Municipal power deals remain a subject of active lobbying at the US Treasury | Norton Rose Fulbright
Independent power producers who sell their electricity to municipal utilities under long-term contracts would like the ability to have the municipal utilities prepay for the electricity. The municipality would receive a discount in exchange for prepaying. The thought is that it would borrow in the tax-exempt bond market to raise the money for the prepayment. In effect, the independent producer would have had access indirectly to the tax-exempt bond market for funds to build his project. IRS regulations allow anyone who is prepaid for “goods” to report the income over the same period the goods are delivered as long as this is how the income is reported for financial purposes.
The problem is arbitrage restrictions in the tax-exempt bond area rule out this type of transaction — at least for electricity. The IRS made an exception in the arbitrage regulations last year for prepaid gas deals. The American Public Power Association — the trade association for municipal utilities — sent the Treasury a letter in December urging that it make the same exception for electricity.
There have been roughly 20 prepayment deals to date, mostly for gas. The Treasury argues that an exception for gas makes sense because the gas market is uniformly deregulated and municipal gas companies need to enter into long-term deals with gas suppliers in order to ensure stable prices. Treasury officials are less convinced of the need in electricity markets because many states still control prices. This reflects confusion about electricity deregulation. The wholesale power markets are deregulated. It is retail rates that remain controlled.
Memphis Light, Gas & Water tentatively struck a deal last fall with the Tennessee Valley Authority under which TVA would supply electricity for 15 years at fixed rates. Memphis would prepay $1.5 billion of the total cost by issuing tax-exempt bonds. TVA offered Memphis a 4% discount on electricity prices over the term of the contract, worth about $225 million, according to a report in The Wall Street Journal.