The IRS has adopted a “no ruling” position on the tax treatment of electrical interties in merchant plants. Ordinarily, when an independent power producer connects to a utility grid, the utility insists on taking title to the intertie but makes the power producer pay the cost. The IRS said in a 1988 notice that the utility does not ordinarily have to report the value of the intertie as income, at least when the intertie is tied to a “qualifying facility” project under the Public Utility Regulatory Policies Act, or PURPA. The IRS extended the same rule to other independent power projects by private ruling. If the utility had to report the value as income, then it would insist that the power producer pay not only the cost of the intertie, but also a tax “gross up” that can add roughly another 50% to the cost of interconnection.

Recently, two utilities asked the IRS for rulings about interties in merchant plants. The IRS said it is no longer prepared to rule in such cases until it has a better understanding of all the fact patterns that might come out of deregulation.

Discussions are underway with the Treasury Department.