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October 4, 2022

IRS rules that renewable energy facility is not public utility property

  • The IRS rules that a solar energy facility is not public utility property to a partnership or its partners because it charges fixed rates and therefore is not subject to the normalization rules.
  • The fact that the IRS explicitly includes partners in its normalization ruling makes this a more thorough analysis of the subject.
  • This ruling is helpful to utilities that own renewable energy facilities by allowing them to be competitive with market prices.

In PLR 202239002, 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. Taxpayer created a special purpose subsidiary to acquire ProjectCo, which is developing a solar facility with a battery energy storage system (Facility). Taxpayer expects that Facility will qualify for the investment tax credit. When Facility is completed, Taxpayer will sell its membership interest in ProjectCo to Partnership. Commission is expected to 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 a regional transmission organization (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 asked the IRS to rule that Facility is not PUP under IRC Section 168(i)(10) and is not subject to the ITC normalization rules, 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). Taxpayer also requested approval to treat its trade or business as an electing regulated utility trade or business under Treas. Reg. Section 1.163(j)-1(b)(15)(i)(B).

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 Facility satisfied the first two requirements. Facility failed, however, to satisfy the third requirement because Partnership will use Facility to sell its energy at rates established on a market basis (and not on a rate-of-return or cost basis).

The IRS also ruled that Facility will not be subject to the ITC normalization rules of former IRC Section 46(f) by Taxpayer or Partner because Taxpayer and Partner are ineligible under IRC Section 761 to elect out of partnership treatment, and Facility is not treated as PUP owned by Taxpayer or Partner.

The IRS also ruled that a utility electing to be treated as "regulated" for IRC Section 163 purposes does not make it subject to the normalization rules. Even if the Partnership were eligible to make an irrevocable election to be an excepted regulated utility trade or business under Treas. Reg. Section 1.163(j)- 1(b)(15)(iii), making that election would not affect the finding that Facility is not PUP.


This ruling, along with others, continues to show the path forward for utilities that wish to invest in renewable energy projects but are concerned about trying to be cost competitive with independent power producers that are not subject to the normalization rules.


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