GIVING AN ISO OPERATING CONTROL OVER TRANSMISSION ASSETS will not jeopardize tax-exempt bonds that a utility used to finance them, the IRS said.

The IRS made the statement in a private letter ruling made public in May. There are currently five “independent system operators,” or ISOs, set up to manage the grids in California, Texas, New York, New England and PJM (Pennsylvania, New Jersey and Maryland). The Federal Energy Regulatory Commission is also pushing utilities to set up regional transmission organizations, or RTOs, to operate the grid in other parts of the country. At a minimum, these entities have operating control over the grids. In some cases, they might take legal title. Utilities worry about the tax effects of transferring their transmission assets.

The utility in the ruling had used tax-exempt debt under the “two-county rule” to finance portions of its grid. This rule let private utilities that serve an area no larger than two contiguous counties use tax-exempt financing for their assets. The rule has since been repealed, although power companies that qualified for such financing at the time of repeal can still use it.

The utility planned to give operating control over its grid to an ISO. This called into question whether the grid would now be used in more than two counties, jeopardizing the tax exemption on the bonds. The IRS said it would not be. The key to the ruling was that the actual use of the grid was not expected to change. The IRS also analyzed the effects of a single rate structure for all transmission over wires controlled by the ISO, and the fact that this meant that the benefits of tax-exempt financing by the two-county utility would be shared to an extent with transmission customers over the entire grid controlled by the ISO, before deciding this was not a problem.

Keith Martin