Municipal Utilities

Municipal Utilities

November 10, 2010 | By Keith Martin in Washington, DC

MUNICIPAL UTILITIES can make bilateral sales of renewable energy credits from wind, solar or other renewable energy projects they own without fear that the projects will be considered put partly to private business use, the IRS ruled privately.

Municipal utilities often use tax-exempt debt to finance their facilities. However, such debt can only be used for facilities are that put to public use. More than 10% private  business use of a municipal facility will cause the interest on any bonds used to finance it to become taxable to bondholders. It would normally be private business use for a municipality to enter into a long-term contract to sell the electricity from one of its power plants to an investor-owned utility. The amount of private business use would be calculated by looking at the power sold as a percentage of the expected output of the power plant over the term of the bonds.

The private ruling was addressed to a joint action agency that generated electricity and supplied it to municipal utilities that are its members. The joint action agency planned to
issue tax-exempt debt to acquire and then finish building a partially-constructed wind farm and then sell all of the electricity from the project to an unidentified “company” that
would resell it to the municipal utilities. The joint action agency plans to sell the renewable energy credits on the project separately to private parties.

The IRS was not bothered by the REC sales. It said that anyone buying RECs is not really “using” the wind farm in the same way as someone buying the electricity. “Although
the contract provides for liquidated damages in the event of non-delivery of RECs to [the buyer],” the agency said, “these provisions do not rise to the level of control over the facility or its operations.” 

The ruling is Private Letter Ruling 201037006. The IRS released a redacted version in September.