Td 8941

Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR part 1
[TD 8941]
RIN 1545–AX87

Obligations of States and Political
Subdivisions
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations.
SUMMARY: This document contains
temporary regulations that provide
guidance to issuers of tax-exempt bonds
for output facilities. This document also
contains final 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 regulations
will affect issuers of tax-exempt bonds
and nongovernmental persons engaged
in the local furnishing of electric energy
or gas after the effective date.
The text of the 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: Effective Date: These regulations
are effective January 19, 2001.
Applicability Date: For dates of
applicability, see §§ 1.141–15T,
1.142(f)(4)–1(g), and 1.150–5(b).
FOR FURTHER INFORMATION CONTACT: Rose
M. Weber (202) 622–3980 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collection of information in this
rule has been reviewed and, pending
receipt and evaluation of public
comments, approved by the Office of
Management and Budget (OMB) under
44 U.S.C. 3507 and assigned control
number 1545–
.
The collection of information in this
regulation is in § 1.142(f)(4)–1. This
information is required to enable the
IRS to identify persons engaged in the
local furnishing of electric energy or gas
that use facilities financed with exempt
facility bonds under section 142(a)(8)
and that expand their service area in a
manner inconsistent with the
requirements of sections 142(a)(8) and
(f) who have made an election to ensure
that those bonds will continue to be
treated as exempt facility bonds. The
data collected will be used by the IRS

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as the mechanism for identifying bonds
that will remain tax-exempt
notwithstanding a service area
expansion that is inconsistent with the
requirements of sections 142(a)(8) and
(f). The collection of information is
mandatory. The likely respondents are
business institutions.
Comments on the collection of
information should be sent to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer, W:CAR:MP:FP:S:O
Washington, DC 20224. Comments on
the collection of information should be
received by March 19, 2001. Comments
are specifically requested concerning:
Whether the collection of information
is necessary for the proper performance
of the functions of the Internal Revenue
Service, including whether the
information will have practical utility;
The accuracy of the estimated burden
associated with the collection of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the collection of information may be
minimized, including through the
application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
Estimated total annual reporting
burden is 15 hours.
Estimated average annual burden
hours per respondent is 1 hour.
Estimated number of respondents is
15.
Estimated annual frequency of
responses is on occasion.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
This document amends the Income
Tax Regulations (26 CFR part 1) under
section 141 by providing special rules

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for tax-exempt bonds issued for output
facilities. This document also amends
the Income Tax Regulations under
section 142(f)(4) by providing rules to
make the election provided in that
section for nongovernmental persons
engaged in local furnishing of electric
energy or gas using facilities financed
with tax-exempt bonds.
On January 22, 1998, temporary
regulations (TD 8757) (the 1998
temporary regulations) were published
in the Federal Register (63 FR 3256) to
provide guidance under the Internal
Revenue Code of 1986 regarding the
application of the private activity bond
tests under section 141(b)(1) and (2) to
output contracts for output facilities; the
application of the $15 million limit
under section 141(b)(4) to output facility
financings; the election provided in
section 142(f)(4) for nongovernmental
persons engaged in local furnishing of
electric energy or gas using facilities
financed with tax-exempt bonds; and
the filing location for certain notices
and elections. A notice of proposed
rulemaking (REG–110965–97) crossreferencing the temporary regulations
was published in the Federal Register
on the same day (63 FR 3296). On April
28, 1998, the IRS held a public hearing
on the proposed regulations. Written
comments responding to the notice of
proposed rulemaking were also
received. After consideration of all the
comments, the 1998 temporary
regulations are revised by this Treasury
decision. The new temporary
regulations are referred to below as the
‘‘revised regulations.’’ The revisions are
discussed below.
Explanation of Provisions
A. Section 1.141–7T
Output Facilities

Special Rules for

1. Benefits and Burdens Test—
Transmission Contracts
Under the 1998 temporary
regulations, an agreement to provide
firm or priority transmission services is
generally treated as a take or take or pay
contract. Commentators suggested that
firm or priority transmission contracts
should not automatically be treated as
take or take or pay contracts. They
recommended that the same standards
that apply to determine whether
generation contracts result in private
business use, including the
requirements contract provisions,
should also apply to transmission
contracts. The revised regulations adopt
this recommendation by deleting the
provision that generally treats all
contracts for firm or priority
transmission service as take or take or
pay contracts.

