Look for a showdown next year between IOUs and municipal utilities over whether munis can serve customers outside municipal boundaries and still retain the tax exemption on their debt.

Municipal utilities expect to suffer erosion in their customer bases due to deregulation. This makes it hard to make debt service payments unless they try to replace the revenue from lost customers by expanding the areas they serve. Most municipal facilities are financed with tax-exempt debt. However, the tax exemption is threatened if they expand.

Senator Gorton (R.-Wash.) said September 30 that he will make a major push next year for a bill that has the backing of municipalities. The bill would allow expansion without the loss of tax exemption on existing debt, as long as a utility foregoes the right to issue any additional bonds to finance generating plants. It could continue to finance its transmission and distribution lines, and certain pollution control equipment, in the tax-exempt market. The Clinton administration supports a version of the Gorton bill.

Meanwhile, IOUs are backing a bill by Senator Murkowski (R.-Alaska) that would let munis that expand keep existing tax-exempt debt, but only on two conditions. They would have to forego any future tax-exempt borrowing to finance generating plants. They would also have to repay their outstanding debt at the earliest redemption date allowed under the bonds. For bonds issued since November 1997, redemption would have to occur within 10 years at the latest. Murkowski chairs the Senate Energy Committee. However, neither senator is on the tax-writing committee where the issue will ultimately be decided.