FERC Filings
Request of EPSA for Clarification and Rehearing of Order No. 2003-A re: Standardization of Generator Interconnection Agreements and Procedures
Tax issues
It is important to recognize that, as with many other provisions of the ANOPR and NOPR, the tax provisions contained in Order No. 2003 were developed through negotiations among tax professionals representing both interconnection customers and transmission providers, in which all of the represented parties made concessions. These tax provisions represented a balanced approach designed to accommodate the needs of all market participants on a number of complex and interrelated issues and struck a balance between the competing interests.
Specifically, EPSA has two concerns with the changes the Commission made to the tax provisions of Order No. 2003. First, the Commission should not extend the Transmission Provider’s right to require security beyond the point in time when a favorable private letter ruling is obtained. Second, the Commission should not have eliminated the Interconnection Customer’s right to contest or appeal taxes for which the Interconnection Customer is ultimately liable.
In Order No. 2003, the Commission ruled that a Transmission Provider could require an Interconnection Customer to post security for the potential tax liability, but once the Transmission Provider receives a private letter ruling from the Internal Revenue Service (IRS) determining that the payments made by the Interconnection Customer to the Transmission Provider are not subject to tax, the Interconnection Customer’s security obligations would terminate. In Order 2003-A, the Commission deleted the requirement that security posted against the risk of a taxable event be eliminated if a favorable private letter ruling is obtained. Instead, the Transmission Provider may require security for arguably an indefinite period.
Receipt of such a letter ruling significantly reduces the already small risk of tax liability and thus of the need for security. The Commission needs to be aware of the costs associated with this change. For example, requiring an Interconnection Customer to post a $3 million credit, assuming a 30 percent tax gross-up rate on a $10 million interconnection, would have an on-going cost of $20,000 to $60,000 per year to secure a very remote risk. This is patently unfair and would upset the balance achieved in the consensus approach to the tax provisions of the NOPR. Therefore, EPSA urges the Commission to rescind this decision and return to the approach set out in Order No. 2003.
Doing so would be consistent with (1) Order No. 2003-A at P 343, wherein the Commission holds that the security requirement should track the cost consequence of any current tax liability over time, and (2) the Commission’s elimination of the requirement that a Transmission Provider post security if it collects taxes from an Interconnection Customer. Certain Transmission Providers argued that the risk of a Transmission Provider being unable to pay when an Interconnection Customer was entitled to a refund was too low to justify the great expense of security. The Commission agreed with the Transmission Providers. Because the Interconnection Customer’s expense is equally high and the risk equally low, the Commission should be consistent and eliminate the Interconnection Customer’s security obligation.
In addition, under Order No. 2003, the Interconnection Customer could appeal, protest, seek abatement of, or otherwise protest a Government Authority’s determination that payments made by an Interconnection Customer to a Transmission Provider constitute income that is subject to taxation. In Order No. 2003-A, however, the Commission modified sections 5.17.7 and 5.17.9 to permit the Transmission Provider to decide, in its sole discretion, whether to contest such a determination. This is patently unfair in the instances where the ultimate liability for the Governmental Agency’s determination will be paid by the
Interconnection Customer.
Notwithstanding the arguments made by some Transmission Providers, the risk is not that the Interconnection Customer will somehow become enmeshed in the Transmission Provider’s other tax issues. As the Commission implicitly recognizes in Order No. 2003-A at P 373, it is easy to draft provisions limiting an Interconnection Customer’s participation to those tax matters in which it has a financial stake. The very real risk is that a Transmission Provider with multiple tax matters in controversy would be able to trade off a concession on one matter for relief on another. If given a choice, such Transmission Providers would have a fiduciary obligation to their shareholders to concede tax issues that are fully indemnified, as opposed to issues where there are real dollars at stake. The precise extent to which this goes on may be debatable, but controversies, like other financial disputes, are frequently settled by negotiated trade-offs.
Nor is there any real risk that an Interconnection Customer will force the Transmission Provider needlessly to litigate matters on which there is no real chance of success. Section 5.17.7 provides that Interconnection Customers are obligated to pay for any tax controversies pursued on their behalf. That alone should be sufficient to ensure that an Interconnection Customer will not force the Transmission Provider to undertake frivolous contests and appeals.
The tax provisions contained in Order No. 2003 struck the appropriate balance between the competing interests of an Interconnection Customer, which must have contest rights to protect its significant financial interest, and a Transmission Provider, which seeks to protect the confidentiality of its tax returns and accurately report its income. Accordingly, the Commission should modify Sections 5.17.7 and 5.17.9 to clarify that an Interconnection Customer has the right to contest a determination by a Governmental Authority for which the Interconnection Customer must indemnify the Transmission Provider.