Electric and gas interties remain a hotbed of activity.

Electric and gas interties remain a hotbed of activity | Norton Rose Fulbright

June 01, 2002 | By Keith Martin in Washington, DC

ELECTRIC AND GAS INTERTIES remain a hotbed of activity.

The Federal Energy Regulatory Commission released for comment in late April a draft model interconnection agreement that all utilities and independent power producers will be expected to use in the future. The commission is tired of having to act as an arbiter between independent generators and utilities. A majority of interconnection agreements today are filed with the commission unsigned because the parties cannot agree on terms.

Owners of independent power plants must pay the cost of power lines, breakers, meters and other equipment to connect their plants to the utility grid. The cost often covers upgrades to the grid itself to accommodate the additional power. The utility owns the intertie. Utilities have sometimes insisted they must report the value of the equipment as income and insist the generator pay a “grossup” to cover the income taxes. The IRS said in a notice last December that such payments do not normally have to be reported as income.

Consequently, the FERC model agreement suggests that utilities should not ordinarily collect tax grossups, but it gives any utility the right to do so that believes “in good faith” that it has taxable income. The generator would be able to seek a ruling from the IRS on whether there is income in such cases. Utilities would be free when no grossup is collected to require the generator to post security. The security would be for the full amount of taxes that might have had to be paid in theory on the intertie (absent the IRS notice). The form of security is up to the utility. Any comments on the model agreement must be submitted to FERC by June 17.

Meanwhile, the IRS is making utilities who apply for private rulings confirming they have no income do more than simply show their cases are covered by the IRS notice last December. The IRS also wants them to make an affirmative case that they have no income. This makes for somewhat longer ruling requests than expected, but has not otherwise created difficulties. The power industry is talking to US Treasury officials in the meantime about whether the IRS is taking too narrow a view of the December notice.

Finally, discussions are also underway with the IRS about the tax treatment of gas interties. In general, an interstate pipeline must report payments from a power plant to connect to the pipeline as income. The reason is the power plant is usually a customer of the pipeline. Payments that a utility receives from a “customer or potential customer” must be reported as income. However, there may be situations where taxes on gas interties can be avoided.

Keith Martin