Solar projects and “public utility property”

Solar projects and “public utility property”

October 09, 2020 | By Keith Martin in Washington, DC

Another public utility property ruling was issued by the Internal Revenue Service.

Utilities have been asking the IRS for private rulings that solar projects they plan to develop, buy from developers or put into tax equity partnerships will not be “public utility property.”

Utilities have a harder time claiming investment tax credits and accelerated depreciation on public utility property. The projects are public utility property if the rates at which the electricity is sold are established or approved by a utility commission on a rate-of-return basis.

Most of the projects addressed by the rulings are not public utility property because the electricity is sold at negotiated rates.

The IRS released another such ruling at the end of August. The ruling is Private Letter Ruling 202034004.

The utility in question planned to buy a large solar project from a project developer under a build-transfer agreement and then use the project to supply electricity to four commercial and industrial customers at negotiated rates.

Any remaining electricity from the project not sold to the four customers would be sold into the wholesale power market.

The state utility commission had to approve the special contracts with the four customers, but not the rates. The amount the utility pays for the project will not be added to its rate base.

The IRS has issued at least four other private rulings about similar arrangements in the last 15 months. (For earlier coverage, see “Renewables and public utility property” in the August 2020 NewsWire, “Utility partnership flips” in the June 2020 NewsWire and “Solar projects and public utility property” in the June 2019 NewsWire.)

It is unclear how many more times utilities will feel the need to hear the same thing from the IRS or the IRS will be willing to repeat it.

The IRS also issued one ruling where a utility plans to put a project into a tax equity partnership that will sell the electricity back to the utility at negotiated rates. The ruling was silent about whether the utility will put its investment in the partnership into rate base. It will pass through the negotiated rate it pays the partnership to its customers as a purchased power expense. (For more details, see “Utility tax equity structures” in the December 2019 NewsWire.) The ruling is Private Letter Ruling 201946007.