In Private Letter Ruling 201923019 (Feb. 21, 2019) (publicly released on June 10, 2019), the Internal Revenue Service (IRS) addressed a state statute that allowed a regulated public utility to acquire an unregulated solar facility that had previously negotiated market rates with the utility’s customers. The power purchase agreement (PPA) remained in effect after the acquisition and the utility agreed to charge the PPA rates, plus the cost of transportation and administrative costs. Consistent with prior rulings, the IRS ruled that under the statute and PPA, the public utility commission did not have the authority to establish the utility’s rates from the solar facility on a cost of service/rate of return basis and, therefore, the solar facility is not public utility property.
| Eversheds Sutherland Observation: As noted in our Legal Alert dated December 7, 2018, the proposed regulations under Section 163(j) created confusion regarding the scope of the term “cost of service” because they did not adopt the traditional phraseology that “cost of service” includes a “reasonable return on investment.” Although PLR 201923019 adopts that phraseology in setting forth the facts, in its analysis the IRS does not, instead repeatedly using the terms “cost of service” and “rate of return” interchangeably. We continue to believe it would be preferable for the IRS to solely use the “cost of service (including a reasonable return on investment)” terminology to avoid any unnecessary confusion. |
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