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2. Retail Requirements Contracts
The 1998 temporary regulations
provide that a retail requirements
contract generally meets the benefits
and burdens test to the extent it
obligates the purchaser to make
payments that are not contingent on the
purchaser’s output requirements.
Commentators requested clarification
regarding the application of this rule to
reasonable contract damages and
termination provisions. The revised
regulations clarify that a retail
requirements contract does not meet the
benefits and burdens test by reason of
(1) a provision that requires the
purchaser to pay reasonable and
customary damages (including
liquidated damages) in the event of a
default, or (2) a provision that permits
the purchaser to pay a specified amount
to terminate the contract while the
purchaser has requirements, in each
case if the amount of the payment is
reasonably related to the purchaser’s
obligation to buy requirements that is
discharged by the payment.
3. Output Contract Properly
Characterized as a Lease
Under the 1998 temporary
regulations, output contracts that
provide the purchaser with specific
rights to control the output of a facility
or with other specific performance
rights to the use of output of the facility
are generally taken into account under
the private business tests, even if the
benefits and burdens test is not met.
Commentators requested clarification of
the scope of this rule.
The revised regulations amend the
rule and clarify its application by
specifying that an output contract that is
properly characterized as a lease for
federal income tax purposes is tested
under §§ 1.141–3 and 1.141–4 to
determine whether it is taken into
account under the private business tests.
4. Special Rule for Facilities With
Significant Unutilized Capacity
The 1998 temporary regulations
provide that, 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, 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. The revised regulations
change the 30 percent threshold to 20
percent.

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5. Special Rule for Facilities With a
Limited Source of Supply

8. Exception for Short-Term Sales of
Output

Under the 1998 temporary
regulations, the available output of a
facility that is constrained by a limited
source of supply must be determined by
reasonably taking those constraints into
account. Commentators requested
clarification of the meaning of limited
source of supply. For example, they
asked whether the term includes not
only physical but also economic
limitations.
The revised regulations clarify that a
limited source of supply includes a
physical limitation, such as the flow of
water, but not an economic limitation,
such as the cost of coal or gas.

The 1998 temporary regulations
provide that the exceptions for shortterm use that apply to other types of
arrangements under the general private
activity bond rules in § 1.141–3 also
apply to output contracts. Many
commentators suggested that these
exceptions may have limited practical
application in the output context and
recommended that they be expanded to
permit contracts of a longer duration.
These commentators stated that longerterm contracts are required in order to
transfer substantial benefits of
ownership and substantial burdens of
debt service with respect to an output
facility. Other commentators suggested
that any sale of output by a municipal
utility outside of its traditional service
territory should result in private
business use.
The revised regulations provide an
exception under which an output
contract with a nongovernmental person
will not be taken into account under the
private business tests if: (1) the term of
the contract, including all renewal
options, does not exceed one year; (2)
the compensation under the contract is
based on generally applicable and
uniformly applied rates or represents a
negotiated, fair market price; and (3) the
facility is not financed for a principal
purpose of serving that
nongovernmental person.

6. Measurement of Private Business Use
The 1998 temporary regulations
provide that, if an output contract
results in private business use, the
amount of such use generally is the
capacity that must be reserved for the
nongovernmental person under prudent
reliability standards. Commentators
stated that this provision is difficult to
apply and may overstate the amount of
private business use. They suggested
that the amount of private business use
should be the amount of output actually
purchased under the contract.
The revised regulations provide that,
if an output contract results in private
business use, the amount of private
business use generally is the amount of
output purchased under the contract.
7. Exception for Small Purchases of
Output

9. Special Exception for Sales of Output
Attributable to Excess Generating
Capacity Resulting From Open Access

The 1998 temporary regulations
provide that output contracts are not
taken into account under the private
business tests if the purchaser is not
required to make a substantially certain
payment in any year that is greater than
0.5 percent of the average annual debt
service on an issue that finances the
facility. Some commentators suggested
that this provision should be amended
to take into account average annual
payments under a contract, rather than
payments in any one year, and that the
provision should apply based on all the
outstanding bonds for the facility. Other
commentators stated that the exception
should be eliminated as inconsistent
with a competitive electric industry.
The revised regulations provide that
output contracts are not taken into
account under the private business tests
if the average annual payments under
the contract that are substantially
certain to be made do not exceed 0.5
percent of the average annual debt
service on all outstanding tax-exempt
bonds issued to finance the facility.

The 1998 temporary regulations
contain an exception to private business
use for certain output contracts if: (1)
The contract term does not exceed three
years; (2) the issuer does not utilize taxexempt financing to increase the
generating capacity of its system during
the contract term; (3) the governmental
owner offers non-discriminatory, open
access transmission tariffs under certain
rules of the Federal Energy Regulatory
Commission (FERC) (or comparable
provisions of state law pursuant to a
plan approved by the FERC); (4) all of
the output sold is attributable to excess
capacity resulting from the offer of the
open access tariffs; (5) the contract
mitigates stranded costs attributable to
the open access tariffs; and (6) any
stranded costs recovered by the
governmental owner are applied as
promptly as is reasonably practical to
redeem tax-exempt bonds in a manner
consistent with § 1.141–12.
Comments were received regarding
many of the above requirements. In
particular, many commentators

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suggested that the maximum contract
term should be extended beyond three
years. Some commentators
recommended eliminating the
prohibition on tax-exempt financing to
increase capacity during the contract
term. Others suggested that de minimis
capacity increases should be permitted.
Some commentators suggested that the
requirement that a contract mitigate
stranded costs should be eliminated
because the purpose of that provision is
accomplished by the requirement that
all of the output sold be attributable to
excess capacity from open access tariffs.
Some commentators recommended
deleting the reference to FERC approval
of state open access plans because the
FERC may not approve all such plans.
Other commentators requested
clarification regarding the amounts that
an issuer must use to redeem bonds.
Finally, some commentators
recommended deleting the exception
entirely.
The revised regulations retain the
exception, with certain modifications.
First, the revised exception permits taxexempt financing during the contract
term for property that does not increase
the generating capacity of the issuer’s
system by more than three percent.
Second, the amended exception deletes
the reference to FERC approval of state
open access plans. Third, the revised
regulations remove the reference to
stranded costs. Finally, the revised
exception clarifies that the amounts that
an issuer must use to redeem bonds
consist of all payments that it receives
under the contract, other than the
portion of such payments that is
properly allocable to the payment of
ordinary and necessary expenses
directly attributable to the operation and
maintenance of the facility (as described
in § 1.141–4(c)(2)(C)).
10. Special Exceptions for Transmission
Facilities
The 1998 temporary regulations do
not treat all use of transmission facilities
pursuant to standard tariffs as general
public use, but contain certain special
exceptions to private business use of
transmission facilities. Some
commentators suggested that use of
transmission facilities under standard
tariffs should be treated as general
public use, and therefore should never
result in private business use. The
revised regulations do not treat all use
of transmission facilities pursuant to
standard tariffs as general public use,
but retain and modify the special
exceptions, as discussed below.
The 1998 temporary regulations
contain two special exceptions under
which certain actions with respect to

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transmission facilities financed by an
issue are not treated as deliberate
actions under § 1.141–2(d). The first
exception provides that the execution of
a contract for the use of transmission
facilities is not treated as a deliberate
action if the contract is entered into in
response to or in anticipation of a
specific order by the FERC to wheel
power 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); the terms of the contract are
bona fide and arm’s-length; and the
consideration paid is consistent with
section 212(a) of the Federal Power Act.
Commentators suggested eliminating
the requirement that orders of state
regulatory authorities be undertaken
pursuant to a FERC-approved state open
access plan because FERC approval may
not be required for all such plans. The
revised regulations adopt this suggested
change.
The second exception in the 1998
temporary regulations provides that an
action is not treated as a deliberate
action if it is taken to implement the
offering of non-discriminatory, open
access tariffs for the use of financed
transmission facilities in a manner
consistent with FERC rules, including
the reciprocity conditions of FERC
Order No. 888 (61 FR 21540, May 10,
1996). The 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. The
exception does not apply, however, to
the sale, exchange, or other disposition
of bond-financed transmission facilities
to a nongovernmental person.
Commentators recommended that the
exception be expanded to apply to open
access tariffs that are offered under state
law provisions that are comparable to
FERC rules, regardless of whether those
provisions are promulgated by a state
regulatory authority or approved by the
FERC. The revised regulations adopt
this suggested change.
Commentators also requested
clarification regarding the
circumstances in which an independent
system operator (ISO) may be treated as
a private business user of transmission
facilities. Some commentators suggested
that the operation of transmission
facilities by an ISO is a quasigovernmental function and thus should
never constitute private business use.
Some commentators requested
clarification of whether the existing
rules for management contracts under
section 141 may be applied to

