19 May 2020 IRS issues another ruling finding a wind facility is not a public utility property In private letter ruling 202020011, the IRS ruled that a wind power facility does not meet the requirements to be public utility property (PUP) under IRC Section 168(i)(10) because the electricity it will generate will be sold through a power purchase agreement (PPA) at market rates, not on a rate-of-return basis. The IRS declined to rule on the issue of whether IRC Section 707(b) would disallow any losses (resulting from the sale of electricity from LLC to Taxpayer) that the LLC allocated to its investors. Taxpayer, through a limited liability company (LLC), planned to replace a substantial portion of its existing electric generating fleet by investing in and purchasing electricity from wind projects. Taxpayer entered into a joint venture with Investor to form LLC, which will buy all the assets of a developer building a wind project (Facility). Facility will generate electricity to sell to Taxpayer under a PPA. The LLC transaction and the PPA are subject to approval by the first utility commission, which participates in a wholesale energy market regulated by the second utility commission. The PPA is a "wholesale PPA" under the market-based rate authority of the second utility commission. The prices under the PPA will be determined on an arm's length, market basis and will not be determined on a rate-of-return basis or cost basis. Taxpayer will include electricity purchased from LLC as part of its delivery of electricity to retail customers, the sale of which will be regulated by the first utility commission. IRC Section 168(i)(10) defines public utility property as property used predominantly in the trade or business of furnishing or selling electrical energy if the rates for furnishing or selling have been established or approved by a state or political subdivision. Treas. Reg. Section 1.46-3(g)(2) defines the regulated rates as those established or approved on a rate-of-return basis. Depreciation under IRC Section 168 will not apply if the utility does not use the normalization method of accounting. The operative rules for normalizing timing differences from use of different methods and periods of depreciation are only logical in the context of rate-of-return regulation.
The IRS said Facility satisfied the first two requirements. Facility did not satisfy the third requirement, however, because the PPA requires LLC to sell Facility's electricity to Taxpayer, which will sell that electricity immediately to wholesale electric markets on a market basis, not a rate-of-return basis. The IRS said it could not rule on whether IRC Section 707(b) would disallow losses of LLC allocated to Investor or Taxpayer from LLC's sale of electricity to Taxpayer under the PPA because the IRS cannot issue a private letter ruling "if the request presents an issue that cannot be readily resolved before a regulation or any other published guidance is issued." This is yet another ruling on alternative energy highlighting a general demand and preference by regulated utilities to own renewable assets outright, rather than engage in power purchase agreements with independent power producers. This ruling is similar to an earlier one that said the property in question was not PUP and therefore not subject to normalization rules because the rates being charged were market-based and not cost-of-service/rate-of-return regulated rates (see Tax Alert 2019-2080 and Tax Alert 2020-1148.) A key takeaway from this ruling is that utility companies continue to evaluate structures that will facilitate the inclusion of renewables in their regulated operations at competitive prices. That said, care must be taken to navigate the normalization rules when considering adding renewable energy property in regulated operations.
Document ID: 2020-1332 | |||||||||
