in commercial operating dates of these capacity additions beyond June 30 were incurred as a result of construction and technical problems, regulatory and environmental problems," FPC reported. “No units were reported delayed as a result of financial problems." On March 25, 1977, FPC issued another of its quarterly reports which indicated that 26 electric generating units, totalling 8,160,000 kilowatts, originally scheduled for service by December 31, 1974, were not completed as scheduled. “No units were reported delayed as a result of environmental or financial difficulties," FPC stated. Reasons given for the delays were regulatory, operational, labor, and equipment problems.

4. Program would benefit those in "reasonably fair health.”—The program may not benefit those companies which are probably in the greatest need of financial assistance. Aid would be supplied primarily in the form of Federal tax relief, despite the fact that, according to the Federal Power Commission, privately owned electric utilities in 1974 paid only 1.4% of their total electric operating revenues in Federal income taxes, and in 1973 about 50 power companies-onefourth of the Nation's major power companies-paid no Federal income taxes at all.

Furthermore, it would appear that if financial assistance for private companies is needed, it should be applied on a case-by-case basis, rather than "blanket” relief which provides assistance for those who are not in need as well as those in need.

The necessity of a case-by-case analysis is apparent in a comment by Gordon Corey, Vice Chairman of Commonwealth Edison Co. and Chairman of the Federal Power Commission's Technical Advisory Committee on Finance.

Indicating "enthusiastic" support for tax relief for private power companies, Mr. Corey observed to Energy Finance Week that the proposals advanced by Secretary Simon will help only companies "in reasonably fair health." It would seem questionable public policy to embark upon a long-range tax program which awards unique advantages to a sector within a selected industry which is "in reasonably fair health.”

Secretary Simon has said that: "The increase in the investment tax credit will he a cash contribution by the Federal government for the construction of additional electric power plants." If such special transfer payments in the form of tax relief are to be made, clearly each case should be examined to insure that financial aid is justified. Federal welfare programs available to low-income families impose means tests or qualification requirements. It would seem that no less scrutiny should be paid to utility clients of the government which seek income maintenance programs.

5. Program is discriminatory.-As previously indicated, some-but not allprivately and publicly owned electric utilities have reported financial difficulties which have adversely affected acquisition of new plant and equipment that may be important in supplying future electric demand.

As a remedy to this situation, Secretary Simon has recommended to the committee a number of new tax breaks for all private power companies-regardless of need. No comparable program has been proposed by the Administration to assist any publicly-owned power systems, which serve 13.5% of the nation's electric consumers, although similar problems may exist in this segment of the utility industry. The Administration plan is therefore discriminatory.

Furthermore, the Secretary has proposed special tax benefits for one sector of private business which enjoys unique protective devices. As then Secretary of the Treasury Douglas Dillon pointed out in 1962 in arguing against availability of the investment tax credit to utilities: "This recommendation was made with full recognition of the great contribution that utilities make to the American economy. It was based on the fact that public utilities are regulated monopolies with substantial assurance of a given rate of return on investment after governed by public requirements." The Department of the Treasury noted at that time that: "In return for their authorization to operate as regulated service corporations, they are assured consumer rate charges which will cover their costs of operation, including Federal income taxes, plus a just and reasonable rate of return on investment. This rate of return is so set as to attract the capital needed to serve the public convenience and necessity. For the vast majority of utilities the rate of return presently available, when adjusted for the lack of risk on that investment, equals or exceeds the rate of return in other industries.

56-674-75—47

Furthermore, the rate of return is gauged to enable the utility to obtain adequate capital at whatever cost is required."

While private power companies may disagree with specific decisions of regulatory commissions, there is no question that they operate within a protective framework which is not available to a host of other businesses-many of whom would undoubtedly argue that they are more logical candidates for tax relief than utilities.

6. Contribution to employment considered marginal.—Another stated goal of the utility tax package promoted by Secretary Simon is creation of jobs. However, a 1972 subsidy study prepared for the Joint Economic Committee to determine the usefulness of the 7% investment tax credit in reducing high unemployment concluded that the credit does not correct this market deficiency as proponents originally argued. The study estimated that the credit would reduce unemployment by 0.1% in one year and 0.3% over a 21⁄2 year period.