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arrangements for the operation of
transmission facilities by an ISO.
The revised regulations do not
provide that the operation of bondfinanced transmission facilities by an
ISO or other regional transmission
organization (RTO) is disregarded under
section 141. However, the existing rules
for management contracts under section
141, including Revenue Procedure 97–
13 (1997–1 C.B. 632), are applicable in
determining whether an arrangement for
the operation of transmission facilities
by an ISO or other RTO results in
private business use, including a
determination of whether the
arrangement is properly characterized as
a lease for federal income tax purposes.
Comments are requested on whether
additional guidance is needed
concerning the treatment under section
141 of arrangements for the operation of
bond-financed transmission facilities by
an ISO or other RTO.
The 1998 temporary regulations
provide a special transition rule for
bonds (other than advance refunding
bonds) that refund bonds issued prior to
July 9, 1996 (the effective date of FERC
Order No. 888). Under this rule, an
action taken or to be taken with respect
to transmission facilities is not taken
into account under the reasonable
expectations test of § 1.141–2(d) if the
action is described in one of the two
special exceptions discussed above and
the weighted average maturity of the
refunding bonds does not exceed the
remaining weighted average maturity of
the prior bonds.
Commentators recommended that the
July 9, 1996 date be changed to a date
on or after February 23, 1998 (the
effective date of the 1998 temporary
regulations). The revised regulations
change the cut-off date to February 23,
1998.
Under the 1998 temporary
regulations, issuers may apply the
special exceptions for transmission
facilities to any bonds issued before the
effective date of those regulations.
However, issuers may not apply the
exceptions to refunding bonds issued on
or after the effective date, unless the
refunding bonds are subject to the 1998
temporary regulations in their entirety.
Commentators suggested that, in order
to encourage open access, issuers
should be permitted to apply the
exceptions to refunding bonds that are
not otherwise subject to the regulations.
The revised regulations adopt this
change.
11. Definition of Transmission Facilities
The 1998 temporary regulations
define transmission facilities to include
facilities that are necessary to provide

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ancillary services required to be offered
as part of open access transmission
tariffs under FERC rules. Commentators
stated that the inclusion of ancillary
services within the general definition of
transmission facilities creates
unwarranted complexity. They
recommended that facilities used for
ancillary services be treated as
transmission facilities only for purposes
of the special exceptions for
transmission facilities in the
regulations. The revised regulations
adopt this approach.
B. Section 1.141–8T $15 Million
Limitation for Output Facilities
Under the 1998 temporary
regulations, property that replaces
existing property is treated as part of the
same project as the replaced property
unless, among other things, the bonds
that finance 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.
One commentator noted that it is not
common to allocate bonds that finance
output facilities to the specific assets
that comprise those facilities, and thus
it may be difficult to determine whether
this 120 percent requirement is met. The
revised regulations amend this rule so
that it applies to the entire output
facility of which the replaced property
is a part, rather than the specific asset
being replaced.
C. Need for Temporary Regulations and
Request for Public Comments
Congress passed the Energy Policy
Act of 1992 to encourage restructuring
of the electric power industry. Since
that time, the FERC and many 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.
The 1998 temporary regulations were
published in order to provide
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 restructured electric
utility industry. Treasury and the IRS
are aware, however, that restructuring
efforts are evolving and uncertain, and
that new types of arrangements may be
developed to implement restructuring.
Accordingly, the revised regulations
are published in both temporary and
proposed form in order to continue to
provide guidance on which issuers can
rely in evaluating their participation in
open access regimes, while providing
the opportunity for public comment
with respect to developments in the

