Is a not-for-profit independent system operator that controls the bulk electric grid and runs spot markets -- but does not own the grid or buy or sell electricity -- subject to section 186, section 186-a, or the Article 9-A franchise tax?

Plain-English summary

The New York Independent System Operator (NYISO) is a Type B not-for-profit created in the electric-industry restructuring of the late 1990s. It has operational control of New York's bulk electric transmission grid, administers spot markets for energy and capacity, and maintains reliability standards -- but it does not own the grid, transmit power, take title to power, bear the risk of energy loss, buy or sell electricity for its own account, or set wholesale/retail prices. It asked whether it is subject to section 186 (electric companies), section 186-a (utility gross income), or Article 9-A.

The Department held NYISO owes none of these:

• Section 186. That tax falls on a corporation supplying electricity. Because NYISO does not own the grid, transmit power, take title, or buy/sell electricity, it is not supplying electricity -- so no section 186 tax.
• Section 186-a. That tax falls on a person who sells electricity or furnishes electric service. NYISO does neither, so no section 186-a tax.
• Article 9-A. Not being a section 186 corporation, NYISO would default to Article 9-A -- but as a corporation organized other than for profit, without stock, operated on a nonprofit basis with no inurement to officers/directors/members, it is exempt under 20 NYCRR 1-3.4(b)(6). And if the IRS recognizes it under section 501(c)(3) or 501(c)(4), it is presumed exempt from Article 9-A.

What this means for you

Controlling and operating a market is not "supplying electricity"

A grid operator that manages the system and the markets, without owning the grid or trading power, is not a taxable electric utility under section 186 or 186-a.

The taxable acts are ownership, transmission, title, and sale

The opinion turns on what NYISO does not do: own lines, transmit, take title, bear loss risk, buy/sell for its own account, or set prices.

Not-for-profit status provides the Article 9-A exemption

Defaulting into Article 9-A is not the end -- a no-stock, no-inurement not-for-profit is exempt under the regulations, and federal 501(c) recognition creates a presumption of exemption.

Common questions

Q: Is the independent system operator a taxable electric utility?
A: No. Because it does not own the grid or buy or sell electricity, it is not supplying electricity (section 186) or furnishing electric service (section 186-a).

Q: Does it owe Article 9-A franchise tax?
A: No. As a not-for-profit with no stock and no inurement it is exempt under 20 NYCRR 1-3.4(b)(6).

Q: What if the IRS grants it 501(c) status?
A: Then it is presumed exempt from Article 9-A; an IRS denial would ordinarily be followed too.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 186 (franchise tax on electric light, heat and power companies)
- Tax Law section 186-a (gross income tax on utilities)
- Tax Law section 209.1 and 209.4 (Article 9-A; corporation taxable under section 186 not subject to 9-A)
- 20 NYCRR 1-3.4(b)(6) (Article 9-A exemption for not-for-profit corporations)
- IRC section 501(c)(3) and 501(c)(4) (federal exempt organizations)
- The New York Independent System Operator, Inc., TSB-A-00(1)C (Jan. 14, 2000)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a00_1c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(1)C
Corporation Tax
January 14, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C990922A

On September 22, 1999, a Petition for Advisory Opinion was received from The New York
Independent System Operator, Inc., 3890 Carman Road, Schenectady, New York 12303.
The issues raised by Petitioner, The New York Independent System Operator, Inc., are:
1. Whether a not-for-profit corporation no part of the net proceeds of which inure to
the benefit of shareholders or individuals or a not-for-profit corporation recognized
as an exempt organization under section 501(c) of the Internal Revenue Code ("IRC")
is exempt from (a) the gross receipts tax imposed on the furnishing of utility services
under section 186-a of Article 9 of the Tax Law, (b) the franchise tax on electric or
steam heating, lighting and power companies imposed under section 186 of Article
9 of the Tax Law, and (c) the franchise tax on business corporations imposed under
Article 9-A of the Tax Law.
2. Whether a not-for-profit corporation organized to supervise the operation of New
York State's bulk electric transmission system, administer competitive spot markets,
maintain system reliability and compatibility standards, monitor market power and
take actions to mitigate market power abuses is engaged in an activity subject to (a)
the gross receipts tax imposed on the furnishing of utility services under section 186­
a of Article 9 of the Tax Law, or (b) the franchise tax on electric or steam heating,
lighting and power companies imposed under section 186 of Article 9 of the Tax
Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a Type B not-for-profit corporation created in response to New York State and
federal regulatory initiatives: (i) to promote competition in the supply of electric energy; (ii) to assure
continued reliable, safe and secure operation of the New York State bulk electric transmission
system in a competitive environment; (iii) to administer economically efficient spot markets for the
wholesale trading of electric energy, capacity and related ancillary services; and (iv) to reduce the
reliance upon government regulatory intervention to protect the interests of consumers and the
general public.
Originally incorporated in 1997, Petitioner indicated that it anticipated taking up its
responsibilities on or about October 12, 1999, after more than five years of collaborative industry,
regulatory and public efforts, under the aegis of the New York State Public Service commission
("PSC") and the Federal Energy Regulatory Commission ("FERC"). Petitioner states that as an

