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<title>Take or Pay: Tax Exempt Financing in a Competitive Market</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<td width="75%" valign="top"><img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" WIDTH="375" HEIGHT="75"><p><b><u>February 1998</u><br>
<br>
<big><big><big>TAKE OR PAY: TAX EXEMPT FINANCING IN A COMPETITIVE MARKET</big></big></big></b></p>
<p><strong>by Roger Feldman -- Bingham, Dana and Gould, P.C.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
03/98</em>)</font></p>
<p><b> </p>
</b><p align="justify"><font face="Arial">Most private power players, other than those
involved with renewable and waste fuels have not been required to focus on the tax exempt
finance dynamics which tilt the competitive financeability of projects and therefore
collaterally impact the competitive power market in ways having little to do with energy
policy. By contrast, public power proponents, rooted in their tax exemption, have been
much more sensitive to the extent to which deregulation and the introduction of
competition may affect their hold on traditional markets. The increased amount of public
outsourcing of services and efforts to securitize the resulting cash flow as a basis to
facilitate project development has sharpened the interest of power privateers in the rules
governing the public market. "Privatization" in the form of finance of long term
outsourcing has become increasingly popular in many utility service fields.</font></p>
<p align="justify"><font face="Arial">The overall issue recently achieved some public
attention with the publication by the IRS of guidance on the governmental issuance of debt
for "output facilities" and to nongovernmental persons engaged in the
"local furnishing" of power or gas utilizing tax exempt debt. Stated very
broadly and in non-technical terms, the IRS Rules (TD 8757, 26 CFR Part 1) are intended to
advise when the issuance of bonds by a governmental body to finance governmentally owned
facilities producing fungible commodities like electric power-- "output
facilities"-- are taxable, because of the involvement in the overall transaction of
private parties. That can occur when the sales from that facility to (or uses of that
transmission system by) a private party are such the "benefits and burdens" of
the facility are transferred to a private party. This can occur even if ownership is not
transferred to the private party, where the private use of output is on a different basis
than it is for the general public and/or where long term private payment for a portion of
the output is more or less certain. In other words, if the tests are "met", the
bonds are taxable.</font></p>
<p align="justify"><font face="Arial">The IRS (naturally) wants to restrict the uses of
tax exempt debt, i.e. see the tests "met". "Take or pay" or
"take" contracts have been deemed to meet the test since 1994, with resultant
bars to use of tax exempt finance. In the new Rules, certain types of "requirements
contracts" by a private party to take all or part of its requirements from a
government financed facility are exempted, but only when and to the extent it is not
substantially certain that all output available under a contract will be taken. For
example, a retail requirements contract will not meet the benefits and burden standard, so
that government bonds are tax exempt, unless substantial private termination payments are
built into the contract. Note, however, that the benefits and burdens test is also deemed
met by any output contract in which private purchase obligations effectively are pledged
as part of the security for the bonds issued to finance the facility.</font></p>
<p align="justify"><font face="Arial">The output facility rules are complex regulations
which apply as well, under separate carefully crafted provisions, to transmission
facilities; power swapping and pooling; and excess generation capacity resulting from the
creation by deregulation of excess capacity at a facility. Public power has hailed the
rules as a "welcome relief," i.e. California munis will be able to join the
State ISO without jeopardizing their tax exempt debt. But they do not appear to have been
developed with a view to facilitating the kinds of creative transactions which may be
necessary to save whole segments of public power through restructuring to make feasible
optimum utilization of plants and transmission in a competitive environment; or to
accommodate the full scope of types of transactions in which power marketers can engage.
Puzzling out the complexities of this seemingly straightforward and
deregulation-accommodating rule should therefore be one of the requirements for future
development activities which private power must either "take or pay." </font></p>
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<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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