For Tax Professionals  
T.D. 8757 January 21, 1998

Obligations of States & Political Subdivisions

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8757] RIN 1545-AV46

TITLE: Obligations of States and Political Subdivisions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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 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
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regulations) are withdrawn.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 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 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
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 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 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  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 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. 1.150-5T Filing Notices and Elections.

The temporary regulations specify that notices and elections under
section 142(f)(4)(B) and 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
1.141-7 and 1.141-8 and adding entries to the table in numerical
order to read as follows:

1.141-0 Table of contents.

* * * * *

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.

(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.

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
issU.S. (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.

* * * * *

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:

1.141-2 Private activity bond tests.

* * * * *

(d) * * *

(3) * * *

(ii) * * *

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

* * * * *

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:

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 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 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 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 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
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 1.141-4.

(f) Exceptions for certain contracts--(1) Small purchases of output.
An 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.29 (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 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
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 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 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 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
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.35 an
output facility financed with two or more sources of funding are
generally allocated under the rules in 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
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.

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 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 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 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 1.141-2(d). Under
the special exception in.39 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.

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 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
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--

(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:

1.141-15 Effective dates.

(a) Scope. The effective dates of this section apply for purposes of
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 1.150-1(b).

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

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

1.141-15T Effective dates (temporary).

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

(f) Effective dates for certain regulations relating to output
facilities--(1) General rule. Except as otherwise provided in this
section,  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, 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 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
1.141-15 (d) or (e) or paragraph (i) of this section, 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 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: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:

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
Acting Commissioner of Internal Revenue
Approved: Jonathan Talisman
Deputy Assistant Secretary of the Treasury


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