The Internal Revenue Service (IRS) will announce this fall whether utilities must report interconnection payments from generators to connect their power plants to the grid as income. IRS policy since 1988 has been not to tax such payments. The agency announced last summer that it has the area under study. In the meantime, some utilities are requiring generators to “gross up” their interconnection payment for taxes. However, most are taking a wait-and-see approach and are asking only for a promise to pay any taxes if they arise.
At issue is whether generators make interconnection payments in their capacities as “customers” of the utilities. An amendment to the U.S. tax code in 1986 requires utilities to pay tax on any contribution of money or property by “a customer or potential customer.” Generators argue the payments are not income because generators are not utility customers as Congress used the term and, moreover, the utility has no “income” in the sense of an increase in wealth. The utility cannot put the intertie in its rate base, and it does not earn a profit from its use.
Walter Woo, an IRS lawyer assigned to the issue, said he expects the IRS to publish a notice announcing its decision this fall.
Excerpt from Chadbourne & Parke LLP’s “Project Finance NewsWire,” August 2001.
