Par. 4. Sections 1.141-0 through 1.141-16 are added to read as follows:
(a) Private business use and private security or payments test--(1) General rule. The purchase by one or more nongovernmental persons of more than 10 percent of the available output of an output facility (including water facilities) financed with the proceeds of an issue may satisfy the private business use test and the private security or payment test under section 141(b)(1) and (2). These tests are satisfied if that use has the effect of transferring to those nongovernmental persons substantial benefits of owning the facilities and substantial burdens of paying the debt service on bonds used (directly or indirectly) to finance the facilities (the benefits and burdens test), so as to constitute the indirect use by those persons of (and the indirect payment by those persons of debt service of) more than 10 percent of those proceeds.
(2) Application of benefits and burdens test. The benefits and burdens test is satisfied (and the bonds are private activity bonds under section 141(b)(1) and (2)) if each of the following conditions is satisfied:
(i) Either--
(A) A nongovernmental person agrees pursuant to a contract to take, or take or pay for, more than 10 percent of the available output of a facility; or
(B) Two or more nongovernmental persons, each of whom pays an average annual demand charge or other guaranteed minimum payment during the contract term exceeding 1 percent of the average annual debt service with respect to the issue agree to take or take or pay for more than 10 percent of the available output of a facility. For purposes of this section, contractual conditions related to the production of output are disregarded;
(ii) Payments made or to be made with respect to contracts described in paragraph (a)(2)(i) of this section by nongovernmental persons (or by other persons under those contracts) exceed 10 percent of the debt service with respect to that issue over the contract term, determined under the rules provided in Sec. 1.141-4 (that is, on a present value basis).
(3) Special rules and definitions. For purposes of this paragraph (a) the following special rules and definitions apply:
(i) Available output. The available output of a facility 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 contract term of the issue issued to finance that facility. 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) and is reduced to account for scheduled maintenance but not for reserves or other unutilized capacity. If nameplate capacity or the equivalent is greater than 150 percent of the average expected output during the contract term, average expected output is used in lieu of nameplate capacity. For transmission facilities and cogeneration facilities, available output must be measured in a reasonable manner. For example, for short, radial transmission lines, thermal capacity may be reasonable. Similarly, for a transmission network, the use of load share ratios, in a manner consistent with the requirements of the Federal Energy Regulatory Commission, may be reasonable.
(ii) Contract term. The contract term of an issue begins on the date the output facility is placed in service (but not earlier than the issue date of the bonds), and ends on the final maturity date of the issue (determined without regard to any optional redemption dates.) If a contract may be extended by the owner of the facility, the term of the contract includes the period for which that contract may be so extended.
(iii) Refundings and extensions of maturity. In determining the contract term and debt service on an issue under paragraphs (a)(2)(ii) and (a)(3)(ii) of this section if, on or before the issue date of an issue to finance a facility, the issuer makes a commitment (for example, in the bond documents) to refund that issue with a refunding issue, the contract term and debt service are based on the final maturity date of any bond of the refunding issue (determined without regard to any optional redemption dates).
(iv) Take or take or pay contracts. A take or pay contract is a contract under which the purchaser agrees to pay for the output under the contract, whether or not that output is received by the purchaser. A take contract is a contract under which the purchaser agrees to pay for the output under the contract if the output facility is capable of providing the service. In the case of a transmission facility, both agreements to provide firm transmission services and agreements to provide transmission service comparable to the owner's own use are treated as a take or take or pay contracts.
(v) Certain requirements contracts treated as take or take or pay contracts--(A) In general. An agreement by a nongovernmental person to purchase all of its output requirements (a requirements contract) is not a take or take or pay contract unless the purchaser agrees to pay a guaranteed minimum payment or if the purchaser has no substantial ability to purchase its output requirements from other sources.
(B) Requirements for certain contracts. A requirements contract entered into on or after the date that is 60 days after publication of final regulations is a take or take or pay contract if the purchaser has priority rights to the output (or rights to control the allocation of the available output), if it is reasonably expected that the purchaser will purchase at least 10 percent of the available output of the facility, or if the purchaser under the contract is a regulated utility that is in the business of reselling output of the type purchased. For these purposes, to the extent that the amount of output under the contract does not increase, a contract is treated as entered into before the date that is 60 days after publication of final regulations notwithstanding an extension of the contract term or changes to other terms of the contract, provided that there is no change, directly or indirectly, in the parties to the contract and the weighted average maturity of the bonds financing the facility is not extended.
(vi) Reasonable expectations determinations. The provisions of this paragraph (a) regarding renewals of output contracts and the issuer's requirements for output from the facility are applied on the basis of the issuer's reasonable expectations as of the issue date.
(4) Benefits and burdens test not exclusive. The benefits and burdens test of this section is not the exclusive means by which bonds financing output facilities may satisfy the private business use or private security or payment tests. Thus, for example, an output facility that is leased to a nongovernmental person may satisfy the private business use test.
