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February 7, 2022

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

The IRS ruled in PLR 202205005 that a solar energy facility will not be 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 that sells electric energy. Additionally, Taxpayer is a transmission system owner-member in a regional transmission organization (RTO) that operates on a merit order dispatch. Taxpayer offers electricity in the RTO's day-ahead and real-time markets.

Taxpayer created a special purpose subsidiary to acquire ProjectCo, which is developing a solar facility (Facility). When Facility is completed, Taxpayer will sell its membership interest in ProjectCo to Partnership. Taxpayer will later have the option to buy out all the interests in Partnership. 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 directly to the wholesale electricity markets administered by RTO. Taxpayer will buy electricity on the wholesale markets at RTO's prices. Partnership will not sell energy to Taxpayer and there will be no power purchase agreement between them.

Under an agreement between Taxpayer and Partnership, Taxpayer will pay to Partnership a fixed price for the power generated by Facility plus the expected values of the resulting renewable energy certificates (REC) and RTO zonal resource credits (ZRC). The RECs and ZRCs generated by Facility will be assigned to Taxpayer. Partnership will then pay the market-based amount to Taxpayer for the power.

Taxpayer requested that the IRS rule that Facility is not PUP under IRC Section 168(i)(10), so depreciation deductions and investment tax credits 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 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 failed, however, to satisfy the third requirement because Partnership will use the Facility to sell its energy at rates established on a market basis (and not on a rate-of-return or cost basis). In addition, the agreement between Taxpayer and Partnership also involves the sale of electricity at market-based rates.


This is another in a series of private letter rulings concluding that selling electricity at market prices causes companies to fail the third requirement to be considered PUP and therefore not be subject to the normalization rules. The facts all differ slightly, but the conclusion remains consistent. This shows that utilities can structure and price renewable projects in various ways to avoid the pricing challenges that can exist when utilities own renewable facilities.


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