Solar projects and "public utility property"
Solar projects owned by regulated utilities are not “public utility property” if the electricity is sold at market rates, the IRS confirmed.
By law in Utah, a customer can negotiate directly with a solar developer to buy electricity from a solar facility that the developer plans to build. The customer and developer enter into a power purchase agreement. The solar facility and contract are then sold by the developer to the utility.
A concern when a regulated utility owns a solar facility is whether an investment tax credit and accelerated depreciation can be claimed on it.
Utilities could not claim investment tax credits on solar facilities before 2008 as Congress worried that utilities would squeeze out independent solar developers. Since then, an ITC can be claimed, but utilities must still clear one more hurdle. Utility ownership will turn the solar facility into “public utility property” if the rates at which the electricity is sold are “established or approved” by a public utility commission on a rate-of-return basis.
In a game of chicken in 1969 with state regulators, the utilities asked Congress to deny them accelerated depreciation on “public utility property” if they are forced by regulators to pass through these tax benefits to ratepayers too quickly. Any sharing of benefits with ratepayers must not be faster than is allowed under a “normalization” method of accounting. Normalization also applies to the investment tax credit.
The IRS confirmed in a private letter ruling made public in June that solar facilities that utilities acquire under a Utah-like program are not “public utility property” since the electricity is sold at rates that the customer negotiates directly with the solar developer rather than at regulated rates. The ruling is Private Letter Ruling 201923019.
The conclusion is not a surprise, but the ruling may still prove helpful in some tax equity transactions. Not every utility is able to use the tax benefits. Some regulated utilities are entering into tax equity transactions to convert the tax benefits into current cash that can be used to help pay the project cost. There is a premium on structures that avoid subjecting the tax benefits to normalization.