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October 20, 2020

IRS rules solar energy facility is not public property because rates are fixed

The IRS ruled in PLR 202042005 that a solar energy facility is not considered public utility property (PUP) because its rates are fixed and not determined on a cost-of-service, rate-of-return basis.


Taxpayer is a public utility. Taxpayer's retail electric rates are established by a Commission on a cost-based, rate-of-return basis. Taxpayer applied to build a new solar energy facility using traditional cost-of service, rate-of-return ratemaking but after other organizations intervened, entered into a settlement agreement under which it would charge a fixed rate, which would not be affected by actual costs or future changes in anticipated costs. In addition, the facility and its associated costs would be excluded from Taxpayer's commission-approved base rates throughout the life of the project

Under the settlement agreement, the rate could be adjusted only because of, among other events, a change in the federal or state income tax rate that resulted in a change to Taxpayer's other commission-approved tariff rates (Tax Rate Adjuster).

The Taxpayer asked the IRS to rule that the Tax Rate Adjuster will not cause the facility to be PUP under IRC Section 168(i)(10) and former IRC Section 46(f)(5) because the model used to recalculate the fixed rate if there is a Tax Rate Adjuster does not cause the fixed rate to be treated as being derived from cost-of-service, rate-of-return ratemaking.

Law and analysis

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 a facility must have three characteristics to qualify as PUP:

  • It must be predominantly used in the trade or business of furnishing or selling electricity
  • The rates for the sale must be established or approved by one of the listed agencies or instrumentalities
  • The rates must be established on a rate-of-return basis

The IRS said the facility satisfied the first two requirements. The facility, however, failed to satisfy the third requirement because the rates will be determined by reference to comparable, competitive market prices as agreed upon in the settlement agreement and are therefore fixed, not based on cost-of-service and rate-of-return.


Consistent with earlier rulings, this one demonstrates that utilities are continuing to develop and own renewable facilities using a cost-competitive approach that avoids the pitfalls of the tax normalization rules. Utilizing market-based rates is one approach that can accomplish that goal. Utilities should examine their regulatory environment to determine if this strategy is viable in the markets where they participate.


Contact Information
For additional information concerning this Alert, please contact:
Americas Power & Utilities Tax Group
   • Mike Reno (
   • Brian Murphy (
   • Ginny Norton (