IRS ruling eases power plant interconnection tax burden

By the OGJ Online Staff

HOUSTON, Dec. 14 -- Electric power industry observers said a new Internal Revenue Service tax ruling should remove a financial obstacle hindering independent and merchant power generation projects.

The IRS ruling exempts from taxation the cost of building transmission lines to connect a new plant to the electric grid. Both investor-owned utilities and independent generators who often don't see eye to eye on issues praised IRS ruling.

The Electric Power Supply Association, represented independent generators and marketers, said the ruling will make it easier to invest in power plant project. "It is a significant development," said spokesman Mark Stultz.

The Edison Electric Institute, representing investor-owned utilities, said uncertainty about the IRS's interpretation effectively forced utilities to pass on the Contributions in Aid of Construction (CIAC) tax to the generator when connecting to transmission facilities.

It said the IRS notice mirrors EEI's position that the connection to the grid is a nontaxable event. The notice also permits CIAC tax payments on agreements prior to Dec. 24 to be reconsidered on a case-by-case basis.

"We welcome the ruling made by the IRS," said EEI Pres. Thomas Kuhn. "This ruling helps breakdown a significant barrier to providing much needed new generation and will help to facilitate the development of a more competitive electricity market."

An EEI spokeswoman said the ruling could save up to $35 million in taxes on transmission facilities based on a $100 million power plant. Who paid the tax was a sore point between the utility and the generator.

Deregulation of bulk power markets has fostered the development of merchant plants or stand-alone generators, which are permitted to sell power at market rates. The Federal Energy Regulatory Commission opened access to the stand-alone generators in 1996, but tax laws weren't changed to accommodate the new market.

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