Interconnection costs: Electricity v. water and sewer

Interconnection costs: Electricity v. water and sewer

August 13, 2021 | By Keith Martin in Washington, DC

Most interconnection payments and government grants to investor-owned water and sewer utilities will no longer have to be reported by the utilities as income if the bipartisan infrastructure bill that passed the Senate on August 10 is ultimately enacted.

Water and sewer utilities will have different rules than electric utilities.

Electric utilities usually do not have to report interconnection payments from independent generators to reimburse for the cost of upgrades that must be made to the grid to accommodate a new interconnecting power plant. Such payments usually do not have to be reported as income by the utility as long as the independent generator is not also a customer of the utility. It would be a customer, for example, if it pays the utility to wheel its electricity across the power grid to a distant electricity purchaser.

In cases where the utility must report a payment as income, it charges a tax gross up that increases the cost to connect a project to the grid. (For more detail, see “IRS Updates Tax Treatment of Interconnection Payments” in the August 2016 NewsWire.)

Electric utilities must report most government grants as income.

The US has a problem with lead in water pipes. The utilities may need government grants to help pay the cost to replace such pipes.

The Senate infrastructure bill would spare investor-owned regulated utilities that provide water and sewage disposal from having to report amounts received to pay for equipment used to provide such services. This tax treatment would apply to cost reimbursements from private parties as well as government grants. The utility would have to spend the money on improvements by the end of the second tax year after the year in which the money is received.

The utility could not put the improvements into rate base.

The relief would only apply to utilities that are treated as corporations for federal income tax purposes.

Some version of the infrastructure bill in which this provision is included is expected to be taken up in the House in the fall, but probably not before late October.

The provision applies to amounts received after calendar year 2020.