Facility-Specific Power Purchase Agreements Are Part of the Facility

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The Internal Revenue Service recently ruled that certain facility-specific power purchase agreements (PPAs) are considered part of the underlying energy facility, and are not separate property. In PLR 201214007, an electric company acquired all of the membership interests in an unrelated entity that owned and operated (or was constructing) wind energy facilities. The entity had entered into PPAs that obligated the energy producer to sell and, the purchaser to buy, all or a specified cap amount of electricity that was produced at that specific facility at a specified price for a specified term of years. In the case of a specified cap amount, some PPAs contained a price adjustment for sales in excess of the cap amount. Under no circumstances could the entity fulfill its obligations under the PPAs from sources other than the specified energy facility. As a result, a transfer of a PPA without a transfer of the related wind energy facility would leave the transferee with no way to satisfy the PPA.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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