-2­
TSB-A-00(1)C
Corporation Tax
January 14, 2000

independent and disinterested entity, it will aid in the transformation of the electric industry in New
York from a monopoly – dominated by vertically integrated, investor owned utilities – to a
competitive market for the benefit of the general public. In a fully competitive market, generators
will compete to supply wholesale electric energy and capacity and energy service companies will
compete to provide retail electric services to end users. Only transmission and distribution systems
will remain as regulated monopolies, but their owners, operating through affiliates, will be free to
compete in the generation and energy service sectors of the marketplace.
For the public to benefit fully from competition, the bulk electricity transmission system must
be operated on an economically sound, nondiscriminatory basis, while remaining safe, reliable and
secure. At the same time, spot markets for electric energy need to be operated efficiently and in a
nondiscriminatory manner, both to facilitate the operation of a fully competitive market and to
provide the proper economic signals for the dispatch of electric energy over the bulk electric
transmission system. Petitioner states that by accepting responsibility for operational control of the
bulk electric transmission system and administration of spot markets for electricity, it will help to
assure that these functions are conducted in an independent, competitively neutral and fully
responsible manner, thereby fostering a competitive market and reducing the regulatory burdens that
would otherwise fall upon the PSC and the FERC.
Background presented by Petitioner
Most retail electric service in New York State is provided by a group of investor owned
utilities ("IOUs"), the Long Island Power Authority ("LIPA") and the Power Authority of the State
of New York, collectively referred to as the New York Power Pool ("NYPP").1 Hitherto, each of the
IOUs was the exclusive provider of retail electric service of all kinds within its franchise area. Each
of them remains the dominant retail seller of electric energy and the exclusive retail distribution
company in its territory. Each of the IOUs is required, moreover, to provide retail electric service
(that is, electric energy and related services other than distribution) to all members of the general
public within its respective franchise area as the provider of last resort. In addition to being
regulated by the PSC with respect to retail electric services, safety, reliability and security, the IOUs
have been regulated at the wholesale level by the FERC. Generally, the FERC's jurisdiction extends
to the wholesale sale and transmission of electric energy in interstate commerce.

1

The NYPP is composed of the eight major electric transmission and distribution
companies in New York State, including six IOUs – Central Hudson Gas and Electric
Corporation, Consolidated Edison Company of New York Incorporated, New York State Electric
and Gas Corporation, Niagara Mohawk Power Corporation, Orange and Rockland Utilities
Incorporated, and Rochester Electric and Gas Corporation – LIPA (in part successor to the Long
Island Lighting Company which was once an IOU) and the Power Authority of the State of New
York. Until recently, the six IOUs and the Long Island Lighting Company were the principal
privately owned generators in New York.

-3­
TSB-A-00(1)C
Corporation Tax
January 14, 2000

The IOUs have historically discharged their retail electric service responsibilities by owning
and operating vertically integrated systems, including facilities that provide: (i) generation capacity
and energy; (ii) high voltage transmission service; (iii) lower voltage distribution service; and (iv)
retail billing and collection services. The IOUs' right to be the sole provider of retail electric service
within their respective geographic areas, together with the vertical integration of their generation,
transmission, distribution and billing operations, created opportunities for the IOUs to protect their
capital investment in generation facilities by closing their transmission and distribution systems to
alternative suppliers of electricity. Recognizing the potential for competition in the electric industry
and the burden that monopoly, even regulated monopoly, places upon the general economy, the PSC
in New York and the FERC throughout the country have since the early 1990s moved aggressively
to restructure the electric industry.2
The most significant aspects of the restructuring in New York include: (i) the breakup of
monopoly control of generating capacity and energy as a result of mandatory divestiture by the IOUs
of their generation facilities; (ii) the requirement, under FERC Order No. 888, that the IOUs provide
open access to their transmission systems; and (iii) the creation of spot markets in which generators
and end users will be able to sell and purchase competitively priced bulk electricity, capacity and
ancillary services. To assure that access to the bulk transmission system will be fully open and
nondiscriminatory and that the transmission system will continue to be operated on a safe, reliable
and secure basis, however, the FERC and the PSC have insisted that an independent body be formed
to be the operator. It was to fill this role that Petitioner was created.
Petitioner's functions in the reorganized market will be: (i) to assure maintenance of the
reliability, safety and security of the entire New York State bulk electric transmission system; (ii)
to assure open and non-discriminatory access to all eligible market participants desiring to use New
York State's bulk electric transmission system; and (iii) to administer markets for electric capacity,
energy and ancillary services in a non-discriminatory, economically efficient manner. Independent
disinterested performance of these functions is needed to assure that the benefits of competition are
realized by the public without diminution or impairment of safety, reliability and security. While
Petitioner will have operational control over the power grid and will administer markets for energy,
capacity and ancillary services, it will have no financial stake in either beyond the recovery of actual
costs through rates promulgated under FERC approved tariffs.
Petitioner, a not-for-profit corporation governed by a self-perpetuating Board of Directors
comprised of 10 individuals, unaffiliated with any transmission provider or other market participant.
Board actions require the affirmative vote of six Board members. Board members, officers and

