislature in State X to own and operate certain power generating

facilities, sells all of the power from its existing facilities to

four private utility systems under contracts executed in 1999, under

which the four systems are required to take or pay for specified

portions of the total power output until the year 2029. Existing

facilities supply all of the present needs of the four utility

systems, but their future power requirements are expected to

increase substantially beyond the capacity of K's current generating

system. K issues 20-year bonds in 2004 to construct a large

generating facility. As part of the financing plan for the bonds, a

fifth private utility system contracts with K to take or pay for 15

percent of the available output of the new facility. The balance of

the output of the new facility will be available for sale as

required, but initially it is not anticipated that there will be any

need for that power. The revenues from the contract with the fifth

private utility system will be sufficient to pay less than 10

percent of the debt service on the bonds (determined on a present

value basis). The balance, which will exceed 10 percent of the debt

service on the bonds, will be paid from revenues derived from the

contracts with the four systems initially from sale of power

produced by the old facilities. The output contracts with all the

private utilities are allocated to K's entire generating system. See

paragraphs (g)(1) and (2) of this section. Thus, the bonds meet the

private business use test because more than 10 percent of the

proceeds will be used in the trade or business of a nongovernmental

person. In addition, the bonds meet the private payment or security

test because payment of more than 10 percent of the debt service,

pursuant to underlying arrangements, will be derived from payments

in respect of property used for a private business use.

[[Page 3264]]

Example 4. Allocation to displaced resource. Municipal utility

MU, a political subdivision, purchases all of the electricity

required to meet the needs of its customers (1,000 MW) from B, an

investor-owned utility that operates its own electric generating

facilities, under a 50-year take or pay contract. MU does not

anticipate that it will require additional electric resources, and

any new resources would produce electricity at a higher cost to MU

than its cost under its contract with B. Nevertheless, B encourages

MU to construct a new generating plant sufficient to meet MU's

requirements. MU issues obligations to construct facilities that

will produce 1,000 MW of electricity. MU, B, and I, another

investor-owned utility, enter into an agreement under which MU

assigns to I its rights under MU's take or pay contract with B.

Under this arrangement, I will pay MU, and MU will continue to pay

B, for the 1,000 MW. I's payments to MU will at least equal the

amounts required to pay debt service on MU's bonds. In addition,

under paragraph (g)(1)(iii) of this section, the contract among MU,

B, and I is entered into as part of a common plan of financing of

the MU facilities. Under all the facts and circumstances, MU's

assignment to I of its rights under the original take or pay

contract is allocable to MU's new facilities under paragraph (g) of

this section. Because I is a nongovernmental person, MU's bonds are

private activity bonds.

Example 5. Transmission facilities transferred to independent

system operator. (i) In 1998, the public utilities commission of

State C adopts a plan for restructuring its electric power industry.

The plan fosters competition by providing both wholesale and retail

customers with non-discriminatory access to transmission facilities

within the State. The plan provides that investor-owned utilities

will transfer operating control over all of their transmission

assets to an independent system operator (ISO), which is a

nongovernmental person that will operate those combined assets as a

single, state-wide system. Municipally-owned utilities are eligible

for, but are not required to participate in, the open access system

implemented by the ISO. The functions of the ISO include control of

transmission access and pricing, scheduling transmission, control

area operations, and settlements and billing. In addition, under

certain circumstances the ISO may order the transmission owners to

construct additional transmission facilities. The restructuring plan

is approved by the FERC pursuant to sections 205 and 206 of the

Federal Power Act.

(ii) In 1994 City D had issued bonds to finance improvements to

its transmission system. In 1998, D transfers operating control of

its transmission system to the ISO pursuant to the restructuring

plan. At the same time, D chooses to apply the private activity bond

regulations of Secs. 1.141-0 through 1.141-15 to the 1994 bonds. The

operation of the financed facilities by the ISO does not meet the

exception for management contracts that do not give rise to private

business use under Sec. 1.141-3(b)(4)(iii)(C) because it is not a

contract solely for the operation of a facility under that

exception. Under the special exception in paragraph (f)(5) of this

section, however, the transfer of control is not treated as a

deliberate action. Accordingly, the transfer of control does not

cause the 1994 bonds to meet the private activity bond tests.

