Interconnection costs

April 10, 2018 | By Keith Martin in Washington, DC

Interconnecting to a distribution line did not trigger taxes to the utility, the IRS said.

Utilities require independent generators connecting to the grid to reimburse for the cost of the intertie and of any network upgrades to accommodate the additional electricity on the grid.

Utilities must report any such payments from an independent generator that is a customer of the utility as income. This makes interconnection more expensive for such generators, since the utility will collect a tax gross up as part of the interconnection payment. 

However, the IRS has made clear in a series of notices since 1988 that interconnection payments from independent generators who are not customers do not have to be reported as income.

The IRS updates these notices periodically. The latest such update was Notice 2016-36 in June 2016. One of the issues the IRS addressed in the 2016 update is whether it matters whether the independent generator connects its project to a utility transmission line or a distribution line. Community solar projects are often connected to distribution lines.

The 2016 notice said it makes no difference. The notice said the interconnection payment is not income “even if the generator is interconnected with a distribution system, rather than the transmission system.” Later, where the notice lists the boxes that must be checked to avoid income, one box is the intertie must be used for “transmitting electricity.” (For more details on IRS policy in this area, see “IRS Updates Tax Treatment of Interconnection Payments” in the August 2016 NewsWire.)

The IRS does not issue private letter rulings about issues addressed in the interconnection notices as a labor-saving measure. It does not want to have to spend time repeating what it has already said in notices.

The utility to whom it issued the new ruling had already asked for a ruling on this issue before the latest notice was issued, so the IRS made an exception.

The generator in the ruling had a long-term power purchase agreement to sell its electricity to X, but had to move the electricity across two utility systems to reach X. Its project was connected to the distribution lines of one utility and to the distribution and transmission lines of the utility to whom the IRS issued the ruling. Presumably X took title to the electricity near the generator’s power plant and was the customer of the two utilities for transmission.

The ruling confirmed that the intertie will be used for “transmitting electricity” within the meaning of the 2016 notice.

The ruling is Private Letter Ruling 201813016. The IRS released a redacted copy to the public on March 30.