INTERTIES AT MERCHANT PLANTS will receive more study from the IRS
The IRS declined to rule recently on whether a utility had to pay income taxes on the value of an intertie to connect a merchant plant to its grid. Power plant owners typically pay the cost of interconnecting their plants with the grid. The utility takes title to the intertie. Usually when a company receives property from a customer or supplier, it must report the value as income. However, the IRS issued a notice in 1988 that said utilities do not have to report the value of interties from QFs, or “qualifying facility” projects, as income. The IRS later expanded this to independent power projects in general.
Pacific Gas & Electric Company applied for a ruling confirming this is still the correct tax treatment in the case of a merchant plant. The IRS declined to rule, saying it wants to make sure it has a better understanding of the fact patterns that come out of deregulation before issuing any further guidance in this area. A group is organizing to discuss the issues further with the US Treasury.