Entire city qualifies as the utility commission's service area for bond rules

Plain-English summary

A city public utilities commission had generated, transmitted, distributed,
and sold electricity to retail customers throughout the city for more than ten
years. The city planned to use bond proceeds to buy an investor-owned utility's
transmission and distribution assets needed to serve customers in the same
area. At least 95 percent of the acquired project's output would be consumed
within the city. The IRS ruled that the whole city is a qualified service area
under IRC § 141(d)(3)(B)(i) because the commission had continuously provided
the same type of output, electricity, throughout that area for the required
ten-year period. The ruling did not decide whether interest on the acquisition
bonds would be tax-exempt under § 103.

Ruling snapshot

• Question: Is the city's entire geographic area a qualified service area
  for the commission's acquisition of utility output property?
• Outcome: Approved
• Key authorities: IRC §§ 103 and 141(d); Treas. Reg. § 1.141-1(b)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202046004 Third Party Communication: None
Release Date: 11/13/2020 Date of Communication: Not Applicable
Index Number: 141.03-00
Person To Contact:
-------------------------------------------------------- ----------------, ID No. -------------
Telephone Number:
--------------------------------------------- --------------------

------------------------------------------------- Refer Reply To:
---------------------------------- CC:FIP:B05
------------------------------ PLR-104954-20
Date:
August 18, 2020

LEGEND:

Bonds = -------------------------------------------------------------------
----------------------------------------------------------------------------

City = -----------------------------------------------

Commission = --------------------------------------------------------

State = -------------

Utility = ------------------------------------------

a = --

Date = -----------------

Dear ------------:

This is in response to your request for a ruling that the entire geographic area of City is
a “qualified service area” of Commission for purposes of § 141(d) of the Internal
Revenue Code.

Facts and Representations

Commission is City’s public utilities commission. Commission owns and operates
multiple hydroelectric generating plants. For more than 10 years, Commission has
generated, scheduled, purchased, sold, transmitted, and distributed electricity to meet
PLR-104954-20 2

the needs of retail electric customers located throughout the entire geographic area of
City (“Program”), as shown in the maps attached to your ruling request (“Service Area”).

Commission serves ------------of retail electric customers: customers served by
Commission’s hydroelectric generating plants (“Hydro Power”) ---------------------------------

Customers of Hydro Power include all municipal departments of City, as well as
residential and retail commercial customers in Service Area. Hydro Power customers
are dispersed throughout Service Area. Program provides both generation and
transmission/distribution services to Hydro Power customers, and Program bills such
customers for all electricity services. Electricity generated by Commission’s
hydroelectric generating plants is transmitted through Commission-owned and operated
transmission lines. The transmission facilities also interconnect with Utility’s
transmission and distribution systems to deliver Commission-generated or purchased
power to customers of Commission in Service Area. To provide distribution service to
most, but not all, of these customers, Commission purchases wholesale distribution
services from Utility.

Utility is an investor-owned electric utility company with a service area located within
State. A franchise agreement between City and Utility grants Utility a non-exclusive
franchise to provide electric service in Service Area. This franchise is terminable by
City and imposes no limitations on Commission’s ability to serve retail customers.

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Utility owns and operates most of the electric distribution infrastructure within Service
Area as well as nearly all the high-voltage transmission lines entering Service Area.
Program serves Hydro Power customers in Service Area through City-owned
distribution networks at City-owned properties, through City or Commission-owned and
operated distribution facilities, and through Utility-owned distribution lines.

City wants to purchase substantially all of Utility’s electric distribution and transmission
assets needed to provide retail electric service to all electricity customers in Service
Area (the “Project”). The acquired assets would become part of Program. The Project
does not include any generation facilities of Utility or any assets not necessary to
provide electricity within Service Area.
PLR-104954-20 3

City proposes to pay the purchase price of its acquisition of Project with proceeds of the
Bonds. City will complete its purchase of Project after Date. Ninety-five percent or
more of the output from the Project will be consumed within Service Area.

Law and Analysis

Section 103(a) provides that gross income does not include interest on any state or
local bond. Section 103(b) provides, however, that § 103(a) shall not apply to any
private activity bond which is not a qualified bond (within the meaning of § 141).

Section 141(d)(1) provides that the term “private activity bond” includes any bond issued
as part of an issue if the amount of the proceeds of the issue which are to be used
(directly or indirectly) for the acquisition by a governmental unit of nongovernmental
output property exceeds the lesser of five percent of such proceeds or $5,000,000.

Section 141(d)(2) defines “nongovernmental output property” generally as any property
(or interest therein) which before such acquisition was used (or held for use) by a
person other than a governmental unit in connection with an output facility (within the
meaning of § 141(b)(4)) (other than a facility for the furnishing of water).

Section 141(d)(3)(A) provides that nongovernmental output property shall not include
any property which is to be used in connection with an output facility 95 percent or more
of the output of which will be consumed in (i) a qualified service area of the
governmental unit acquiring the property, or (ii) a qualified annexed area of such unit.

Section 141(d)(3)(B)(i) defines “qualified service area,” with respect to the governmental
unit acquiring the property, to mean any area throughout which such unit provided (at all
times during the ten-year period ending on the date such property is acquired by such
unit) output of the same type as the output to be provided by such property.

Section 1.141-1(b) of the Income Tax Regulations defines “output facility” to mean
electric and gas generation, transmission, distribution, and related facilities, and water
collection, storage, and distribution facilities.

For Service Area to be treated as a “qualified service area” within the meaning of
§ 141(d)(3)(B)(i), the requirements as applied to this case are that, throughout Service
Area, Commission provided output of the same type as the output to be provided by
Project at all times for the preceding ten years. These requirements are satisfied. The
type of output to be provided by Project is the same type of output as Commission has
provided within Service Area: electricity. Further, Commission has provided electricity
throughout Service Area at all times for the preceding ten years.
PLR-104954-20 4

Conclusion

Based on the facts represented, we conclude that Service Area is a qualified service
area of Commission within the meaning of § 141(d)(3)(B)(i).

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any transaction or item discussed or referenced in this letter,
including whether the interest on the Bonds will be tax-exempt under § 103. This ruling
is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not
be used or cited as precedent.

In accordance with a Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

The ruling contained in this letter is based upon information and representations
submitted by Commission and accompanied by penalty of perjury statements executed
by the appropriate parties. While this office has not verified any of the materials
submitted in support of the request for a ruling, it is subject to verification upon
examination.

                                Sincerely,

                                Associate Chief Counsel
                                (Financial Institutions and Products)




                                By:    ________________________
                                       Johanna Som de Cerff
                                       Senior Technician Reviewer
                                       Branch 5

cc: