Independent generators pay the cost to connect their power plants to the transmission grid. The cost can include not only the cost of radial lines and substation improvements, but also improvements to the grid itself so that it can accommodate another power plant. Grid improvements are called “network upgrades.”

The Federal Energy Regulatory Commission is of the view that utilities that own the grid should collect the cost of network upgrades from all users of the grid through the rates they charge customers for transmitting electricity. Utilities have a timing problem. They need to make the improvements when the independent power plant connects to the grid. That’s before the cost of the improvements can be collected through rates. Therefore, utilities ask owners of independent power plants to advance the funds to cover the cost of the network upgrades, but must eventually pay back the money. Utilities do this by giving the power plant owner “transmission credits” that he can work off against future charges for wheeling his electricity or receive the cash equivalent.

These arrangements are in substance a loan by the independent generator to the utility. Therefore, the utility should not have to report the advance as taxable income.

The IRS issued one private letter ruling in late February confirming this, but on a fairly simple fact pattern. It has struggled with the more complicated Entergy transmission credit program, but had been expected to rule favorably on it. IRS officials still believe advances to Entergy are loans, but they are now debating whether to issue a set of general guidelines to utilities rather than issue any more private letter rulings.

In the meantime, the queue of ruling requests is growing. The agency has been holding some of the requests since last summer.