Independent generators pay the cost of connecting their power plants to the local utility grid. This is the only way to get their electricity to market. Interconnection usually involves constructing not only a radial line to hook into the grid, but also improvements to the grid so that it can accommodate output from another power plant.

On July 23, the Federal Energy Regulatory Commission adopted a model interconnection agreement that all generators and utilities will be expected to use in the future. Under this agreement, utilities will be allowed to ask generators to advance money for grid improvements — called “network upgrades” — but the utilities must repay the advances within five years with interest. FERC said the cost of network upgrades is more appropriately borne by all users of the grid rather than individual generators. Some utilities, like Entergy, had already been awarding generators “transmission credits” that they can work off against future wheeling charges or receive back in cash. FERC has also ordered some utilities to repay amounts they collected in the past from generators for network upgrades, even though the utility had not promised the generator a refund when the parties signed their interconnection agreement.

Utilities want the Internal Revenue Service to confirm that they do not have to report advances from generators for network upgrades as taxable income.

The IRS issued one private ruling to that effect in late February, but then stopped issuing any further such rulings. It has “10 or 12” ruling requests stuck in the queue, according to an IRS official. The problem is not necessarily that the IRS believes utilities have income — the generators insist they are merely lending money to the utilities — but rather that anything the IRS says on the issue might come back to haunt it in other areas of the tax law. The IRS says it generally refrains from ruling on whether arrangements are loans.

The power industry met with senior IRS and Treasury officials about the issue in July, and the issue has now been put on the latest IRS business plan. The IRS commits each July to a list of issues that it will address in the coming year. The industry hopes this one will be addressed soon. Some generators have large tax deposits or letters of credit tied up with utilities pending resolution of the issue.

In a related development, the Federal Energy Regulatory Commission ordered the New England Power Company to drop its demand that AES post security to ensure payment of any future taxes that might be triggered on the electric intertie for the Londonderry project in New Hampshire. Under US tax rules, a utility should not ordinarily have to pay taxes on interconnection payments from an independent generator that the utility is allowed to keep. However, it is possible for a tax to be triggered in certain circumstances in the future. AES agreed to indemnify the utility for any such future taxes. The utility also wanted AES to post security to ensure payment of the indemnity. FERC said in an order issued on June 27 that the utility could not require the security.

In another development, the IRS said in a private ruling made public in June that a tax is not triggered in the future merely because the power plant lost its status as a “qualifying facility,” or QF. The ruling is PLR 200324037.