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February 25, 2022

IRS rules that solar energy facility is not public utility property

In PLR 202208005, the IRS ruled 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 with rates regulated by Commission. The rates are based on cost of service and the cost of purchased fuel, power and related expenses.

Taxpayer intends to acquire Facilities, which will generate solar electricity. A state program requires renewable energy rates to be based on competitive market prices and does not consider capital investment associated with Facilities. Taxpayer represents that (1) customer pricing will be based on competitive market rates and not on cost-of-service or rate-of-return, and (2) Facilities' capital investment and costs will not be included in Taxpayer's rate base and revenue requirements.

Taxpayer asked the IRS to rule that Facilities are 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 Facilities satisfied the first two requirements. Facilities failed, however, to satisfy the third requirement because Taxpayer will charge market-based rates for electricity to be produced by Facilities under the state program's requirements.


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 demonstrates that utilities can deal with the cost pressures that normalization can apply by structuring their renewable investments with the use of market rates to avoid potential normalization pitfalls. 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 (
   • Jim Barrett (