Leonard Woodcock, President of the United Auto Workers Union, in testimony earlier this month before the committee, pointed out with respect to the investment tax credit that:

"As representatives of the UAW have stated before Congress many times, while described as incentives, investment tax credits are in reality windfalls. They are available for investment that would have been made in any event as well as for any inevitably relatively smail-amount of additional investment that might be attributable to it. (In fact, the credit is available even to a firm that responds to the incentive by reducing the amounts of its investment below previous levels.) Thus, in the unlikely event that the credit stimulates an investment increase of as much as 10 percent, more than 90 percent (100 divided by 110) of the credit will represent tax revenues wasted in paying businesses for investment made for reasons that have absolutely nothing to do with the credit.

"Tax breaks for business are usually sold as a spur to savings and investment, which will ultimately provide more jobs. It is obvious, however, that with the effect of the credit on the level of investment marginal, at best, its contribution to employment must also be marginal."

As you know, Mr. Woodcock also told the committee that:

“Our recommendation to let the corporate tax cuts in the Tax Reduction Act expire at the end of 1975 extends to those cuts favoring the private power companies. Similarly, we do not support any of the other tax subsidies for the industry that the Administration is actively pursuing. These again are examples of blanket solutions which fail to distinguish between utilities in need and those which do not require aid. If enacted, these loopholes would continue to generate tax privileges and lost revenues long after the need for them, if there ever was one, has passed.

"As I stated above, the 'by case' approach is the only efficient and equitable way of dealing with this problem."

7. Would probably eliminate power companies as taxpayers.-Adoption of Secretary Simon's solutions would reportedly reduce private power companies' tax liabilities by $600 million in fiscal year 1976 and by an increasing amount in subsequent years. The initial annual tax relief proposed by the Secretary is greater than the $531 million in Federal income taxes paid by all private power companies last year. Due primarily to prior tax subsidies, private power companies paid only 1.4% of total electric operating revenues in Federal income taxes in 1974, continuing a 20-year downward trend.

Congress has already increased the investment tax credit for private companies by 250% for the years 1975 and 1976, and liberalized its availability. This subsidy is in addition to other tax advantages previously made available to private power companies, including use of municipal bond financing for pollution control equipment. The additional tax favors requested by the Administration not only would discriminate against other ownership segmets of the electric utility industry and other kinds of business organizations (which may have financial problems that are more pronounced than utilities), but could eliminate private power companies as Federal income taxpayers-even though they might continue to collect such taxes from their consumers.

Secretary Simon's testimony suggests that if special tax benefits of this kind are to be made available to needy industries, private power companies may not be the place to start. He noted that after-tax profits of manufacturers account for 5 of every dollar of sales. However, FPC 1974 statistics show that the comparable figure for private power companies is 14e of every dollar of sales.

8. Would mandate policies by state commissions.—Administration proposals for eliminating tax liabilities of private power companies are conditional on regulatory agency "normalization" of the tax benefits and inclusion of construction work in progress in rate base. This approach seeks to use the Internal Revenue Code to stimulate so-called "mandated reforms" in utility regulation which the Administration has previously proposed. Congress has thus far declined to approve these suggestions for Federal pre-emption of regulation by state commissions, which are responsible for scrutiny of retail rates and certification of new plant, principally because the changes have been construed as unfair to consumers, who experienced an estimated $8 billion increase in electric rates in 1974. Secretary Simon is proposing that the Congress second-guess regulatory commissions on the merits of particular rate making policies. This would be done by attempting to prevent further rate base deductions or flow-through of tax benefits and to compel consumers to pay for plants which are not providing them with electricity.

9. Tax incentives not essential to encourage non-petroleum conversions or replacements.—While minimizing importation of foreign oil is one of the alleged aims of the utility tax program outlined by Secretary Simon, it is not clear that tax incentives are essential, in most instances, to encourage non-petroleum generation conversions or replacements. The high price of oil coupled with legistion passed or pending in Congress to require coal conversion or capability for generating stations moves utilities in this direction without benefit of new tax breaks, although some forms of aid may be needed in specific cases.

As for nuclear facilities, it is of interest to note the Atomic Industrial Forum report that: "U.S. nuclear power plants scored impressively over their fossil-fired counterparts in reliability and economic performance, according to utility data for the first quarter of 1975." Economic incentives to go nuclear are further emphasized by AIF's comment that: "Almost all the utilities in the AIF survey report that electricity produced by nuclear power cost less than electricity produced by fossil fuels, as much as two thirds less."

