Transmission Credits Receive a Favorable Tax Ruling

Transmission Credits Receive a Favorable Tax Ruling

April 01, 2003

TRANSMISSION CREDITS receive a favorable tax ruling.

The Internal Revenue Service said in a private letter ruling in late February that a utility did not have to report amounts for which an independent power company reimbursed it for “network upgrades” as taxable income. “Network upgrades” are improvements to the transmission grid to accommodate another power plant.  Utilities are required currently to collect the cost of such work from all users of the grid through the rates they charge for transmitting electricity.  However, collecting this way takes time, so utilities ask the owner of any new power plant connecting to the grid to advance the funds for the improvements and promise that the amount will be repaid through “transmission credits.”

Some utilities worry that they must report the advances from generators as taxable income.  The IRS ruled privately in February that they do not.  The advances are a loan, and borrowed money does not have to be reported as income.

The ruling is important to any generators who would otherwise have been required by a utility to “gross up” their network upgrade payments for taxes.  Such grossups can run into the millions of dollars.  Any generator who already paid such a grossup should be entitled to its money back.

In the case addressed by the ruling, the utility awarded the generator transmission credits in the same dollar amount as its network upgrade payments.  The credits could be used against future charges for wheeling electricity from the generator’s power plant.  Any credits that the generator was unable to use in this manner by an outside date were repaid in cash.  The generator received back eventually not only its money, but also interest.  The utility did not put the network upgrades into its rate base.

The IRS was initially “adverse” on a more difficult fact pattern, but is expected to rule that this more difficult case also involves a loan by the generator to the utility.  In it, the utility does not repay the amounts with interest, and there is no deadline by when the full amount must be returned to the generator.  The utility also puts the upgrades into rate base at inception when the upgrades are made.

In the meantime, the Federal Energy Regulatory Commission has ordered at least one utility to repay network upgrade payments to a generator – and to do so with interest – even though the interconnection agreement that the parties signed did not require this.  It was an old contract.  See related article beginning on page 8.

Keith Martin