Example 6. Current refunding. The facts are the same as in

Example 5 of this paragraph (h), and in addition D issues bonds in

1999 to currently refund the 1994 bonds. The weighted average

maturity of the 1999 bonds is not greater than the remaining

weighted average maturity of the 1994 bonds. D chooses to apply the

private activity bond regulations of Secs. 1.141-0 through 1.141-15

to the refunding bonds. In general, reasonable expectations must be

separately tested on the date that refunding bonds are issued under

Sec. 1.141-2(d). Under the special exception in paragraph (f)(5) of

this section, however, the transfer of the financed facilities to

the ISO need not be taken into account in applying the reasonable

expectations test to the refunding bonds.

Sec. 1.141-8T $15 million limitation for output facilities

(temporary).

(a) In general--(1) General rule. Section 141(b)(4) provides a

special private activity bond limitation (the $15 million output

limitation) for issues 5 percent or more of the proceeds of which are

to be used to finance output facilities (other than a facility for the

furnishing of water). Under this rule, a bond is a private activity

bond under the private business tests of section 141(b)(1) and (2) if

the nonqualified amount with respect to output facilities financed by

the proceeds of the issue exceeds $15 million. The $15 million output

limitation applies in addition to the private business tests of section

141(b)(1) and (2). Under section 141(b)(4) and paragraph (a)(2) of this

section, the $15 million output limitation is reduced in certain cases.

Specifically, an issue meets the test in section 141(b)(4) if both of

the following tests are met:

(i) More than $15 million of the proceeds of the issue to be used

with respect to an output facility are to be used for a private

business use. Investment proceeds are disregarded for this purpose if

they are not allocated disproportionately to the private business use

portion of the issue.

(ii) The payment of the principal of, or the interest on, more than

$15 million of the sales proceeds of the portion of the issue used with

respect to an output facility is (under the terms of the issue or any

underlying arrangement) directly or indirectly--

(A) Secured by any interest in an output facility used or to be

used for a private business use (or payments in respect of such an

output facility); or

(B) To be derived from payments (whether or not to the issuer) in

respect of an output facility used or to be used for a private business

use.

(2) Reduction in $15 million output limitation for outstanding

issues--(i) General rule. In determining whether an issue more than 5

percent of the proceeds of which are to be used with respect to an

output facility consists of private activity bonds under the $15

million output limitation, the $15 million limitation on private

business use and private security or payments is applied by taking into

account the aggregate nonqualified amounts of any outstanding bonds of

other issues 5 percent or more of the proceeds of which are or will be

used with respect to that output facility or any other output facility

that is part of the same project.

(ii) Bonds taken into account. For purposes of this paragraph

(a)(2), in applying the $15 million output limitation to an issue (the

later issue), a tax-exempt bond of another issue (the earlier issue) is

taken into account if--

(A) That bond is outstanding on the issue date of the later issue;

(B) That bond will not be redeemed within 90 days of the issue date

of the later issue in connection with the refunding of that bond by the

later issue; and

(C) More than 5 percent of the sale proceeds of the earlier issue

financed an output facility that is part of the same project as the

output facility that is financed by more than 5 percent of the sale

proceeds of the later issue.

(3) Benefits and burdens test applicable--(i) In general. In

applying the $15 million output limitation, the benefits and burdens

test of Sec. 1.141-7T applies, except that ``$15 million'' is

substituted for ``10 percent'', or ``5 percent'' as appropriate.

(ii) Earlier issues for the project. If bonds of an earlier issue

are outstanding and must be taken into account under paragraph (a)(2)

of this section, the nonqualified amount for that earlier issue is

multiplied by a fraction, the numerator of which is the adjusted issue

price of the earlier issue as of the issue date of the later issue, and

the denominator of which is the issue price of the earlier issue. Pre-

issuance accrued interest as defined in Sec. 1.148-1(b) is disregarded

for this purpose.

(b) Definition of project--(1) General rule. For purposes of

paragraph (a)(2) of this section, project has the meaning provided in

this paragraph. Facilities that are functionally related and

subordinate to a project are treated as part of that same project.

