1. NIXON PEABODY LLP 1 AMERICAN PUBLIC POWER ASSOCIATION TAX-EXEMPT BONDS: SEC, IRS and Congressional Initiatives April 21, 2005 W648471.1

2. NIXON PEABODY LLP 2 CURRENT LEGISLATIVE ATMOSPHERE JCT PROPOSALS SFC INVESTIGATION BUDGET PICTURE – Search for Revenue Raisers TAX REFORM

3. NIXON PEABODY LLP 3 SFC INVESTIGATION SFC staff sees problems Interest of Senator Grassley Possible areas of concern and discussions with the IRS

4. NIXON PEABODY LLP 4 JCT PROPOSALS Eliminate advance refundings Demand side changes “Abuses” – pools, stadiums, Indian Tribes Information reporting

5. NIXON PEABODY LLP 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. NIXON PEABODY LLP 6 Tax Reform and the Joint Tax Committee Proposals Flatter Tax/Lower Top Tax BracketHigher floor on short-term tax-exempt rates State/Local Tax Deduction RepealIncreased value to in-state buyers as a trade-off for the AMT Lifetime Savings AccountsReduced dollars into tax-exempt mutual funds Joint Tax Committee ProposalsLast minute revenue raisers to close budget gap (esp. § 265 and advance refunding)

7. NIXON PEABODY LLP 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. NIXON PEABODY LLP 8 Tax Credit Bonds What are they? Why use them? Are there risks? Status

9. NIXON PEABODY LLP 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. NIXON PEABODY LLP 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. NIXON PEABODY LLP 11 Circular 230 - Future Comments What happens next? Regulatory process Are bond counsel already reacting?

12. NIXON PEABODY LLP 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. NIXON PEABODY LLP 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. NIXON PEABODY LLP 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. NIXON PEABODY LLP 15 Equity First Equity first---The Problem IRS Proposal—Advance 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. NIXON PEABODY LLP 64847116 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. NIXON PEABODY LLP 17 Equity First -- Status of Allocation and Accounting Regulations and Next Steps Timing Scope Opportunity for input

18. NIXON PEABODY LLP 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. NIXON PEABODY LLP 19 IRS Audit Program—Status 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. NIXON PEABODY LLP 20 IRS Audit Program—Status 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 doesn’t like to go away empty handed –6700 penalty threat Is there any hope for improvement? –NABL ADR proposal –Treasury/IRS interest