Transmission grids became a little easier to transfer.

The IRS told a group of municipal utilities that financed their transmission grids with tax-exempt debt, and then later put the grids under the control of an “independent system operator,” that the action would not cause loss of the tax exemption on their bonds.

Tax-exempt debt cannot be used to finance equipment that will be put to more than 10% private business use.  The independent system operator in this case auctions “firm transmission rights” in the grids under its control to the highest bidders.  Whether bonds are tax exempt is determined based on the expected use of the equipment financed with them when the bonds are issued.  However, a “deliberate action” later to allow private use will cause loss of the tax exemption.

The IRS regulations recognize that it is US government policy to require open access to the electricity grid.  Therefore, use of a municipal grid by a private party is not considered impermissible private use to the extent the municipality is simply complying with US law.  However, it is impermissible private use if the municipality makes a conscious “sale, exchange, or other disposition” of all or part of its grid to a private person.

The IRS ruled privately to a joint entity in which a number of municipal utilities participate that the transfer of operational control of their grids to the ISO and sale by the ISO of firm transmission rights are not a “sale, exchange, or other disposition” of the grids.

To have gone too far, the utilities would have had to transfer an ownership interest in the grids.  They did not.  The ruling is Private Letter Ruling 200542032.  The IRS made the text public in late October.

Keith Martin