Solar Generation as Public Utility Property
The Internal Revenue Service (IRS) has issued several private letter rulings (PLR) in recent months clarifying the relationship between solar power generation equipment and public utility companies. The main focus is defining whether or not generation equipment with energy pricing based on monthly fees can be treated as public utility property. The designation of generation equipment as public utility property has several important implications, all of which impact how utilities treat the property for tax purposes.
Background
Solar equipment owned by a utility frequently resides on-location at customer sites, and the renewable energy generated is provided through energy service agreements for solar photovoltaic systems. Per Internal Revenue Code Section (IRC) 168(i)(10), this equipment must meet the following criteria to qualify as public utility property:
The property must be used predominantly in the trade or business of the furnishing or sale of electricity
The rates for the sale of this electricity must be established or approved by a state or political subdivision, any agency or instrumentality of the United States, or by a public service or public utility commission
The rates established or approved must be determined on a rate-of-return basis
Utilities requested rulings on the qualification of solar generation equipment because the energy generated is sold for a monthly fee and not at a cost-of service based, rate-of-return price. If this interpretation were upheld, the solar generation equipment would not meet the criteria above for public utility property per IRS guidelines.
Rulings
Between April and December 2020 the IRS issued PLRs 202017027, 202032002, 202034004, 202042005, 202046007, and 202047004. In these rulings the IRS agreed that the IRC does define public utility properties as having rates that are determined on a rate-of-return basis and are not based on a monthly fee.
When a utility provides solar energy through solar service leases, the program is not subject to the regulatory jurisdiction of a commission or to rate regulation by any other state or federal regulatory body. Instead, the utility enters into service agreements with customers to provide services through a solar photovoltaic generation system constructed and installed on customers' premises. The prices are market-based and are not cost-of-service based, and therefore the associated generation equipment does not meet the criteria of public utility property.
Significance
The operative rules for normalization requirements for timing differences based on different methods and periods of depreciation (method/life) are only logical in the context of rate-of-return regulation. Because the rates for the sale of electricity from solar generation property is not strictly based on rate-of-return methodologies, the associated tax implications are not governed by these same normalization requirements.
The non-application of normalization requirements means that the solar generation equipment has different treatment for the accrual of deferred income taxes, changes the application treatment of investment tax credits (ITC), and changes regulatory reporting requirements for plant property. Further 163(j) implications are the changes to eligibility for bonus depreciation and the limitation of interest expense deductions.
How Lucasys Can Help
The 2020 solar generation designation rulings illustrate the increasing interest that regulated utilities have in investing in renewable energy facilities in a way that generates payment models competitive with market pricing. Utilities that have previously only utilized power-purchase agreements for procuring green energy are seeing incentives to own and operate their own renewable-energy facilities.
As power generation standards evolve, Lucasys has the consulting expertise to help. Our knowledgeable team of consultants has the experience to restructure and standardize tax accounting and fixed asset records to adapt to the latest regulatory rulings. Organizing new tax records correctly the first time prevents utilities from having to play catch-up later when processing deadlines are approaching.
For utilities looking for insight on maintaining new types of property or those that want to validate the records they already keep, Lucasys can provide insights into the latest tax issues of the utility industry. To learn more about how Lucasys can help, please visit https://www.lucasys.com/solutions.