By SETH HANDY
Since 1988, National Grid has passed a tax through to renewable-energy developers from which it is exempt. When an electric customer funds an upgrade to the electric distribution system to receive electrical service, the value of that system improvement is treated as a contribution to the utility and taxed at its value. That rule makes sense — if a utility receives a benefit without paying for it, that benefit should be considered income for taxation purposes.
But, IRS Notice 88-129, promulgated in 1988, says that this “contribution in aid of construction” tax does not apply to the transfer of “interconnection equipment constructed for the purpose of allowing the flow of electricity from a generator to the utility; rather, it is intended to apply where the purpose is to allow the flow of electricity from the utility to the generator ...” (1)
This rule is also sensible — if the purpose of the improvement is to help the generator send electricity to the distribution grid, then there is no “contribution” or taxable income.
In January 2014, two developers contested National Grid’s continued assessment of the interconnection tax, at the Rhode Island Public Utilities Commission (PUC). In response, National Grid challenged PUC’s jurisdiction over federal tax law and answered that the safe harbor established in Notice 88-129 only applied to transmission interconnections and not to interconnections to the company’s distribution system.
The PUC ruled that this question of tax liability was between the utility and the IRS. It ordered the utility to pursue a private letter ruling (PLR) from the IRS to resolve the question of whether the safe harbor applies to the specific distribution system interconnections at issue in Rhode Island.
National Grid’s PLR request acknowledged that “IRS Notices confirm that section 118(b) does not apply to a generator’s contribution in aid of construction, paid to a utility as reimbursement for the cost of interconnection equipment used exclusively for the purpose of allowing the flow of electricity from the generator to the utility.”
It also acknowledged that “the Service has already confirmed in two private letter rulings that the contribution of an intertie by a generator to a utility that allows electricity to be delivered to the electric grid was a fully non-taxable contribution to capital where the intertie was part of both the ‘Taxpayer’s transmission and distribution system.’”
On Nov. 9, 2015, the IRS returned National Grid’s PLR request and fee because the Service would be issuing new guidance to resolve any such uncertainty. On June 20, 2016, the IRS issued that guidance. (2)
After discussing the long history of IRS Notices on the subject, and explaining the changes to the industry and our electric grid, the IRS made it clear that “a generator — such as a solar or wind farm — may contribute an intertie to a utility that qualifies under the new safe harbor even if the generator is interconnected with a distribution system.”
The issue is now definitively decided for Rhode Island and the nation.
In response to the new IRS notice, National Grid’s director of U.S. tax research & planning wrote to the IRS that it would be “incorrect” to read that notice to limit the new safe harbor to transmission interconnections. (3)
The Edison Electric Institute (EEI), the trade association for the nation’s electric distribution utilities, also agreed, writing to the IRS that EEI’s experts “assume your intent was to provide the same treatment for all transfers of an intertie to a distribution utility as is provided for transfers of intertie property to transmission utilities.” (4)
However, at the PUC, National Grid still claims ambiguity and refuses to honor the safe harbor. The petitioners and developers throughout the state, and beyond, still await PUC’s decision. Meanwhile, National Grid continues to assess the interconnection tax, an unreasonable and unwarranted charge on interconnecting customers that ultimately costs ratepayers.
Why would a utility want to pass on a tax to which it is not subject? (5) Why would it take over 26 years of baseless taxation for anyone to stand up to the utility on this issue? Why is the matter still unresolved over two years after a petition was filed with the PUC?
Fair questions, the answers to which should inform and concern us all. Now it’s time for resolution.
Seth Handy is an attorney with Handy Law LLC, based in Providence.
(1) Transfers of Property to Regulated Public Utilities by “Qualifying Facilities,” Notice 88-129, 1988-2 C.B. 541
(2) Transfers of Property to Regulated Public Utilities by Electricity Generators, Notice 2016-36, https://www.irs.gov/pub/irs-drop/n-16-36.pdf
(3) June 28, 2016 email from Robert Ermanski to David Selig, “Consequently, the continued use of the restrictive term “transmission” in Section IIIB and IIIC of Notice 2016-36 may cause taxpayers to conclude incorrectly that the new safe harbor is only permitted when electricity which passes through a “distribution” system intertie is ultimately delivered to the utility’s “transmission” system.” http://www.ripuc.org/eventsactions/docket/4483-NGrid-Reply-TaxIssueUpdate-WED(8-26-16).pdf
(4) September 13, 2016 letter from Alexander Zakupowsky, Jr. to David Selig (IRS). http://www.ripuc.org/eventsactions/docket/4483-NGrid-Update-PLRCompliance(10-13-16).pdf
(5) You may recall that last year National Grid asked the Commission to impose an access fee on customers generating renewable energy for their use of the distribution system, a proposal that was unanimously opposed and soundly rejected. http://www.ripuc.org/eventsactions/docket/4568page.html