Gas Interties

Gas Interties

December 01, 2004

Gas interties are out of favor with the IRS.

Owners of independent power plants must negotiate terms with local utilities to let them connect to the grid. Otherwise, they have no way to move their electricity to market.

The utility will make the independent generator pay the cost of the radial lines, circuit breakers, substation improvements and other parts of the “intertie” needed to connect the plant. The utility will insist on owning most of this equipment. Ordinarily, when a corporation receives cash or property from someone who is not a shareholder, it must report the value as income. However, the IRS has said in a series of rulings since 1988 that utilities do not have to report interconnection payments by independent generators in cases where the generator is not a customer of the utility.

That is why most independent generators are careful to make sure they sell the electricity from their plants to someone else before the electricity reaches the grid. Otherwise, they would be customers of the utility for “wheeling” – or moving – the electricity across the grid. In cases where the electricity is sold before it reaches the grid, the customer is the one who pays for wheeling.

The IRS has been more stingy with rulings on arrangements with gas utilities. For example, where a gas producer connects to an interstate pipeline, the same principles should apply. The gas pipeline company should not have to report the value of a gas lateral paid for by the producer to connect to the pipeline as long as the producer is not a customer of the utility for gas, storage or transportation.

However, IRS officials in Washington who write rulings in this area appear loathe to extend the same principles in the electric rulings to gas interties – at least not in cases that are different from what they have already analyzed in the electric area.

The IRS told a gas distribution company in a private ruling that it had to include intertie payments in its taxable income. The ruling is PLR 200448008. The agency made it public in late November.

The gas distribution company in the ruling received requests from local residents who wanted gas connections. For example, home builders would ask for extensions for new housing developments. The utility would do a cost-benefit study. If the potential return did not justify the investment, then it would ask the person requesting the extension to pay enough of the cost to make the investment economic.

The utility was also able to tap a “universal service fund” funded mainly by a rate surcharge for some of the money.

The utility asked for a ruling that it did not have to include in its income the cost reimbursements from the universal service fund or from homebuilders and others asking for gas extensions. The IRS refused. It said the amounts were income.

The utility argued that the payments were not from customers because the utility does not sell any gas – it merely transports it – and all the transportation charges are paid by the suppliers and not the end users of the gas. The IRS rejected the argument. It said the persons asking for line extensions were getting a customer-like benefit since they were setting themselves up for gas service.

The ruling reflects the reluctance by the IRS branch that deals with these issues to extend the principles in the electric rulings to gas cases. Walter Woo, the IRS official who reviews rulings in this area, is retiring at year end.