Par. 4. Sections 1.141-0 through 1.141-16 are added to read as follows:
(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. Under this rule, a bond is a private activity bond under the private business tests of section 141(b) (1) and (2) if the nonqualified amount with respect to output facilities financed by the proceeds of the issue exceeds $15 million. The $15 million output limitation applies in addition to the private business tests of section 141(b) (1) and (2). In addition, under section 141(b)(4) and paragraph (a)(2) of this section, the $15 million limitation is reduced in certain cases. Specifically, under the $15 million output limitation, the private business use test and the private security or payment test apply as follows:
(i) Private business use test. An issue to which the $15 million limitation applies meets the private business use test if more than $15 million of the sale proceeds of the issue to be used with respect to an output facility are to be used for a private business use.
(ii) Private security or payment test. An issue to which the $15 million limitation applies meets the private security or payment test if the payment of the principal of, or the interest on, more than $15 million of the sale proceeds of the portion of the issue used with respect to an output facility is (under the terms of the issue or any underlying arrangement) directly or indirectly--
(A) Secured by any interest in an output facility used or to be used for a private business use (or payments in respect of such an output facility); or
(B) To be derived from payments (whether or not to the issuer) in respect of an output facility used or to be used for a private business use.
(2) Reduction in $15 million output limitation for outstanding issues--(i) General rule. In determining whether an issue more than 5 percent of the proceeds of which are to be used with respect to an output facility consists of private activity bonds under the $15 million output limitation, the $15 million limitation on private business use and the $15 million limitation on the private security or payment test are each applied by taking into account any outstanding issues of tax-exempt bonds with respect to that output facility or any other output facility that is part of the same project. Thus, the $15 million limitation on private business use for an issue is reduced by the amount of private business use for that same project financed by any other outstanding tax-exempt bonds. Similarly, the $15 million limitation on the private security or payment test is reduced by the amount of private security or payments for that same project for any other outstanding tax-exempt bonds.
(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) The earlier issue is outstanding on the issue date of the later issue;
(B) The earlier issue will not be redeemed within 90 days of the issue date of the later issue in connection with the refunding of the earlier issue by the later issue; and
(C) More than 5 percent of the sale proceeds of the earlier issue financed an output facility that is part of the same project as the output facility that is financed by more than 5 percent of the sale proceeds of the later issue.
(3) Benefits and burdens test applicable--(i) In general. In applying the $15 million output limitation, the benefits and burdens test of Sec. 1.141-7 applies, except that ``$15 million'' is substituted for ``10 percent''. For this purpose, the amount of private business use with respect to an output facility financed by an issue is determined by multiplying the percentage of private business use over the contract term of the issue by the issue price of the issue.
(ii) Earlier issues for the project. If an earlier issue is outstanding that must be taken into account under paragraph (a)(2) of this section, the amount of private business use and private security or payments for that issue (as determined under paragraph (a)(3)(i) of this section) is multiplied by a fraction, the numerator of which is the greater of the outstanding principal amount or present value of the outstanding bonds 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 as of the issue date of that issue.
(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 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. Facilities that are not owned by the same person are not part of the same project. All participants in a joint powers authority that issues bonds to finance a project are treated as related parties for purposes of applying the $15 million limitation to bonds financing the same project. In the case of undivided ownership interests in a single output facility, property that is not owned by the same person is treated as separate projects only if the separate interests are not financed--
(i) With bonds of a single issuer; and
(ii) With a principal purpose of avoiding the limitation in this section.
(3) Generating property--(i) Property on same site. In the case of property for the generation of output and related facilities (generating property), project means property located at the same site.
(ii) Special rule for generating units. Separate generating units (and related facilities) are not a part of the same project if one is placed in service (determined under Sec. 1.150-2(c)) more than 3 years before the other. Common facilities or property that will be functionally related to more than one generating unit must be allocated on a reasonable basis. If a generating unit already is constructed or is under construction (the first unit) and bonds are to be issued to finance an additional generating unit (the second unit), all costs for any common facilities paid or incurred before the earlier of the issue date of bonds to finance the second unit or the commencement of construction of the second unit are allocated to the first unit. At the time that bonds are issued to finance the second unit (or, if earlier, upon commencement of construction of that unit), any remaining costs of the common facilities may be allocated among the first and second units so that in the aggregate the allocation is reasonable.
(4) Transmission. In the case of property for the transmission of output and related facilities, project means functionally related or contiguous property used for transmission of output but only to the extent that the property is placed in service during a single 2-year period. Separate property is not part of a single project, however, unless it is intended to provide transmission between two significant output facilities (for example, a line to connect two substations).
(5) Subsequent improvements. An improvement to generating or transmission property that is not part of the original design of that property (the initial project) is not part of the same project as the initial project if the construction, reconstruction, or acquisition of that improvement commences more than three years after the initial project is placed in service and the bonds issued to finance that improvement are issued more than three years after the initial project is placed in service.
(6) Conservation. In the case of property to provide energy conservation, project means functionally related property that is located at a single site.
(7) Replacement property. For purposes of this section, output property that replaces existing output property is treated as part of the same project as the replaced output property unless--
(i) The need to replace the property was unexpected or occurred more than 3 years in advance of the expected need to replace the property; and
(ii) The bonds that financed (and refinanced) the replaced output property have a weighted average maturity that is not greater than the reasonably expected economic life of the replaced output property.
(c) Examples. The application of the provisions of this section is illustrated by the following examples:
Example 1. Power authority K, a political subdivision, intends to issue a single issue of tax-exempt bonds to finance the construction of an electric generating facility under a turnkey construction contract providing for a single payment of $500 million at the completion of construction. 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 maximum amount of tax-exempt bonds that may be issued for the acquisition of the facility is $465 million (that is, $450 million for the 90 percent of the facility that is governmentally owned and used, and a maximum of $15 million for the privately used portion).
Example 2. The facts are the same as in Example 1 except that the construction contract calls for milestone payments every 6 months beginning July 1, 1995. K intends to finance the facility with 4 separate issues of tax-exempt bonds. On July 1, 1995, K issues the first issue for $100 million and makes the first milestone payment. On January 1, 1996, K intends to issue the second issue for the facility for $150 million and use the proceeds of that issue to make the second milestone payment. As of January 1, 1996, no other amounts have been paid under the construction contract for the facility and none of the bonds issued on July 1, 1995, have been retired. The January 1, 1996, issue will consist of private activity bonds since the issue will have $15 million of private business use and private payments or security (10 percent of $150 million) and the maximum permitted private use portion for the second issue is only $5 million ($15 million less than $10 million private use portion of the first issue). For each subsequent issue for the facility and assuming that the January 1, 1996, issue consisted of tax-exempt bonds, K could not issue tax-exempt bonds to finance the portion of the facility used by L.