GENERATORS who paid tax grossups in addition to the cost to connect their power plants to the grid are now asking utilities for their money back.

The Internal Revenue Service said in December that such payments do not have to be reported in most cases as income by utilities. The IRS notice applies to interconnection payments made after December 26, 2001. However, the same principles should apply to earlier payments. The agency said it would issue private letter rulings to anyone who wants confirmation about earlier payments.

One utility, Entergy, said it plans to send letters to generators on its system telling them how they can get their money back. The utility expects to make prompt refunds of tax grossups collected during 2001, but said that refunds of earlier amounts will have to wait until the utility can get a refund itself from the IRS.

Several issues have come up since the IRS issued its notice. The IRS notice only applies where the generator has a “long-term” interconnection agreement with the utility. Some utilities have questioned whether this requirement is met if the generator has a right to terminate the interconnection agreement at any time after 30 days’ notice. Such provisions are commonplace. Some utilities award generators a “transmission credit” for the cost of system upgrades that the generator can work off against future wheeling charges or assign to whomever the generator sells its electricity. Some utilities feel the tax treatment of interconnection payments in this circumstance is unclear.

Talks are underway with senior IRS and Treasury officials to resolve both issues.

Meanwhile, the Federal Energy Regulatory Commission is expected to release a standard form of interconnection agreement for comment that utilities and generators would be expected to use in the future. An industry group of both generators and utilities submitted a “consensus” document that they hope will be the document put out for comment. This document has language explaining when a tax grossup will be required in the future on intertie payments, but the tax language remains unsettled.