Facilities having different purposes or serving different customer

bases are not ordinarily part of the same project. For example, the

following are generally not part of the same project--

[[Page 3265]]

(i) Generation and transmission facilities;

(ii) Separate facilities designed to serve wholesale customers and

retail customers; and

(iii) A peaking unit and a baseload unit.

(2) Separate ownership. Except as otherwise provided in this

paragraph (b)(2), facilities that are not owned by the same person are

not part of the same project. If different governmental persons act in

concert to finance a project, however (for example as participants in a

joint powers authority), their interests are aggregated with respect to

that project to determine whether the $15 million output limitation is

met. In the case of undivided ownership interests in a single output

facility, property that is not owned by different persons is treated as

separate projects only if the separate interests are financed--

(i) With bonds of different issuers; and

(ii) Without a principal purpose of avoiding the limitation in this

section.

(3) Generating property--(i) Property on same site. In the case of

generation and related facilities, project means property located at

the same site.

(ii) Special rule for generating units. Separate generating units

are not part of the same project, if one unit is reasonably expected,

on the date of each issue that finances the project, to be placed in

service more than 3 years before the other. Common facilities or

property that will be functionally related to more than one generating

unit must be allocated on a reasonable basis. If a generating unit

already is constructed or is under construction (the first unit) and

bonds are to be issued to finance an additional generating unit (the

second unit), all costs for any common facilities paid or incurred

before the earlier of the issue date of bonds to finance the second

unit or the commencement of construction of the second unit are

allocated to the first unit. At the time that bonds are issued to

finance the second unit (or, if earlier, upon commencement of

construction of that unit), any remaining costs of the common

facilities may be allocated among the first and second units so that in

the aggregate the allocation is reasonable.

(4) Transmission. In the case of transmission facilities, project

means functionally related or contiguous property and property for

ancillary services, such as property required to be included in open

access transmission tariffs under rules of the FERC. Separate

transmission facilities are not part of the same project if one

facility is reasonably expected, on the issue date of each issue that

finances the project, to be placed in service more than 2 years before

the other.

(5) Subsequent improvements--(i) In general. An improvement to

generating or transmission facilities that is not part of the original

design of those facilities (the original project) is not part of the

same project as the original project if the construction,

reconstruction, or acquisition of that improvement commences more than

3 years after the original project was placed in service and the bonds

issued to finance that improvement are issued more than 3 years after

the original project was placed in service.

(ii) Special rule for transmission facilities. An improvement to

transmission facilities that is not part of the original design of that

property is not part of the same project as the original project if the

issuer did not reasonably expect the need to make that improvement when

it commenced construction of the original project and the construction,

reconstruction, or acquisition of that improvement is mandated by the

federal government or a state regulatory authority to accommodate

requests for wheeling.

(6) Replacement property. For purposes of this section, property

that replaces existing property of an output facility is treated as

part of the same project as the replaced property unless--

(i) The need to replace the property was not reasonably expected on

the issue date or the need to replace the property occurred more than 3

years before the issuer reasonably expected (determined on the issue

date of the bonds financing the property) that it would need to replace

the property; and

(ii) The bonds that finance (and refinance) the replaced property

have a weighted average maturity that is not greater than 120 percent

of the reasonably expected economic life of the replaced property.

(c) Example. The application of the provisions of this section is

illustrated by the following example:

Example. (i) Power Authority K, a political subdivision, intends

to issue a single issue of tax-exempt bonds at par with a stated

principal amount and sales proceeds of $500 million to finance the

acquisition of an electric generating facility. No portion of the

facility will be used for a private business use, except that L, an

investor-owned utility, will purchase 10 percent of the output of

the facility under a take contract and will pay 10 percent of the

debt service on the bonds. The nonqualified amount with respect to

the bonds is $50 million.

(ii) The maximum amount of tax-exempt bonds that may be issued

for the acquisition of an interest in the facility in paragraph (i)

of this Example is $465 million (that is, $450 million for the 90

percent of the facility that is governmentally owned and used plus a

nonqualified amount of $15 million).