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electric power industry that have
occurred since the publication of the
1998 temporary regulations. The revised
regulations are published in temporary
form with the expectation that 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
additional guidance is needed to
address the proper treatment under
section 141 of output contracts for the
use of transmission and distribution
facilities under open access, and output
contracts for ancillary services that are
necessary to maintain the reliability of
a transmission grid. Comments are also
requested on the impact of FERC Order
No. 2000 (65 FR 810, January 6, 2000)
on tax-exempt bonds issued by public
power systems, including whether
additional guidance is needed regarding
the proper treatment under section 141
of arrangements for the operation of
bond-financed transmission facilities by
an ISO or other RTO that satisfies the
requirements of Order 2000.
Effective Dates
Sections 1.141–7T and 1.141–8T are
applicable to bonds sold on or after
January 19, 2001. Section 1.142(f)(4)–1
applies to elections made on or after
January 19, 2001. Section 1.150–5
applies to notices and elections filed on
or after January 19, 2001.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 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
collection of information in these
regulations will 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
1997 a total of only 80 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 IRS 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

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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 Bruce M. Serchuk, and
Rose M. Weber, Office of Chief Counsel
(Tax-exempt and Government Entities),
Internal Revenue Service, and Stephen
J. Watson, Office of Tax Legislative
Counsel, Department of the Treasury.
However, other personnel from the IRS
and Treasury Department participated
in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
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
revising the entire entries for §§ 1.141–
7T, 1.141–8T and 1.141–15T 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) Take contract and take or pay contract.
(5) Transmission facilities.
(6) 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) Output contract properly characterized as
a lease.
(d) Measurement of private business use.
(e) Measurement of private security or
payment.

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(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 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.

*

*

*

*

*

§ 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.
(3) Elective application of 1998 temporary
regulations.
(g) Refunding bonds.
(h) Permissive retroactive application.
(i) Permissive retroactive application of
certain regulations pertaining to output
contracts.

*

*
*
*
*
Par. 3. Section 1.141–7T is revised 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 the purchase 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. Sections 1.141–3 and
1.141–4 generally apply 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

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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,
maintenance 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 with
significant unutilized capacity. If an
issuer reasonably expects on the issue
date that persons that are treated as
private business users will purchase
more than 20 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 determine the
available output of a financed peaking
electric generating unit by reference to
the reasonably expected annual 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 more than 20
percent of the actual output of the
facility during the measurement period
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.

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(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 this purpose, a limited
source of supply shall include a
physical limitation (for example, flow of
water), but not an economic limitation
(for example, cost of coal or gas). 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) 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.
(5) Transmission facilities—(i) In
general. Transmission facilities are
facilities for the transmission or
distribution of output.
(ii) Special rule for ancillary services.
For purposes of paragraph (f)(5),
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 for purposes of paragraph (f)(5)
of this section.
(6) 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 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

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bonds used (directly or indirectly) to
finance the facility (the benefits and
burdens test). See paragraph (c)(5) of
this section for the treatment of an
output contract that is properly
characterized as a lease for Federal
income tax purposes. See paragraphs (d)
and (e) of this section for rules regarding
measuring the use of, and payments of
debt service for, an output facility for
determining whether the private
business tests are met. 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. This paragraph
(c)(2)(iii) applies to pledges made on or
after February 23, 1998, with respect to
bonds that are subject to this section.
(3) Take contract or take or pay
contract. 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
available output of a facility.
(4) Requirements contracts—(i) In
general. A requirements contract under
which a nongovernmental person agrees
to purchase all or part of its output

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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)(2) 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, but are not
limited to—
(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 (a retail requirements
contract) 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 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. A retail
requirements contract does not meet the
benefits and burdens test by reason of a
provision that requires the purchaser to
pay reasonable and customary damages
(including liquidated damages) in the
event of a default, or a provision that
permits the purchaser to pay a specified
amount to terminate the contract while
the purchaser has requirements, in each
case if the amount of the payment is
reasonably related to the purchaser’s
obligation to buy requirements that is
discharged by the payment.
(5) Output contract properly
characterized as a lease.
Notwithstanding any other provision of
this section, an output contract that is

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properly characterized as a lease for
Federal income tax purposes shall be
tested under the rules contained in
§§ 1.141–3 and 1.141–4 to determine
whether it is taken into account under
the private business tests.
(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 amount of output
purchased under the contract.
(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
average annual payments under the
contract that are substantially certain to
be made under paragraph (c)(2)(ii) of
this section do not exceed 0.5 percent of
the average annual debt service on all
outstanding tax-exempt bonds issued to
finance the facility, determined as of the
effective date of the contract.
(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. An
output contract with a nongovernmental
person is not taken into account under
the private business tests if—
(i) The term of the contract, including
all renewal options, is not longer than
1 year;
(ii) The contract either is a negotiated,
arm’s-length arrangement that provides
for compensation at fair market value, or
is based on generally applicable and
uniformly applied rates; and
(iii) The output facility is not financed
for a principal purpose of providing that
facility for use by that nongovernmental
person.

