Two Utility Issues

Two Utility Issues

August 01, 2004

Two utility issues are on the IRS business plan for next year.

The IRS committed in its latest business plan to issue guidance on the tax treatment of “system upgrade payments made to electric utilities” and a revenue ruling on when spending on existing power plants can be treated as a “repair” rather than as an “improvement.” The cost of repairs can be deducted. Spending on “improvements” must be treated as an investment in the power plant and recovered over time through depreciation. Both items were on the business plan last year, but the agency was unable to get to them. The IRS issues a business plan each July identifying topics that it has committed to address by the following June 30.

In a separate development, an independent power developer is questioning an increase in the “tax grossup” that Entergy requires from independent generators who want to connect power plants to the Entergy grid. The matter is before the Federal Energy Regulatory Commission.

Entergy insists that a grossup be paid on “system upgrade payments,” or amounts that a generator advances Entergy to help pay the cost of improvements to accommodate the additional power that the generator wants to put on the Entergy grid. Entergy ultimately collects the cost of such improvements from all users of the grid through the tariffs it charges for wheeling electricity. However, it requires generators connecting to the grid to advance the money in the meantime, and then returns it later as Entergy is reimbursed through its wheeling tariff.

Entergy announced earlier this year that it is increasing the amount of the grossup from roughly 34% to 43%. It has temporarily suspended collection. A generator developing a project in Arkansas has challenged the increase. The case is pending before FERC.

Keith Martin