The IRS on June 10 issued Notice 2016-36, which expands a safe harbor allowing certain transfers of property to regulated public utilities to be treated as nontaxable contributions of capital to a corporation, rather than as taxable contributions in aid of construction (“CIACs”). This expanded safe harbor is intended to modernize the rules in a way that will promote efficiency throughout the grid and the development and interconnection of renewable energy resources. The new safe harbor will protect some renewable energy producers from being required to make gross-up payments to transmission providers in connection with required system upgrades.
Under prior guidance, originally issued in 1988 and updated in 1990 and 2001, a transfer of an intertie or other property to a regulated public utility by an owner of a facility qualified as a non-taxable contribution to the capital of the utility only if the transfer was made exclusively in connection with the sale of electricity by the facility to the utility pursuant to a long-term power purchase contract or a long-term interconnection agreement between the generator and the utility. The safe harbor did not apply to a transfer of property by a generator to a utility if the generator did not sell power to that utility or did not enter into a long-term interconnection agreement with that utility. The IRS confirmed in a private letter ruling issued earlier this year that the safe harbor did not apply to a transfer of an intertie by a generator to the owner of a distribution system if the generator was not selling electricity to the owner of the distribution system (see our May 11, 2016 alert). As such, the owner of the distribution system recognized taxable income in an amount equal to the fair market value of the intertie.
The expanded safe harbor removes the requirement that the transfer of property be made exclusively in connection with the sale of electricity by the generator to the utility pursuant to a long-term power purchase contract or a long-term interconnection agreement between the generator and the utility. According to the IRS, this will bring the CIAC rules more in line with the realities of the marketplace, in which generators are more often required to provide network upgrades to utilities that are not purchasers of the generator’s power and that are not providing interconnection services to the generator. The new safe harbor also makes clear that transfers of batteries and other storage devices to utilities to help manage grid frequency can qualify as nontaxable contributions to capital.
The expansion of the safe harbor is welcome news to many renewable energy producers who otherwise may have been required to make tax gross-up payments in connection with network upgrades.
If you have any questions regarding the Notice or related matters, please contact a key contributor.