New York said a cogeneration project owes back taxes on the gas it imported for use as fuel.

A cogeneration facility is a power plant that makes two useful forms of energy from a single fuel.  An example is a plant that burns gas in a combustion turbine and then uses the exhaust from the turbine to make steam and electricity in a heat recovery steam generator.

New York taxes gas utilities on their sales of gas.  The tax is passed through to consumers in utility rates.  In order to prevent large industrial customers from avoiding the tax by purchasing their gas out of state, New York enacted a separate tax on gas importers in 1991.  The tax made an exception for cogeneration facilities.

A partnership that owns a cogeneration facility at the Brooklyn Navy Yard bought gas directly at the field in Canada and the Gulf of Mexico and arranged with pipelines to bring the gas to New York.  The partnership claimed an exemption from the gas import tax on grounds that it owns a cogeneration facility.  The state tax department said on audit that the partnership owed about $7.3 million in back taxes for the period from December 1996, when the plant started operating, through November 1999, the end of the period covered by the audit, on grounds that it did not qualify for the exemption.

On appeal, the division of tax appeals said no exemption could be claimed for gas purchased before April 9, 1997, but an exemption was allowed after that.

The partnership had trouble getting an order from the Federal Energy Regulatory Commission that the project is a “qualifying cogeneration facility” under the Public Utility Regulatory Policies Act.  FERC rejected the first application the partnership filed because the project had too much utility ownership.  An electric utility cannot own more than 50% of a qualifying facility, or “QF.” Projects do not need formal orders from FERC to be qualifying facilities.  This one promptly amended its partnership agreement to address the utility ownership issue and sent a letter to FERC in February 1996 informing the agency that the project is a QF.  It later asked FERC for a formal order.  The order was issued on April 9, 1997.

A project must be either a QF under federal law or a “cogeneration facility” under New York law to qualify for the exemption.  This one was not such a facility under New York law because there is an 80-megawatt limit on size and the project has a capacity of more than 150 megawatts.

The division of tax appeals said, in a decision in September, that the project qualified for the tax exemption only from April 9, 1997.

Another requirement for the exemption is that the electricity or steam produced at the plant must be “supplied and used by a thermal energy host located at or near the project site.” Most of the electricity from the Brooklyn Navy Yard plant is sold to Consolidated Edison, which resells the electricity to its ratepayers.  The tax department argued that Con Ed was not a “thermal energy host,” even though the utility also bought steam from the plant, and Con Ed is not “at or near the project site.” It also argued that Con Ed does not “use” the steam and electricity since it resells them to ratepayers.  The appeals division disagreed.

The New York legislature amended the exemption in 2001 to make it tougher to claim.  Since 2001, gas used to generate electricity — but not steam — that is sold to a public utility no longer qualifies for the exemption.  The case is In the Matter of the Petition of Brooklyn Navy Yard Cogeneration Partners, L.P.  It is DTA No. 819110.  

Keith Martin