(b) Pooling, exchange, spot sales, and wheeling arrangements--(1) Swapping and pooling arrangements. An agreement that provides for swapping or pooling of power 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 if--
(i) Net importers. (A) Under the agreement, on an annual basis and without regard to emergency consumption, the governmental person is a net importer of power (for example, output produced at a particular facility that is owned by a governmental person is provided to a nongovernmental person in exchange for output with a greater value to be delivered by the nongovernmental person at a different location); and
(B) The facilities are not designed differently, sized larger, built sooner, or constructed in a more costly manner than is reasonably necessary for the ordinary customers of the owner of the facilities; or
(ii) Temporary outages, etc. (A) The swapped power is approximately equal in value determined over periods of one year or less;
(B) The agreement is not a take or take or pay contract; and
(C) The purpose of the agreement is to enable each of the parties to satisfy different peak load demands or to accommodate temporary outages.
(2) Certain conduit parties disregarded. The presence of 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 satisfied with respect to financed facilities other than those of the nongovernmental person.
(3) Spot sales. Spot sales of excess power capacity for temporary periods, other than pursuant to take or take or pay contracts, do not result in private business use. For this purpose, a spot sale is a sale pursuant to a single agreement that is limited to no more than 30 days' duration including renewal periods.
(4) Wheeling--(i) General rule. Use of transmission facilities financed by an issue is not treated as 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 to provide transmission services to a particular nongovernmental person (including a requirement that the owner or operator either purchase the output of a facility or provide transmission services). This paragraph (b)(4) applies only if--
(A) The transmission facilities were financed based on the issuer's reasonable expectations regarding the amount of wheeling anticipated;
(B) The terms of the transmission agreement are bona fide and arm's-length, and the new user pays consideration equal to the fair market value for the use of the financed property (for example, as determined by the Federal Energy Regulatory Commission); and
(C) No circumstances are present that indicate an attempt to avoid directly or indirectly the requirements of section 141.
(ii) Exceptions. This paragraph (b)(4) does not, however, apply to any transmission facilities (or portion thereof) that are--
(A) Made necessary by the agreement to provide transmission service, including improvements needed due to increased loads;
(B) Designed differently, sized larger, built sooner, or constructed in a more costly manner than is reasonably necessary for the ordinary customers of the owner of the transmission facilities; or
(C) In excess of the services that are reasonably necessary to the purchaser of the output being transmitted.
(iii) Special limitation. If the transmission services provided under this paragraph (b)(4) involve more than 20 percent of the facility financed with proceeds of the issue, paragraph (b)(4)(i) of this section applies only if the issuer takes a remedial action described in Sec. 1.141-13 regarding the bonds allocable to that use. Paragraph (b)(4) of Sec. 1.141-13 does not apply for this purpose. This paragraph (b)(4)(iii) does not apply if substantially all of the consideration for providing the transmission services is the provision of other output property (for example, transmission).
(c) Certain short term contracts. The purchase of the output of an output facility by a nongovernmental person pursuant to an output contract is not treated as private business use if:
(1) As of the later of the issue date or the date the contract is entered into, the issuer reasonably expects that at the expiration of that agreement the related output will not be used for a private business use (determined without regard to this paragraph (c)) and no subsequent deliberate actions are taken that are inconsistent with this reasonable expectation;
(2) The contract has a term not in excess of 1 year and cannot be renewed or extended beyond this 1-year term; and
(3) The facilities are not designed differently, sized larger, built sooner, or constructed in a more costly manner than is reasonably necessary for the ordinary customers of the owner of the facilities.
(d) Allocations of output facilities and systems--(1) Facts and circumstances analysis. Whether output sold under a 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, including whether the transaction is inconsistent with the purpose of section 141. In general, output is allocated to a facility or system only to the extent that it is physically possible. For example, output from a generating unit that is fed directly into a lower voltage distribution system of the owner of that unit generally cannot leave that distribution system and, therefore, must be allocated to those receiving electricity through that distribution system. Output may be allocated without regard to physical limitations, however, if exchange agreements, 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.
(2) Factors. Except as provided in paragraph (d)(1) of this section, contractual terms relating to the delivery of the output (such as delivery limitations and options or obligations to deliver power from additional sources) are the most significant factor in allocating output to a facility or system. For example, 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, generally is allocated to that unit. Similarly, 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 the system. The method of pricing output under the contract and the consistency of the contract with commercially reasonable terms are also significant factors. For example, output sold under a contract to provide peaking capacity from a combustion turbine generally is allocated to that turbine if the contract provides for pricing that is typical of peaking unit pricing, this pricing is based on the capital and generating costs of that turbine, or no power need be delivered if that turbine is inoperable.
(3) Allocations among users. A facility or system (or portion thereof) that, under this paragraph (d), is allocable to two or more users generally is allocated among those users on a ratable basis. Payments for output provided by an output facility financed with two or more issues of bonds generally are allocated ratably among the issues according to the relative amounts of proceeds of each issue used to finance that facility.
