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November 20, 2020

IRS rules that solar energy facility with fixed rates is not public utility property

The IRS has again ruled in PLR 202046007 that a facility generating solar electricity will not be public utility property (PUP) under IRC Section 168(i)(10) and former IRC Section 46(f)(5).

The IRS based its ruling on the finding that the contract price for furnishing electrical energy under service agreements is not determined on a cost-of-service, rate-of-return basis.


Company is a public utility that produces electricity and is a disregarded entity of Taxpayer. Company has solar-energy-leasing businesses in State B, State C and State D (Solar Services Program). Company has received certificates from local commissions to lease electric-generating facilities in State B and State C. The Solar Service Program in State D is not subject to the regulatory jurisdiction of a commission or to rate regulation by any other state or federal regulatory body.

Under the Solar Services Program, the Company will enter into service agreements with customers to provide services through a solar photovoltaic generation system (System) to be constructed and installed on customers' premises. Customers pay a monthly fee, which could include a fixed-percentage price escalator, for a percentage of the electrical energy generated by the System. The prices will be market-based, determined through arm's-length negotiation.

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

In its analysis, the IRS said the System will meet the first requirement by furnishing electricity. The System will meet the second requirement for the Solar Services Program in States B and C, but not in State D, because the State D Solar Services Program is not subject to the regulatory jurisdiction of a commission or to rate regulation by any other state or federal regulatory body.

The IRS said the System is not PUP regardless of the first two requirements because the monthly fee under the agreement will not be determined on a rate-of-return basis. Instead, Company will establish a market-based price for its services and individual rates will not be set by, or subject to the approval of, any governmental or other regulatory body.


Similar to recent rulings in PLRs 202042005, 202034004 and 202032002, this ruling shows the ever increasing-interest that regulated utilities have in investing in renewable energy facilities in a manner that allows them to be competitive with market prices. Utilities that have previously only utilized power-purchase agreements for procuring green energy should revisit the ability to own and operate renewable-energy facilities in a competitive manner.


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