Par. 5. Section 1.141-15 is revised to read as follows:

Sec. 1.141-15 Effective dates.

(a) Scope. The effective dates of this section apply for purposes

of Secs. 1.141-1 through 1.141-6(a), 1.141-9 through 1.141-14, 1.145-1

through 1.145-2, 1.150-1(a)(3) and the definition of bond documents

contained in Sec. 1.150-1(b).

(b) Effective dates. Except as otherwise provided in this section,

Secs. 1.141-1 through 1.141-6(a), 1.141-9 through 1.141-14, 1.145-1

through 1.145-2, 1.150-1(a)(3) and the definition of bond documents

contained in Sec. 1.150-1(b) apply to bonds issued on or after May 16,

1997, that are subject to section 1301 of the Tax Reform Act of 1986

(100 Stat. 2602).

(c) Refunding bonds. Sections 1.141-1 through 1.141-6(a), 1.141-9

through 1.141-14, 1.145-1 through 1.145-2, 1.150-1(a)(3) and the

definition of bond documents contained in Sec. 1.150-1(b) do not apply

to any bonds issued on or after May 16, 1997, to refund a bond to which

those sections do not apply unless--

(1) The weighted average maturity of the refunding bonds is longer

than--

(i) The weighted average maturity of the refunded bonds; or

(ii) In the case of a short-term obligation that the issuer

reasonably expects to refund with a long-term financing (such as a bond

anticipation note), 120 percent of the weighted average reasonably

expected economic life of the facilities financed; or

(2) A principal purpose for the issuance of the refunding bonds is

to make one or more new conduit loans.

(d) Permissive application of regulations. Except as provided in

paragraph (e) of this section, Secs. 1.141-1 through 1.141-6(a), 1.141-

9 through 1.141-14, 1.145-1 through 1.145-2, 1.150-1(a)(3) and the

definition of bond documents contained in Sec. 1.150-1(b) may be

applied in whole, but not in part, to actions taken before February 23,

1998 with respect to--

(1) Bonds that are outstanding on May 16, 1997, and subject to

section 141; or

(2) Refunding bonds issued on or after May 16, 1997.

(e) Permissive retroactive application of certain sections. The

following sections may each be applied to any bonds issued before May

16, 1997--

(1) Section 1.141-3(b)(4);

(2) Section 1.141-3(b)(6); and

(3) Section 1.141-12.

[[Page 3266]]

Par. 6. Section 1.141-15T is added to read as follows:

Sec. 1.141-15T Effective dates (temporary).

(a) through (e) [Reserved]. For guidance see Sec. 1.141-15.

(f) Effective dates for certain regulations relating to output

facilities--(1) General rule. Except as otherwise provided in this

section, Secs. 1.141-7T and 1.141-8T apply to bonds issued on or after

February 23, 1998 that are subject to section 1301 of the Tax Reform

Act of 1986 (100 Stat. 2602).

(2) Transition rule for requirements contracts. Section 1.141-

7T(c)(4) applies to output contracts entered into on or after February

23, 1998. An output contract is treated as entered into on or after

that date if its term is extended, the parties to the contract change,

or other material terms are amended on or after that date.

(g) Refunding bonds in general. Except as otherwise provided in

paragraph (h) or (i) of this section, Secs. 1.141-7T and 1.141-8T do

not apply to bonds issued on or after February 23, 1998, to refund a

bond to which the Secs. 1.141-7T and 1.141-8T do not apply unless--

(1) The weighted average maturity of the refunding bonds is longer

than--

(i) The weighted average maturity of the refunded bonds; or

(ii) In the case of a short-term financings (such as a bond

anticipation note), 120 percent of the weighted average reasonably

expected economic life of the facilities financed; or

(2) A principal purpose of the issuance of the refunding bonds is

to make one or more new conduit loans.

(h) Permissive retroactive application. Except as provided in

Sec. 1.141-15 (d) or (e) or paragraph (i) of this section, Sec. 1.141-1

through 1.141-6, 1.141-7T through 1.141-8T, 1.141-9 through 1.141-14,

1.145-1 through 1.145-2, 1.150-1(a)(3) and the definition of bond

documents contained in Sec. 1.150-1(b) may be applied in whole, but not

in part to--

(1) Bonds that are outstanding on May 16, 1997, and subject to

section 141; or

(2) Refunding bonds issued on or after May 16, 1997.