(4) Electric transmission facilities. If a contract for use of a transmission facility provides for payments for transmission services using a more accurate method of measuring the transmission facilities used than the contract path specified by the parties (for example, a method that accounts for loop flow or a method based on load share ratios of a network), that method must be used to determine use under this paragraph. In other cases, the determination of use of an electric transmission facility may be based on the contract path specified by the parties to the contract, if reasonable.
(5) Conservation facilities. In general, the financing of an output conservation improvement is treated as the acquisition of an output facility by the utility sponsoring the improvement. The use of a conservation improvement is allocated under the rules in this paragraph (d). Thus, generally, the output attributable to a conservation improvement is allocable to the beneficiary of that output.
(e) Examples. The following examples illustrate the application of this section.
Example 1. Joint ownership. Z, a privately 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 in the facility and by revenues to be derived from its share of the annual output of the facility. Because 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 Z 10 percent of its share of that annual output 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 and, therefore, the contract term of the issue will be 21 years. H also agrees to sell the remaining excess portion of its share of the annual output (40 percent) to numerous other private utilities 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 and no person (other than Z) will pay a demand charge or other minimum payment under conditions which, under paragraph (a) of this section, result in a transfer of substantial benefits of ownership and substantial burdens of paying the debt service on bonds used directly or indirectly to provide those facilities. The bonds are not private activity bonds because H's one-third interest in the facility (financed with proceeds) is treated as a discrete portion of a mixed use facility and, although 10 percent of H's interest in the annual output of the facility will be used, directly or indirectly, in the trade or business of Z, a non-governmental person, under the rule in paragraph (a) of this section, that portion constitutes not more than 10 percent of the available output of the facility. If more than 10 percent of the available output of the facility were to be sold to Z pursuant to a take or pay contract and more than 10 percent of the debt service on the bonds were to be paid or secured by Z, the bonds would be private activity bonds under paragraph (a) of this section.
Example 2. 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 1990, under which the four systems are required to take or pay for specified portions of the total power output until the year 2020. Currently, existing facilities supply all of the present needs of the four utility systems but their future power requirements are expected to increase substantially. K issues 20-year bonds to construct a large generating facility. 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 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 percent value basis). The balance, which will exceed 10 percent of the debt service on the bonds, will be paid from revenues from the contracts with the four systems from sale of power produced by the old facilities. 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 an underlying arrangement, will be derived from payments in respect of property used for a private business use. Therefore, the bonds are private activity bonds.
Example 3. Municipal utility U, 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. Although U does not anticipate that it will require additional electric resources and any new resources would produce electricity at a higher cost to U than its cost under its contract with B, B encourages U to construct new resources sufficient to meet the requirements of U's customers. U issues obligations to construct facilities that will produce 1,000 Mw of electricity. B, U, and I, another investor-owned utility, enter into an agreement under which U assigns to I its rights under U's take or pay contract with B. Under this arrangement, I will make payments to U and U will continue to make payments to B for the 1,000 Mw it is entitled to under the original take or pay contract. The payments made by I to U will be equal to or greater than the amounts required to pay the debt service on U's bonds. Under paragraph (d) of this section, U's obligations are financing a facility in a manner that is inconsistent with the purposes of section 141 and, therefore, the take or pay contract under which I purchases electricity is allocable to U's new facilities. Because I is a nongovernmental person, U's bonds are private activity bonds.
Example 4. Transmission network. In response to an order by the Federal Energy Regulatory Commission (FERC), municipal utility V and investor-owned utility W enter into an agreement for the shared use of W's transmission facilities and transmission facilities that V is to construct (collectively, the network). Both V and W require shared use of the entire network, rather than point-to-point service. Pursuant to the agreement, V issues its bonds to construct new transmission facilities. The FERC order provides for sharing of costs of the network using relative load share ratios. Under this methodology, V will be responsible for 40 percent of the load share of the network. Under all the facts and circumstances, relative load share ratios is a reasonable method of measuring the capacity and use of the network. V and W reasonably expect that, on an annual basis, more than 90 percent of the amounts owed to V for use of its facilities will be paid for in kind (that is, through the provision of transmission services on W's facilities). The agreement provides that V and W will be entitled to transmission services that are comparable to the owner's own use. V reasonably expects that, due to the isolated location of the network, no other parties will seek to use V's transmission facilities. Under these circumstances, W will use more than 10 percent of the available output of the facilities financed with V's bonds and more than 10 percent of the debt service on V's bonds will be paid by W. Under paragraph (b)(4) of this section, however, W's use of the financed facilities will not be treated as private business use if those facilities are financed based on V's reasonable expectations regarding the amount of wheeling anticipated and the requirements of paragraph (b)(4)(i) and (iii) are satisfied. Although W's use of the financed facilities involves more than 20 percent of the property financed with the proceeds of the issue, because substantially all of the consideration for this use is the provision of other transmission services, the limitation in paragraph (b)(4)(iii) of this section does not apply. Assuming that the financed facilities are not necessitated by the need to provide transmission to W and that the other conditions of paragraph (b)(4)(i) of this section are satisfied, W's use of the financed facilities will not cause V's bonds to be private activity bonds.