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December 2, 2020

Dedicated solar energy facility is not public utility property, IRS rules

The IRS ruled in PLR 202047004 that a dedicated renewable energy facility (DREF) generating solar electricity for one customer 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 DREF’s rates for furnishing electricity to the individual customer were based on market prices set in an agreement with that customer.


Taxpayer is a public utility that produces electricity. In general, Commission approves Taxpayer’s retail electric rates, which are a combination of base rates and several separate cost recovery clauses. Commission approved a Program that allows Taxpayer to negotiate individual pricing structures with existing or new electric service customers for renewable energy projects.

Customer owns a municipal airport and allowed Taxpayer to build a photovoltaic array on the airport property. The electricity generated by the Customer’s portion of the array (the DREF) will be delivered to Customer’s metered locations to offset its load. Excess energy from the DREF will be sold to Operator’s energy market with the rates based on the wholesale energy market.

The price of energy from the DREF is based on the terms of an agreement between Taxpayer and Customer and approved by Commission. Under the state statute, a public utility can request approval from Commission for an individual contract (which is not generally allowed).

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 DREF will meet the first requirement because it will be used to furnish electricity. The DREF will meet the second requirement because it is a regulated public utility company under the Commission’s jurisdiction.

The IRS said the DREF is not PUP regardless of the first two requirements because its rate will be based on the negotiated, market-based price agreed upon in the Customer and Taxpayer’s agreement, and thus not established on a cost-of-service, rate-of-return basis. The IRS noted that excess energy sold to Operator will also be at market-based rates.


Similar to recent private letter rulings 202046007, 202042005, 202034004 and 202032002, this PLR 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. While these PLRs all have slightly different fact patterns as to how their rates for electricity were determined, each ended up being viewed by the IRS as not on a cost-of-service, rate-of-return basis.  The variability amongst these fact patterns may allow for other utilities to see paths for them to apply a similar rate setup in their jurisdiction, now that a number of rate settings have been approved. 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 (