(i) Permissive retroactive application of certain regulations

pertaining to output contracts. Section 1.141-7T(f) (4) and (5) may be

applied to any bonds issued before February 23, 1998.

Par. 7. Section 1.142(f)(4)-1T is added to read as follows:

Sec. 1.142(f)(4)-1T Manner of making election to terminate tax-exempt

bond financing (temporary).

(a) Overview. Section 142(f)(4) permits a person engaged in the

local furnishing of electric energy or gas (a local furnisher) that

uses facilities financed with exempt facility bonds under section

142(a)(8) and that expands its service area in a manner inconsistent

with the requirements of sections 142(a)(8) and 142(f) to make an

election to ensure that those bonds will continue to be treated as

exempt facility bonds. The election must meet the requirements of

paragraphs (b) and (c) of this section.

(b) Time for making election--(1) In general. An election under

section 142(f)(4)(B) must be filed with the Internal Revenue Service on

or before 90 days after the later of--

(i) The date of the service area expansion that causes bonds to

cease to meet the requirements of sections 142(a)(8) and 142(f); or

(ii) February 23, 1998.

(2) Date of service area expansion. For the purposes of this

section, the date of the service area expansion is the first date on

which the local furnisher is authorized to collect revenue for the

provision of service in the expanded area.

(c) Manner of making election. An election under section

142(f)(4)(B) must be captioned ``ELECTION TO TERMINATE TAX-EXEMPT BOND

FINANCING'', must be signed under penalties of perjury by a person who

has authority to sign on behalf of the local furnisher, and must

contain the following information--

(1) The name of the local furnisher;

(2) The tax identification number of the local furnisher;

(3) The complete address of the local furnisher;

(4) The date of the service area expansion;

(5) Identification of each bond issue subject to the election,

including the complete name of each issue, the tax identification

number of each issuer, the issue date of each issue, the issue price of

each issue, the adjusted issue price of each issue as of the date of

the election, the earliest date on which the bonds of each issue may be

redeemed, and the principal amount of bonds of each issue to be

redeemed on the earliest redemption date;

(6) A statement that the local furnisher making the election agrees

to the conditions stated in section 142(f)(4)(B); and

(7) A statement that each issuer of the bonds subject to the

election has received written notice of the election.

(d) Effect on section 150(b). Except as provided in paragraph (e)

of this section, if a local furnisher files an election within the

period specified in paragraph (b) of this section, section 150(b) does

not apply to bonds identified in the election during and after that

period.

(e) Effect of failure to meet agreements. If a local furnisher

fails to meet any of the conditions stated in an election pursuant to

paragraph (c)(6) of this section, the election is invalid.

(f) Corresponding provisions of the Internal Revenue Code of 1954.

Section 103(b)(4)(E) of the Internal Revenue Code of 1954 set forth

corresponding requirements for the exclusion from gross income of the

interest on bonds issued for facilities for the local furnishing of

electric energy or gas. For the purposes of this section any reference

to sections 142(a)(8) and (f) of the Internal Revenue Code of 1986

includes a reference to the corresponding portion of section

103(b)(4)(E) of the Internal Revenue Code of 1954.

(g) Effective dates. Section 1.142(f)(4)-1 applies to elections

made on or after February 23, 1998.

Par. 8. Section 1.150-5T is added to read as follows:

Sec. 1.150-5T Filing notices and elections (temporary).

(a) In general. Notices and elections under the following sections

must be filed with the Chief, Employee Plans and Exempt Organizations)

of the appropriate key district office--

(1) Section 1.141-12(d)(3); and

(2) Section 1.142(f)(4)-1T.

(b) Effective dates. This section applies to notices and elections

filed on or after February 23, 1998.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Approved: December 23, 1997.

Jonathan Talisman,

Deputy Assistant Secretary of the Treasury.

[FR Doc. 98-716 Filed 1-21-98; 8:45 am]

BILLING CODE 4830-01-U