10. Improvement in utility operations also could improve financial picture.Secretary Simon did not discuss in his statement to the committee another opportunity to deal with capital costs, but his colleague Frank Zarb, Administrator of the Federal Energy Administration, has emphasized that improvement of utility operations could improve significantly their financial picture.

The Federal Energy Administration has pointed out that the electric utility industry could have capital-and fuel-by improving availability of major generating units and increasing their capacity factor. FEA stated in a March, 1975 report on "Improving the Productivity of Electric Powerplnts":

"On average, the Nation's nuclear and large fossil-fueled units are forced out of service more than 15% of the time, are unavailable for service more than 25% of the time, and operate at less than a 60% capacity factor. Improvements in capacity and availability factors and reductions in forced outage would yield nearterm and long-term benefits for ameliorating the effects of such severe industry problems as financing, high fuel costs, siting and licensing.

"The potential financial benefits of improved productivity are large. By 1980, an industrywide reduction in the average forced outrage rate of just 1 percentage point could reduce the Nation's installed capacity requirements by up to 6,800 MW and capital requirements by as much as $1.8 billion (1974 dollars). Over this same period, a capacity factor increase of 8 percentage points for nuclear units and several percentage points for 400 MW and larger coal-fired units would permit an increase in output from these units equivalent to the electric energy produced by burning more than 500,000 barrels of oil per day. At projected costs for oil, coal, and nuclear fuel, this could reduce the utility industry's total fuel costs in 1980 by approximately $3 million per day (1974 dollars)."

FEA's views on this subject were further expounded by Administrator Zarb at a June load management conference in which he said his agency will seek to cut power plant expansion one-third (70,000,000 kw) by 1985, at a capital saving of $49 billion. A key to reaching the reduction is to boost the utility industry's average plant capacity factor from 49% to 57%.

11. Principles for any new financial aid program enunciated.-If Congress determines that new Federal programs of financial support for some utilities are desirable, they should be founded on four principles:

a. Avoidance of "blanket" solutions which do not distinguish between utilities in need and those which do not require aid.

b. Use of direct, open funding or backup help through a designated Federal agency as opposed to hidden subsidies such as tax breaks.

c. Availability of assistance to all segments of the electric utility industry regardless of ownership.

d. Protection of the public from misuse of Federal aid by recipients. As far as emergency situations are concerned, a Federal program of this type already exists in the Federal Reserve Act. The Federal Reserve System has a general contingency plan which encompasses lending to electric utilities. Authorization for the program was approved by Congress in the 1930s. Aid can be granted in unusual and exigent circumstances, as determined by the FRS Board of Governors. I have discussed the plan with staff of the FRS, and have been assured that it is applicable to both public and private utilities.

Should Congress determine that additional aid is needed for selected utilities which can demonstrate a need for assistance, an agency with the power to make or guarantee borrowings might perform this function. But creation of such an agency is not a tax matter.

REGULATIONS COVERING NONPROFIT CORPORATIONS

Another area of concern to publicly owned electric utilities with respect to financing is the inordinate delay by the Department of the Treasury in issuing regulations or otherwise clarifying the status of non-profit corporation taxexempt financing on behalf of political subdivisions. The non-profit corporation has been a financing vehicle available for joint power projects sponsored by municipal electric utilities when such an entity met the requirements of Revenue Ruling 63–20. Using such a non-profit corporation enables publicly owned electric utilities, having the individual right to finance facilities with tax-exempt bonds, to issue such securities jointly through the non-profit corporation formed on their behalf. The use of tax-exempt municipal bonds by non-profit corporations is in contrast to the use of pollution control or industrial development taxexempt bond issues where public financing insures to the benefit of private business entities, and is subject to separate regulations under the Internal Revenue Code.

It has been more than five months since APPA and its member utilities learned that the Department of the Treasury was considering a change in the regulations regarding the use of non-profit corporations for tax-exempt financing on behalf of political subdivisions. When we contacted the Department on this proposed change we were informed that "abuses" under Revenue Ruling 63-20 were occurring in areas other than joint projects planned by publicly owned electric utilities. During subsequent meetings with Treasury officials, representatives of publicly owned utilities described the nature of the projects which were depending on the use of non-profit corporations for financing, and pointed out that this use is not comparable to types of arrangements leading to abuses in other areas. Officials at the Department of Treasury gave some assurances that the new regulations would be formulated soon.

Unfortunately, bonds cannot be issued on the basis of such verbal assurances, and the delay of the Department of Treasury in resolving the non-profit corporation matter has already forced one group of publicly owned electric utilities to delay necessary financing, and another group also will likely delay financing if this issue is not resolved promptly.

