Public utility property: More IRS rulings

Public utility property: More IRS rulings

December 08, 2020 | By Keith Martin in Washington, DC

Public utility property questions are taking up a lot of IRS time, but perhaps not for much longer.

The IRS released two more private letter rulings confirming that solar projects the utilities plan to build will not be “public utility property.”

It is harder to claim an investment tax credit and accelerated depreciation on solar projects that are public utility property. (For more background, see “Utility tax equity structures” in the December 2019 NewsWire and “Utility partnership flips” in the June 2020 NewsWire.)

One ruling, made public in October, involves a utility that applied to its utility regulatory commission for permission to recover the cost of a utility-scale solar project in rates, but ended up entering into a settlement with ratepayer advocates under which the utility agreed to charge a fixed rate for electricity from the project and not put the project into rate base.

The utility backed into the fixed rate by determining how much it would have to charge to earn its required rate of return. This had a lot in common with how rate-base rates are determined, but there will be no adjustment in the electricity price except where a change in the federal or state income tax rates leads to an adjustment in the utility’s other approved tariff rates.

A project is “public utility property” if the rates at which electricity is sold are established or approved by a government body on a rate-of-return basis.

The IRS said the project will not be public utility property because the project will not go into rate base and the rates are not a function of the utility’s rate base, even though they may have been set initially using a similar logic.

The ruling is Private Letter Ruling 202042005.

The agency released the second ruling in November.

A utility planned to use a small solar array installed on land belonging to a municipal airport to supply electricity to the airport and sell any excess electricity to the local grid.

Electricity will be supplied to the airport at a negotiated rate. Any sales into the grid will be at current wholesale market rates. The IRS said the solar facility will not be public utility property.

The November ruling is Private Letter Ruling 202047004.

The IRS released a priority guidance plan in November for the period through next June that lists subjects on which the IRS hopes to issue guidance. One item on the list is “[g]uidance on public utility property.” Usually when the IRS issues general guidance, it does so in order not to have to keep issuing private letter rulings.