Supreme Court of Illinois Says Courts Can Decide ARES Rate Disputes

Courts – not the ICC – have jurisdiction over rate cases involving an ARES, said the Supreme Court of Illinois.[1] In a unanimous opinion written by Chief Justice Karmeier, the Court in December answered the Seventh Circuit’s certified question whether rate claims against ARESs are under the jurisdiction of the ICC or the courts under the Illinois Public Utilities Act.

The case arose when a residential electricity customer signed up to receive her power from an alternative retail electric supplier (“ARES”) instead of her local public utility. She was attracted to low teaser rates that were to apply during her first month of service. The ARES’ advertisement warned that the “market based variable rate” that was to apply after the first month could be higher than the public utilities’ rates, however the ARES never applied the promotional rate to the first month. Each month the ratepayer paid around three times the rates of her local utility. The ratepayer filed a federal court class-action suit against the ARES in the Northern District of Illinois under diversity jurisdiction, bringing common-law claims as well as claims under the Illinois Consumer Fraud and Deceptive Business Practices Act. The ARES filed a motion to dismiss, claiming that the court did not have jurisdiction to hear the case because rate disputes are in the exclusive jurisdiction of the Illinois Commerce Commission (“ICC”).

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IRS Issus New Guidance on the Beginning of Construction Safe Harbor For Renewable Energy Projects

The IRS recently issued Notice 2017-4 (the “Notice”) which makes two important changes to its “beginning of construction” rules for taxpayers seeking to take advantage of the section 45 renewable electricity production tax credit (PTC) for wind and other renewable energy facilities including geothermal, biomass, landfill gas and certain hydropower and marine hydrokinetic energy projects. Under prior IRS guidance, including Notice 2016-31 discussed in our blog post here, taxpayers have two ways to establish that they started construction. They can either show that they began physical construction of a significant nature (the “Physical Work Test”), or incurred at least 5% of the total cost of the eligible facility (the “5% Safe Harbor”). However, once construction has begun or cost have been paid or incurred, the IRS requires taxpayers to make continuous progress towards completion to satisfy both the Physical Work Test and the 5% Safe Harbor (“Continuous Construction Requirement”). Taxpayers are deemed to satisfy the Continuous Construction Test provided they began construction on the facility prior to January 1, 2015, and place it in service prior to January 1, 2017 (the “Continuity Safe Harbor”).

The Notice now permits taxpayers to fall within the Continuity Safe Harbor provided that they place the facility in service by the later of (1) a calendar year that is no more than four calendar years after the construction of the facility began or (2) December 31, 2018. This provides additional time for developers that have satisfied the Physical Work Test or 5% Safe Harbor to complete construction and place the facility in service without having to demonstrate that the Continuous Construction Requirement was satisfied. For example, if construction begins on January 15, 2013, and the facility is placed in service by December 31, 2018, the facility will meet the Continuity Safe Harbor.

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IRS Revokes Favorable PLR Concerning Ability of Tribe to Pass ITCs to Lessee in Master-Tenant Structure

In recently released Private Letter Ruling 2016-40-010 (the new ruling), the IRS prospectively revoked PLR 2013-10-001 (the original ruling), concluding that a Native American tribe may not elect to pass investment tax credits (ITC) associated with renewable energy assets on reservation lands to a taxable entity under Section 50(d)(5) of the Tax Code.  [Click here for our discussion of PLR 2013-10-001.]

The original ruling describes the Tribe’s plans to place in service renewable energy assets on reservation lands.  The assets will constitute “Section 48 energy property” that qualifies for the ITC.  The renewable energy assets will generate electricity that will be sold to third parties and used by the Tribe in its governmental activities.  The Tribe will maintain ownership of the renewable assets at all times, but will lease the assets to a lessee, during which time the lessee will operate the assets and will be entitled to the net revenues derived from the operation of the assets, including the net revenue derived from the sale of electricity to third party utilities and the Tribe.  At the conclusion of the lease, the Tribe will assume control over the renewable energy assets.  The Tribe and the lessee desired to make the election under Section 50(d)(5) of the Tax Code to allow the ITCs associated with the renewable energy assets to be passed-through the lease to the lessee.  While not stated in the original ruling, it can be assumed that the Tribe and lessee were contemplating a standard “master-tenant” or “lease pass-through” structure, in which the lessor and lessee agree that the lessee will claim the ITC, with the lease terminating shortly after the five-year ITC recapture period.

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IRS Issues Proposed Rules on Income Inclusion under Section 50(d)(5)

The IRS just published long-awaited temporary regulations under section 1.50-1T governing the section 50(d)(5) income inclusion rules. These rules apply to lessees of investment credit property when the lessor elects to treat the lessee as having acquired the property for its fair market value and pass through the investment tax credit available under section 46 (which includes the section 48 energy credit (“ITC”)). When the lessor makes that election, the lessee must include in gross income 50% of the amount of the ITC ratably over the 5-year MACRS period for energy property in lieu of the basis adjustment that the lessor would have been required to make had it not made the pass-through election. The ITC amount included in gross income is determined regardless of the lessee’s income tax situation, and the ratable income inclusion begins on the date that the property is placed in service.

The temporary regulations provide that when the lessee is a partnership, the income is taken by the “ultimate credit claimant,” which is the partner(s) that claimed the tax credit and cannot be treated as an item of partnership income. Because this income goes to the partners proportionally based on their respective share of the ITC rather than the partnership, partners are not permitted to increase their tax basis in the partnership as a result of the Section 50(d) income inclusion and claim a loss on the disposition of their interest. The temporary regulations also apply to shareholders in S corporations.

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New Hampshire Doubles Solar Net Metering Cap

New Hampshire has doubled the caps on energy that both residential and commercial customer-generators of rooftop solar can sell back to the grid, raising the cap from 50 MW to 100 MW. The governor signed H.B. 1116, which was introduced this past March, into law on May 2, 2016.

Net metering programs allow homeowners and other solar customers to sell excess power they generate back to the electrical grid in exchange for a credit. Each New Hampshire utility has a cap on the amount of large-scale projects that can receive credits in their area. Eversource Energy, a company which bills itself as New England’s largest energy delivery company, announced in January that it had reached the state regulated limit on the amount of customer generation under New Hampshire’s net metering laws.

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