Electric power facilities are built after long periods of planning, and lead times as long as seven or eight years are required for large generating stations. There are now about 18 projects throughout the nation in various stages of planning and development which are dependent upon the issuance of bonds by non-profit corporations on behalf of publicly owned electric utilities. Some 8,500 megawatts of power from these projects will be supplied to the participating municipal systems at a capital cost of about eight billion dollars to be spent over the next 15 years. Failure to complete these projects because of delay in issuing new regulations will mean that consumers in the affected cities will face more expensive power supply options, and their utilities may have to employ less efficient sources of power.

It is ironic that the Department of Treasury, by its delay in issuing regulations regarding non-profit corporations, is threatening the financing of electric facilities by publicly owned electric utilities, while at the same time the Administration

is advocating various means of assistance to privately owned electric utilities. if it is important for the investor owned utilities to be able to finance needed expansion, it is no less important for publicly owned electric utilities to be able to finance projects needed by their customers.

It should be noted that the use of a non-profit corporation by publicly owned electric utilities to issue bonds on their behalf does not represent an expansion of tax-exempt financing. Eflicient financing options, such as the non-profit corporation, enable smaller publicly owned utilities to participate fully in large scale projects which take advantage of modern power supply technology. The option for many smaller publicly owned utilities is individual financing of less efficient, more costly, generating units, which will use more valuable fuel, land and water resources, at greater cost to their customers.

POLLUTION CONTROL BONDS

As you know, in 1968 Congress restricted the issuance of industrial development bonds, where state and local governments issue tax-exempt bonds to be utilized by private business. However, Congress did permit industrial development bond financing for certain purposes, including pollution control.

In his testimony before this committee, Secretary Simon noted the rapid growth of tax-exempt financing for pollution control facilities, and indicated that such revenue bonds may currently account for about 15% of the new issue exempt market. He pointed out that the impact of these issues is to tighten the municipal bond market and push up interest costs, and also observed that:

"The emphasis on environmental protection has caused major changes in modern technology and the adoption of new manufacturing processes designed to minimize pollution. The attempt to segregate the cost of such facilities as between the cost of the basic technology and the cost of pollution control has become an administrative mightmare and is, in fact, well nigh impossible."

Because of their adverse market and administratve features, Secretary Simon recommended that industrial development bond financing be further limited by permitting tax-exempt pollution control financing only for separate facilities added to plants in operation before January 1, 1975. "This proposal would help reduce the cost of upgrading existing properties but recognizes that in new plants pollution control and production usually can't be separated," he said.

An analysis prepared by the Municipal Finance Officers Association suggests that if Congress does not act, pollution control issues could grow through the decade to $6 billion or more in annual sales, and that their volume will increase relative to other tax-exempts. "As the volume of pollution bonds grows, their added volume and higher yields drive up rates on all tax-exempt bonds, anywhere from 5 to 20 basis points (at a 20-year maturity) per billion of annual pollution bond financings, depending on market conditions," the MFOA study states. "Pollution control bonds are most directly competitive with other long maturity, term-structure and lower quality tax-exempt bonds and, therefore, they force up rates on these bonds to an even greater extent-an estimated 25 basis points or more under tight credit conditions."

In 1974, out of a total of $1.6 billion in pollution control bond sales reported by the Daily Bond Buyer, $928 million were issued for the benefit of private power companies. The paper reports that: "In 1974, electric utilities were the most frequent and largest users of the IDBs. Of the 114 reported transactions, 47 were for electric utilities or 41.2%. They consumed 56.3% of the total dollar amount." While the private power companies share of such financing is down in the first half of 1975 (17.3% of the financings and 24.2% of the dollar total), it still totaled $240 million. In addition, a list of pending pollution control issues published by the Daily Bond Buyer shows that private power companies would be the beneficiaries of nearly $2 billion in additional tax-exempt pollution control bonds-a sum almost twice as large as all the revenue bonds issued by municipal electric utilities in 1974. Private power companies are also seeking to convince the Internal Revenue Service that safety and production features of nuclear power plants should be defined as pollution control facilities, despite the fact that such an interpretation is contrary to Congressional intent. "At stake are billions more in potential pollution control financing," the Municipal Finance Officers Association has pointed out.

Secretary Simon has told the committee that the Treasury Department views the proliferation of pollution control issues as a prime factor in increasing "dras