Transmission Credits

Transmission credits

December 01, 2002 | By Keith Martin in Washington, DC
Transmission credits puzzle the IRS.

Owners of independent power plants in the US sign interconnection agreements with utilities allowing their plants to connect to the grid. However, 60% of such agreements are filed with the Federal Energy Regulatory Commission unsigned because the parties cannot agree on terns. The commission is tired of acting as an arbiter so, in late April, it published a proposed model interconnection agreement that all generators and utilities would be required to use in the future. FERC hopes to publish a final agreement by the end of the year.

Utilities make generators pay the cost to connect their power plants to the grid. There may be both “direct” costs of radial lines and circuit breakers to link into the grid and also “system upgrades,” or improvements to the grid itself to accommodate another power plant.

Under the proposed model agreement, utilities would be required to return any money that a generator advances to pay for system upgrades. FERC believes that utilities should charge the cost of such upgrades to all users of the grid through transmission tariffs rather than make the generator pay the cost. However, there is a timing problem. The utility must make the grid improvements before it can collect the cost through its tariffs. Therefore, some utilities ask the generator to advance the funds for the upgrades and then award the generator “transmission credits” for the amount that the generator can work off against future charges for wheeling electricity from the generator’s plant. In cases where the generator has no need for transmission credits, the utility returns the advance dollar for dollar as it collects from someone else to move power across its grid from the generator’s power plant.

Various utilities have submitted ruling requests to the IRS asking for confirmation that such an arrangement should be viewed in substance as a loan or deposit by the generator to the utility. This would mean the utility would not have to report the system upgrade payment as income.

The IRS said in October that it was “tentatively adverse” to issuing such a ruling to the first utility in the queue. However, IRS officials appeared to be more comfortable with the proposed tax analysis after a meeting in November. The issue was still unresolved as the NewsWire went to press.

The proposed model agreement would require all utilities to repay system upgrade payments from generators over a period no longer than five years with interest, so long as the utility continues to receive revenue from someone for moving electricity that originated at the generator’s plant during that period.

The tax issue is important because, if a utility must report such payments from a generator as income, then it will require the generator to “gross up” the payments for the tax cost.