n-01-82.pdf

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Part III - Administrative, Procedural, and Miscellaneous
Expansion of Safe Harbor Provisions Under Notice 88-129
Notice 2001-82
PURPOSE
This notice amplifies and modifies Notice 88-129, 1988-2 C.B. 541, as modified
and amplified by Notice 90-60, 1990-2 C.B. 345. Notice 88-129 provides that a
regulated public utility (utility) will not realize income upon transfers of interties from
qualifying small power producers and qualifying cogenerators (collectively, Qualifying
Facilities), as defined in section 3 of the Federal Power Act, as amended by section 201
of the Public Utilities Regulatory Policies Act of 1978 (PURPA). This notice extends the
safe harbor provisions of Notice 88-129 to include transfers of interties from non-
Qualifying Facilities. The safe harbor also is extended to transactions in which there is
not a long-term power purchase contract between the utility and the power producer but
rather the intertie is transferred pursuant to a long-term interconnection agreement and
in which the intertie is used exclusively to transmit power across the utility’s
transmission grid for sale to consumers or intermediaries.

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BACKGROUND
At the time Notice 88-129 was issued, most generators that were not owned by
regulated public utilities (stand-alone generators) were Qualifying Facilities for
regulatory purposes. As a stand-alone generator, the Qualifying Facility had to be
connected to a utility’s transmission lines in order to move its power to market. PURPA
required that a utility interconnect with a Qualifying Facility for the purpose of allowing
the sale of power produced by the Qualifying Facility. A Qualifying Facility generally
sold its electricity under a long-term power purchase contract to the local utility with
whom it was interconnecting at the utility’s avoided cost. A Qualifying Facility also
arranged in certain cases for the interconnected utility to transmit electricity across its
transmission grid for sale to another utility (wheeling) at that utility’s avoided cost.
Deregulation of the electric power industry has significantly changed the
operation of the industry. Today, few new stand-alone generators are Qualifying
Facilities. The Federal Energy Regulatory Commission (FERC) encouraged the
construction of non-Qualifying Facilities starting in the late 1980's by issuing a number
of orders to individual projects (known in the industry as independent power producers)
approving sales of power at market rates. In addition, the Energy Policy Act of 1992
created a new class of stand-alone generators, called exempt wholesale generators,
that are permitted to sell their power at market rates with FERC approval, and are
exempted from certain utility regulation. Unlike PURPA, the Energy Policy Act has no
requirement that utilities buy electricity from stand-alone generators.

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In 1996, FERC issued Order No. 888 in an effort to ensure that every wholesale
supplier of electricity, including, for example, power marketers and stand-alone
generators, has open access to the national transmission grid. The order requires
regulated utilities to allow stand-alone generators to interconnect to the grid and to file
nondiscriminatory tariffs under which any wholesale supplier can pay to have its
electricity wheeled. Stand-alone generators (including Qualifying Facilities) have
additional outlets for their power today that they did not have in 1988, including sales of
power at auction on regional power exchanges or spot markets and under short and
medium-term contracts to specific customers or to power marketers that trade
electricity. Regulated utilities have many more sources of supply for electricity than in
1988. As a result of these changes, very few utilities enter into long-term power
purchase contracts with stand-alone generators. Electricity produced by stand-alone
generators is more likely today than in 1988 to be wheeled across the transmission grid
of the interconnected utility for sale to consumers or intermediaries rather than to be
sold directly to the interconnected utility.
The new stand-alone generators still need to be interconnected to the
transmission grid in order for a customer to take the power. Therefore, the stand-alone
generator enters into a long-term interconnection agreement with the local utility. The
term of a long-term interconnection agreement may be tied to the period that the stand-
alone generator remains in commercial operation. This agreement may permit
assignment of the agreement by the utility to accommodate future consolidation of local
grids into regional transmission systems that will cover broad regions of the country.

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MODIFICATIONS TO NOTICE 88-129 AND NOTICE 90-60
In light of the above-mentioned changes in the electric power industry, the safe
harbor provisions of Notice 88-129 are modified as follows:
1. The safe harbor provisions are extended to include transfers of interties from
non-Qualifying Facilities. Accordingly, the term “QF transfer” appearing in Notice 88-
129 will be construed as including “qualified transfers” of interties from non-Qualifying
Facilities that meet the other requirements of the safe harbor provisions. Similarly, the
term “Qualifying Facility” for purposes of Notice 88-129 will be construed as including
“stand-alone generators” that are not Qualifying Facilities.
2. The safe harbor provisions also are extended to include transfers of interties
used exclusively or in part to transmit power over the utility’s transmission grid for sale
to consumers or intermediaries, including affiliated intermediaries (wheeling). This safe
harbor only applies to transactions in which the intertie is transferred pursuant to a long-
term interconnection agreement and in which ownership of the electricity wheeled
passes to the purchaser prior to its transmission on the utility’s transmission grid. The
ownership requirement of the preceding sentence is deemed satisfied if title to
electricity wheeled passes to the purchaser at the busbar on the generator’s end of the
intertie. The terms “power purchase contract” and “power supply contract” appearing in
Notice 88-129 will be construed as including interconnection agreements in transactions
in which the intertie is used for wheeling. Accordingly, a long-term interconnection
agreement in lieu of a long-term power purchase contract or power supply contract may
be used to satisfy the safe harbor provisions of Notice 88-129 in such transactions.

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The term “dual-use intertie” appearing in Notice 88-129 will be construed as including
an intertie which may be used to transmit power from a third party for sale to the
Qualifying Facility.
3. Section 6, sentence 4, of Notice 88-129, states, “The cost of property
transferred in a QF transfer must be capitalized by the Qualifying Facility as an
intangible asset and recovered as appropriate.” This sentence is modified to read as
follows: “The cost of property transferred in a QF transfer must be capitalized by the
Qualified Facility as an intangible asset and recovered using the straight-line method
over a useful life of 20 years.”
EFFECT ON OTHER DOCUMENTS
Notice 88-129, as amplified and modified by Notice 90-60, is further amplified
and modified.
EFFECTIVE DATE
This notice applies to transfers of property to regulated public utilities pursuant to
interconnection agreements completed after December 24, 2001, the date this notice is
published in the Bulletin. For transfers of interties occurring on or before December 24,
2001 and meeting the requirements of this notice, taxpayers may request application of
this notice through a request for a private letter ruling (including, in appropriate
circumstances, where the taxpayer’s return for the year of transfer has already been
filed).

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DRAFTING INFORMATION
The principal author of this notice is Gregory N. Doran of the Office of Associate
Chief Counsel (Passthroughs and Special Industries). For further information
regarding this notice contact Mr. Doran at (202) 622-3040 (not a toll-free call).