Municipal utilities

Municipal utilities

November 12, 2008

MUNICIPAL UTILITIES can own interests in oil and gas wells alongside private parties who also own interests without the wells being considered put to “private business use,” the
IRS ruled privately. 

The ruling is important because it lets municipal utilities buy fractional interests in private oil and gas wells to secure gas supplies and pay the cost by issuing tax-exempt debt. Tax-exempt debt can ordinarily be used only to finance public facilities.The IRS said it views the fraction of each well owned by the municipal utility as a separate property, as if it were a full well in its own right. The ruling is consistent with transactions involving power plants where a municipal utility might own an “undivided interest”or fraction of the power plant and borrow in the tax-exempt bond market to pay its share of the project cost. The utility takes its share of the electricity from the project in kind.The public and private owners of the plant must own the plant directly and not through a partnership or other common legal entity.

The ruling involving gas wells is Private Letter Ruling 200829008. A joint action agency acting for a group of electric and gas utilities that are municipally owned acquired “working  interests” in oil and gas wells as a way of securing gas for its members.The seller retained a working interest of its own in each well, and other private parties held various kinds of other ownership interests entitling them to royalties, a share in net profits or “production payments” that are fixed in time or amount. The IRS made the ruling public in late July.