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October 19, 2021

Solar facility selling electricity at market rates is not public utility property

In PLR 202140014, the IRS ruled that a facility generating and selling solar electricity at market rates will not be public utility property (PUP) under IRC Section 168(i)(10) and former IRC Section 46(f)(5).


Taxpayer is a public utility that generates and distributes electricity. Its rates are regulated by Commission. Through a special purpose entity subsidiary (ProjectCo), Taxpayer entered into an agreement with a developer to build a solar facility (Facility). When Facility is completed, Taxapayer will sell its membership interest in ProjectCo to Partnership. Taxpayer and partners will contribute cash to Partnership to purchase Facility under an LLC agreement. Commission will allow Partnership to sell electricity at market-based rates, instead of cost-based rates with a regulated rate of return.

Partnership will sell electricity to Taxpayer under a wholesale power purchase agreement (PPA), which will be treated as a service contract under IRC Section 7701(e)(3). Prices under the PPA will be determined on an arm's length market basis, not a rate-of-return or cost-of-service basis. Taxpayer will acquire electricity from the wholesale market at market prices.

Taxpayer requested that the IRS rule that Facility is not PUP under IRC Section 168(i)(10), and therefore related depreciation deductions and investment tax credit will not be subject to the normalization rules under IRC Section 168(i) or former IRC Section 46(f).

Law and analysis

IRC Section 168(i)(10) defines PUP 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:

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

Under Treas. Reg. Section 1.167(l)-3(c), if property held by a partnership is not PUP in the hands of the partnership but would be PUP if an election was made under IRC Section 761 to be excluded from partnership treatment, then IRC Section 167(l) is applied and the partners are treated as directly owning the property in proportion to their partnership interests.

Facility is not PUP

In its analysis, the IRS said Facility will meet the first PUP requirement because it will be used to furnish electricity. Facility will meet the second PUP requirement because Partnership is under the Commission's jurisdiction. The IRS said Facility is not PUP, regardless of the first two requirements, because Partnership will charge market-based rates to Operator for electricity to be produced by Facility.

The IRS noted that Taxpayer did not request a ruling on the status of Partnership for federal income tax purposes.


Similar to numerous recent private letter rulings, 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. This PLR complements those other PLRs and shows that utilities have focused on dealing with the cost pressures that normalization can apply by structuring their renewable investments with the use of market rates to avoid the potential normalization pitfalls. Utilities that have previously only utilized PPAs 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 (
   • Jim Barrett (
   • Brian Murphy (