EEI, NARUC push for rulings as smart grid funds still held up by tax and other issues

By Tom Tiernan

February 11 - With utilities facing federal hurdles before they can receive stimulus funding for smart grid projects, they and their regulators are seeking some help at the Department of Energy, primarily to ensure that funding recipients would not be taxed on the money they receive.

Other matters, such as a possible requirement that DOE own utility smart grid equipment paid for with stimulus funding, have been the subject of negotiation between DOE contracting officers and companies chosen to receive stimulus funding for the projects. The longer the negotiations drag out, the longer it will take for some smart grid deployments to begin, and a letter from the National Association of Regulatory Utility Commissioners last week expresses some concern about the tax issue limiting utility smart grid investments.

Besides NARUC making overtures to DOE and the Treasury Department, asking the agencies to work with the Internal Revenue Service to clarify that this funding should not be taxed, a tax attorney for the Edison Electric Institute also wrote to DOE expressing utility concerns about some of the hurdles associated with negotiations

"It is impossible to predict all arguments the IRS may assert to tax stimulus grants," but some provisions in draft smart grid stimulus agreements "appear problematic," said Alexander Zakupowsky, outside counsel on tax issues for EEI said in the letter.

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The IRS may interpret the provisions "to impose restrictions on the property acquired with the stimulus grant funds or permit use of the funds that are inconsistent with the property becoming part of the permanent capital of the recipient," Zakupowsky, an attorney with Winston & Strawn, told DOE.

The notion of taxing companies selected to receive smart grid stimulus funds for projects in the department's $615 million demonstration program or its $3.4 billion investment grant program has been the subject of negotiations between DOE and the recipients for several months.

Although DOE had hoped to have agreements reached with companies by now, none have been wrapped up yet, and the tax issue, on top of other utility concerns, could hinder smart grid deployments.

In October, DOE selected 100 smart grid projects in 49 states to receive the investment grants and DOE has been negotiating with the companies on various requirements for receiving stimulus money: whether the grants should be taxed, whether DOE can own smart grid facilities installed with stimulus funds, and application of "buy American" provisions in the American Recovery and Reinvestment Act.

The possibility of DOE "owning" utility facilities paid for with stimulus funds, and federal concerns about utilities earning a rate of return on equipment paid for with stimulus funds, have been the subject of discussion over the past several weeks and months, utilities have said.

Because ARRA was designed to stimulate the economy and create jobs, "we believe that taxing the smart grid grants is counterproductive and inconsistent with other energy provisions in the act, such as the non-taxable renewable energy grants that are provided in lieu of investment or production tax credits," NARUC President David Coen of Vermont and Garry Brown of New York, the chairman of NARUC's Electricity Committee, said in the letter.

Neither Treasury nor IRS has issued an order declaring the smart grid funding to be taxable, but after talking with utilities and member commissions as part of the contract negotiations with DOE, "we are operating under the assumption that they are taxable," said Robert Thormeyer, spokesman for NARUC.

"We are studying the issue," said IRS spokesman Robert Marvin, who declined further comment.

Utilities selected for smart grid stimulus funding have received draft contracts from DOE, indicating they are responsible for determining whether the money would be taxable, utility representatives have said in interviews. Baltimore Gas and Electric, Pepco and other utilities have said they are seeking clarification on the issue with the IRS.

Some state regulators have pre-approved smart grid projects in order for utilities to reach a deal with DOE and receive the funding, but the tax issue presents a challenge. Taxing stimulus funds that companies would receive threatens to add another cost to smart grid projects and may alter the cost/benefit dynamics of projects, NARUC said in the letter. "Grant recipients may hesitate to undertake this additional financial burden and commissions may determine that passing along the additional cost of the project would not result in just and reasonable rates for ratepayers," NARUC said.

"We encourage the Treasury and IRS to communicate and work with the DOE to find a way to quickly resolve this issue and ensure that the smart grid grants are non-taxable," the regulators' group said.

Zakupowsky urged DOE to contact Treasury and IRS, provide them with the draft contracts and "request that they issue a notice indicating that payments under [contracts] will be treated as nontaxable contributions to the capital of a corporation." He asked for the notice with 30 days of the January 19 letter.

DOE "is aware of the potential issues concerning the tax liability for capital projects under the smart grid program, and we are working with recipients and our federal partners to understand the implications and provide guidance for grantees as soon as possible," Jennifer Stutsman, a spokeswoman for DOE, said at the end of January.

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