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(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 electric
generating 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
(other than expenditures for property
that does not increase the generating
capacity of the system by more than 3
percent).
(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).
(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)(iii) of this section.
(v) All payments received by the
governmental owner under the contract
(other than the portion of such
payments described in § 1.141–
4(c)(2)(C)) are applied as promptly as is
reasonably practical to redeem taxexempt bonds that financed the output
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); 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 nondiscriminatory, 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 nondiscriminatory, open access tariffs for
the use of transmission facilities

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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 comparable provisions of
state law). 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 of 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 originally
issued before February 23, 1998; 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.

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(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 an output facility
financed with two or more sources of

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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 investorowned 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 24-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 20 years. H
also will sell the remaining 40 percent of its
share of the annual output to numerous other
private utilities under contracts of one year
or less that satisfy the exception under
paragraph (f)(3) of this section. No other
contracts will be executed obligating any
person 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 nongovernmental person,
under 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
paragraph (b)(1) of this section is
approximately 17,520,000 MWh (100 MW ×
24 hours × 365 days × 20 years). 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 30 MW over the 10year period. Based on all of the facts and
circumstances, including the size, diversity,

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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 26 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) Under paragraph (d) of this section, the
amount of reasonably expected private
business use under this contract is
approximately 15 percent (30 MW × 24 hours
× 365 days × 10 years, or 2,628,000 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 26 MW of power (less
the operation and maintenance costs directly
attributable to generating that 26 MW of
power), will be more than 10 percent of debt
service on the issue on a present-value basis.
The payment for 26 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 15
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 × 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

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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 security or payment 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 regional transmission
organization. (i) In 2001, 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 nondiscriminatory 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 a regional transmission
organization (RTO), 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 RTO. The functions of the RTO include
control of transmission access and pricing,
scheduling transmission, control area
operations, and settlements and billing. The
RTO’s compensation under its operating
agreement with transmission owners is based
on a share of net profits from operating the
facilities. The restructuring plan is approved
by the FERC pursuant to sections 205 and
206 of the Federal Power Act.

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(ii) In 1994, City D had issued bonds to
finance improvements to its transmission
system. In 2001, D transfers operating control
of its transmission system to the RTO
pursuant to the restructuring plan. At the
same time, D chooses to apply the private
activity bond regulations of §§ 1.141–1
through 1.141–15 to the 1994 bonds. The
operation of the financed facilities by the
RTO results in private business use under
§ 1.141–3. 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 2003 to currently refund the 1994 bonds.
The weighted average maturity of the 2003
bonds is not greater than the remaining
weighted average maturity of the 1994 bonds.
D chooses to apply the private activity bond
regulations of §§ 1.141–1 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
paragraph (f)(5) of this section, however, the
transfer of the financed facilities to the RTO
need not be taken into account in applying
the reasonable expectations test to the
refunding bonds.

Par. 4. Section 1.141–8T is revised to
read as follows:
§ 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, an
issue consists of private activity bonds
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

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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 5 percent or more 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) 5 percent or more 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 5 percent or more 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

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4669

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 issue date
of each issue that finances the units, 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

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Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations

that unit), any remaining costs of the
common facilities may be allocated
between 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. 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 facilities, 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 output facility have a
weighted average maturity that is not
greater than 120 percent of the
reasonably expected economic life of
the facility.
(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 sale proceeds of $500

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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 amended
by revising paragraphs (c), (d) and (e) to
read as follows:
§ 1.141–15

Effective dates.

*

*
*
*
*
(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 refunding bonds are subject to
section 1301 of the Tax Reform Act of
1986 (100 Stat. 2602); and
(2)(i) The weighted average maturity
of the refunding bonds is longer than—
(A) The weighted average maturity of
the refunded bonds; or
(B) 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
(ii) 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 that are subject to section
141.
(e) Permissive application of certain
sections. The following sections may
each be applied to any bonds—
(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 revised to
read as follows:

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§ 1.141–15T

Effective dates (temporary).

