AMERICAN PUBLIC POWER ASSOCIATION

1
AMERICAN PUBLIC POWER ASSOCIATION

• TAX-EXEMPT BONDS
• SEC, IRS and Congressional Initiatives
• April 21, 2005

W648471.1
2
CURRENT LEGISLATIVE ATMOSPHERE

• JCT PROPOSALS
• SFC INVESTIGATION
• BUDGET PICTURE Search for Revenue Raisers
• TAX REFORM

3
SFC INVESTIGATION

• SFC staff sees problems
• Interest of Senator Grassley
• Possible areas of concern and discussions with
  the IRS

4
JCT PROPOSALS

• Eliminate advance refundings
• Demand side changes
• Abuses pools, stadiums, Indian Tribes
• Information reporting

5
LONGER TERM RISKS -TAX REFORM

• CONSUMPTION-BASED TAXES
• TREATMENT OF INVESTMENT EARNINGS
• TAX-EXEMPT ENTITIES
• DEDUCTIBILITY OF STATE AND LOCAL TAXES
• REFORM WITHIN THE CURRENT SYSTEM

6
Tax Reform and the Joint Tax Committee Proposals

• Flatter Tax/Lower Top Tax Bracket Higher floor on
  short-term tax-exempt rates
• State/Local Tax Deduction Repeal Increased value
  to in-state buyersas a trade-off for the AMT
• Lifetime Savings Accounts Reduced dollars into
  tax-exempt mutual funds
• Joint Tax Committee Proposals Last minute revenue
  raisers to close budget gap(esp. 265 and
  advance refunding)

7
Some Disclosure Considerations

• More emphasis on better and more real-time
  reporting of events
• Sarbanes Oxley
• Central Post Office for NRMSIRs
• Real-time trade reporting to the MSRB
• Problem issues continue to arise
• San Diego Pension concerns
• Analysts continue to press for more/more frequent
  information
• Over the Horizon?
• Need to sign Bond Purchase Agreements the same
  day to facilitate real-time trade reporting
• Shorter window for disclosure?
• More disclosure on contingent liabilities?
• Pensions
• Other Post-Retirement Benefits
• Derivatives
• Auction Rate Bonds
• SEC informal investigation
• FASB classification of ARS

8
Tax Credit Bonds

• What are they?
• Why use them?
• Are there risks?
• Status

9
Circular 230

• What is Circular 230?
• Proposed rules for tax-exempt bond opinions
• Why is this being done?
• The rules govern how bond counsel renders their
  opinions
• Requires a written description by bond counsel of
  facts, law and analysis of tax issues

10
Circular 230 (cont.)

• Potential Consequences
• Additional transaction costs
• Potential disclosure issue and higher interest
  rates
• Provides audit roadmap for IRS
• Opinion disclaimer?
• Bond counsel become more conservative? More
  aggressive?

11
Circular 230 - Future

• Comments
• What happens next?
• Regulatory process
• Are bond counsel already reacting?

12
SLGS - Overview

• Current flexibility of SLGS regulations provides
  significant advantages
• Ability to lock in rates even if transaction is
  not a sure thing
• Ability to use the free option in SLGS to
  restructure escrows to eliminate negative
  arbitrage
• Interest rate setting process provides
  opportunities to eliminate negative arbitrage

13
SLGS Proposed Changes

• Proposed Changes to SLGS regulations
• Mandatory use of SLGS-Safe
• New interest rate setting procedure
• Elimination of ability to change delivery date
• Elimination of penalty free cancellation
• Requirement that bonds be authorized before
  subscription
• Requirement that subscriptions be filed by 6 p.m.
  eastern time
• Eliminate ability to increase yield in purchase
  or redemption of SLGS
• Why is this happening?

14
SLGS Response

• Comments
• the SLGS regulations should continue to permit
  penalty free cancellation of subscriptions
• in lieu of a requirement that issuers authorize
  their bonds prior to subscribing, issuers should
  be required to certify their intent to issue the
  bonds
• the SLGS regulations should continue to permit
  the delivery date for SLGS to be changed by up to
  7 days
• the period during which SLGS can be purchased
  should be extended beyond 6 p.m. eastern standard
  time and
• the proposal to limit the purchase and redemption
  of SLGS so that issuers cannot increase the yield
  on their investments should be eliminated.

15
Equity First

• Equity first---The Problem
• IRS ProposalAdvance Notice of Proposed
  Rulemaking
• For output facilities, private use may be
  allocated to equity first
• Equity only includes taxable bond proceeds and
  issuer funds at closing
• For the equity first rule to apply, bond proceeds
  and equity must have been spent contemporaneously
• The private use and equity must be allocable to
  the same facility for the equity first rule to
  apply

16
Equity First Comments

• Comments
• The contemporaneous expenditure requirement
  should be eliminated (especially for older
  transactions)
• Equity should be defined to include retired
  tax-exempt bonds
• More flexible allocation rules are needed for
  this purpose

17
Equity First -- Status of Allocation and
Accounting Regulations and Next Steps

• Timing
• Scope
• Opportunity for input

18
Transmission and Private Use

• RTOs Private use rules are very favorable for
  transmission in an RTO
• Other open access Transmission is subject to
  the private use rules if used in open access but
  not as part of an RTO
• Private use regulatory relief not as generous as
  relief provided to IOUs and Coops in recent
  legislation

19
IRS Audit ProgramStatus and Risks

• Status of Audit Program
• Areas of IRS Focus
• Largely aimed at abuses
• Selected other areas
• Development of IRS expertise
• Possible expansion of audit topics

20
IRS Audit ProgramStatus and Risks (cont.)

• Risks and Problems from an IRS Audit
• Impact on outstanding bonds
• The audit process is stacked against issuers
• Difficult to convince the auditors that they are
  wrong
• No real ability to obtain an independent review
  of the matter
• IRS doesnt like to go away empty handed
• 6700 penalty threat
• Is there any hope for improvement?
• NABL ADR proposal
• Treasury/IRS interest