Message-ID: <20577585.1075858877125.JavaMail.evans@thyme> Date: Wed, 17 Oct 2001 13:13:43 -0700 (PDT) From: richard.shapiro@enron.com To: d..steffes@enron.com, sue.nord@enron.com Subject: FW: E-Notes: Treasury and IRS Likely to Amend Tax Treatment of Electrical Interconnections Cc: j..kean@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: j..kean@enron.com X-From: Shapiro, Richard X-To: Steffes, James D. , Nord, Sue X-cc: Kean, Steven J. X-bcc: X-Folder: \SKEAN (Non-Privileged)\Kean, Steven J.\Deleted Items X-Origin: Kean-S X-FileName: SKEAN (Non-Privileged).pst Another example of a regular issues e-mail push I receive...this one from a law-firm. -----Original Message----- From: Zimmer, Michael J [mailto:Michael.J.Zimmer@BAKERNET.com] Sent: Wednesday, October 17, 2001 3:08 PM Subject: E-Notes: Treasury and IRS Likely to Amend Tax Treatment of Electrical Interconnections > <<...OLE_Obj...>> > E-Notes provides regular briefings on new developments in global energy > and public utility law. > > > October 17, 2001 > > TREASURY AND IRS LIKELY TO AMEND TAX TREATMENT OF ELECTRICAL > INTERCONNECTIONS > > > The U.S. Department of Treasury and the IRS are likely to issue > within the next several months definitive guidance amending the rules > governing the federal income tax treatment of transfers of, or payments > for, electricity interties. The new rules will almost certainly allow > independent power producers to more freely transfer or pay for an intertie > on a tax-free basis. This certainty could remove the necessity to manage > this issue in negotiations of new interconnection agreements for > generation facilities. > > The key elements of the current rules likely to be modified include the > need for a long-term power purchase agreement to avoid tax and > restrictions on the ability to freely wheel power from the generating > facility. The new rules are not likely to directly apply to transfers of, > or payments for, gas interties, but may, nevertheless, affect the > circumstances in which gas intertie transfers are tax-free where such > transfers can be analogized to electric interconnections. > > Federal income tax law has long provided an exception to gross income for > corporations that receive shareholder and nonshareholder contributions of > money or other property to capital. Congress limited that exception in > 1986, excluding so-called "contributions in aid of construction," or > "CIACs." Congress did not define CIACs in the statute, but the > legislative history indicates that Congress understands CIACs as transfers > designed to induce or encourage the provision of services to or for the > benefit of the person making the contribution. > > In 1988, the IRS provided a safe harbor for qualified facilities (QF's) > within the meaning of the Federal Power Act, as amended by the Public > Utility Regulatory Policies Act. The safe harbor is limited, however, to > cases where, among other things, the QF has a Power Purchase Agreement > (PPA) of at least ten (10) years in place and where a dual-use intertie is > used to transmit only nominal amounts (5% or less) of power back to the > QF. Although understandable in 1988, the long-term PPA requirement seems > misplaced in today's merchant operation environment. Other aspects of the > safe harbor, such as the QF requirement, are also dated. IRS private > letter rulings over the last decade have not added much clarity or > certainty. Uncertainties regarding the federal income tax treatment of > interties have thus increasingly plagued the electric power and natural > gas industries and have escalated in negotiations of new interconnection > agreements. > > The new thinking at Treasury and the IRS may have been foreshadowed > by a recent private letter ruling released by the IRS in late summer, PLR > 280134021 (dated May 30, 2001, and released August 24, 2001). The ruling > concludes that the transfer of an intertie by a QF owner is not gross > income to a transmission company even though only an undisclosed > percentage of the output is subject to a 10-year PPA. The remaining > output will be sold on the open market through an energy trading company. > This result is similar to an earlier ruling, PLR 9327019 (April 6, 1993), > but the new ruling appears more expansive. > > The new guidance is likely to expand the existing safe harbor in one or > more ways, including loosening or eliminating the PPA requirement and > relaxation of the QF requirement in favor of increased reliance on an > updated and expanded de minimus back flow or multi-use test. > > Baker & McKenzie tax and major projects lawyers are taking an active role > in providing industry input to the IRS and Treasury, and reflecting these > developments in the contracting, negotiation and financing of new > generator and fuel facilities nationwide. > > > Michael J. Zimmer > Kenneth R. Hayduk > > > > __________________________________________________________________________ > __ > E-Notes is a publication of Baker & McKenzie. It does not constitute > legal advice or a legal opinion on any specific facts or circumstances. > The contents are intended as general information only. You are urged to > consult your attorney concerning your situation and specific legal > questions you may have. For further information on the subjects discussed > in E-Notes, contact Michael J. Zimmer, > mailto:michael.j.zimmer@bakernet.com or > Jonathan W. Gottlieb, mailto:jonathan.w.gottlieb@bakernet.com. > > For more information about BAKER & McKENZIE and our global energy and > utility practice, click on our electronic business card: > <<...OLE_Obj...>> > > or visit our website at Areas/nabfmp/energy/!viewme.htm> . > > >