(a) through (e) [Reserved]. For further
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 sold on or
after January 19, 2001, that are subject
to section 1301 of the Tax Reform Act
of 1986 (100 Stat. 2602).
(2) Transition rule for requirements
contracts. For bonds otherwise subject
to §§ 1.141–7T and 1.141–8T, § 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. For
purposes of this paragraph (f)(2)—
(i) The extension of the term of a
contract causes the contract to be treated
as entered into on the first day of the
additional term;
(ii) The exercise by a party of a legally
enforceable right that was provided
under a contract before February 23,
1998, on terms that were fixed and
determinable before such date, is not
treated as an amendment of the contract.
For example, the exercise by a
purchaser after February 23, 1998 of a
renewal option that was provided under
a contract before that date, on terms
identical to the original contract, is not
treated as an amendment of the contract;
and
(iii) An amendment that reduces the
term of a contract, or the amount of
requirements covered by a contract, is
not, in and of itself, material.
(3) Elective application of 1998
temporary regulations. For an issue sold
on or after January 19, 2001, and before
February 15, 2001, an issuer may apply
the provisions of §§ 1.141–7T and
1.141–8T in effect prior to January 19,
2001 (26 CFR part 1, revised April 1,
2000) in whole, but not in part, in lieu
of applying §§ 1.141–7T and 1.141–8T.
(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 any bonds sold on or after January 19,
2001, to refund a bond to which
§§ 1.141–7T and 1.141–8T do not apply
unless—
(1) The refunding bonds are subject to
section 1301 of the Tax Reform Act of
1986 (100 Stat. 2602); and
(2)(i) The weighted average maturity
of the refunding bonds is longer than—
(A) The weighted average maturity of
the refunded bonds; or
(B) In the case of a short-term
obligation that the issuer reasonably

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Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Rules and Regulations
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
(ii) A principal purpose for 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) Outstanding bonds that are sold
before January 19, 2001, and subject to
section 141; or
(2) Refunding bonds sold on or after
January 19, 2001, that are subject to
section 141.
(i) Permissive application of certain
regulations pertaining to output
contracts. Section 1.141–7T(f)(4) and (5)
may be applied to any bonds.
Par. 7. Section 1.142(f)(4)–1 is added
to read as follows:
§ 1.142(f)(4)–1 Manner of making election
to terminate tax-exempt bond financing.

(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 (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 date of the service area
expansion that causes bonds to cease to
meet the requirements of sections
142(a)(8) and (f).
(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

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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
report number of the information return
filed under section 149(e) for each issue,
the issue date of each issue, the CUSIP
number (if any) of the bond with the
latest maturity 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. This section
applies to elections made on or after
January 19, 2001.
§ 1.142(f)(4)–1T

[Removed]

Par. 8. Section 1.142(f)(4)–1T is
removed.
Par. 9. Section 1.150–5 is added to
read as follows:

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§ 1.150–5

Filing notices and elections.

(a) In general. Notices and elections
under the following sections must be
filed with the Internal Revenue Service,
1111 Constitution Avenue, NW,
Attention: T:GE:TEB:O, Washington, DC
20224 or such other place designated by
publication of a notice in the Internal
Revenue Bulletin—
(1) Section 1.141–12(d)(3);
(2) Section 1.142(f)(4)-1; and
(3) Section 1.142–2(c)(2).
(b) Effective dates. This section
applies to notices and elections filed on
or after January 19, 2001.
§ 1.150–5T

[Removed]

Par. 10. Section 1.150–5T is removed.
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 11. The authority for part 602
continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 12 . In § 602.101, paragraph (b) is
amended by adding an entry in
numerical order to the table to read as
follows:
§ 602.101

*

OMB control numbers.

*
*
(b) * * *

*

*

CFR part or section where
identified and described
*
*
*
1.142(f)(4)–1 .........................
*

*

*

Current OMB
control No.
*

*
1545–1730

*

*

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: January 10, 2001.
Jonathan Talisman,
Assistant Secretary of the Treasury.
[FR Doc. 01–1412 filed 1–17–01; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF THE INTERIOR
Office of Surface Mining Reclamation
and Enforcement
30 CFR Part 931
[NM–041–FOR]

New Mexico Regulatory Program
AGENCY: Office of Surface Mining
Reclamation and Enforcement, Interior.
ACTION: Final rule, approval of
amendment.
SUMMARY: The Office of Surface Mining
Reclamation and Enforcement (OSM) is

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