2

Since FERC Order No. 888 was issued in April 1994, independent systems operators
have been formed to operate in at least 24 other states. Independent system operators include the
California Independent System Operator, Midwest Independent System Operator, Independent
System Operator New England and PJM Interconnection, LLC.

-4­
TSB-A-00(1)C
Corporation Tax
January 14, 2000

employees are governed by a strict Code of Conduct precluding relationships with (including
personal investments in) market participants. Petitioner states that this governance structure ensures
that it will operate the New York transmission system in an independent and objective manner.
To facilitate open, non-discriminatory access to the New York bulk transmission grid, the
owners of the bulk transmission system will cede to Petitioner complete and independent authority
to direct transmission load over the bulk transmission grid. While the transmission owners will
maintain ownership and physical control of power grid assets, Petitioner's operational control of
them will prevent transmission owners that also own generation facilities and/or participate in the
wholesale market as energy service companies, from using the transmission system in a manner that
would favor their own affiliates. This arrangement will further preclude operation of the
transmission grid by entities that have a financial interest in operation of the system or outcome of
transactions that use the system. Thus, as an independent body with full operational control,
Petitioner will provide all market participants with fair access to the New York transmission grid,
thereby furthering open competition, while at the same time assuring that the transmission grid is
operated in a manner that preserves safety, reliability and security of New York's electric energy
supply system.
Because electric energy cannot be stored, but must be used as it is being generated, the
operation of the market must be closely linked to the operation of the transmission system.
Petitioner will provide a mechanism for the submission and selection of energy bids on a daily and
hourly basis to supply New York State's electric energy requirements.
While Petitioner will facilitate the centralized market, it will neither receive a financial
benefit nor bear any risk of financial loss from the transactions that it oversees. Petitioner will not
trade energy, capacity or ancillary services for its own account. It will merely act as the
administrator of a market for those services. In this capacity, Petitioner states that it will be
providing market participants with a reliable mechanism to match buyers and sellers, thereby
enhancing competition.
Petitioner will not, among other things: (i) own the power grid or transmission lines; (ii)
transmit power; (iii) take title to power transferred over the grid; (iv) bear the risk of loss of energy
on the power grid; (v) buy or sell bulk electricity for its own account; or (vi) set wholesale or retail
prices.
Under the Federal Power Act ("FPA") FERC has exclusive jurisdiction over electricity that
is either transmitted or sold at wholesale in interstate commerce. The FERC also has exclusive
jurisdiction over "retail wheeling" in interstate commerce (i.e., rates, terms and conditions of
unbundled transmission of electricity in interstate commerce from a public utility to end users).
FERC has no jurisdiction, however, over: (i) facilities generating electricity; (ii) facilities used in
local distribution or transmission of electricity in intrastate commerce; and (iii) retail sale of
electricity; and (iv) facilities that consume all the electricity generated or transmitted.

-5­
TSB-A-00(1)C
Corporation Tax
January 14, 2000

FERC will have jurisdiction over Petitioner so long as: (i) Petitioner acts only in relation to
operation of transmission facilities used to deliver electricity to or among wholesalers or from
wholesalers to retailers; and (ii) electricity transmitted in New York originates in another state or is
co-mingled with electricity from other states. Petitioner states that while the PSC was instrumental
in the formation of Petitioner, and has a continuing interest in its operation, the PSC does not have
direct supervisory authority, but does retain limited incidental supervisory authority consistent with
the FPA. For example, while the FPA requires that utilities obtain FERC approval prior to incurring
short term indebtedness (defined as indebtedness that matures in less than twelve months), the FPA
authorizes states to enact legislation that requires utilities to obtain approval from appropriate state
agencies prior to incurring long term indebtedness. Consistent with the FPA, section 69 of the New
York State Public Service Law requires electric companies to obtain approval from the PSC prior
to incurring long term indebtedness. In accord with this provision, Petitioner on August 26, 1999,
requested the PSC to approve its long term credit facilities.
Petitioner states that it is a Type B not-for-profit corporation, without stock or shares,
performing functions that will reduce the burdens of government and, pursuant to its organizational
documents (i.e., Certificate of Incorporation and By-Laws) and relevant provisions of the Not-ForProfit Corporation Law, no part of its net earnings, if any, may inure to the benefit of private
shareholders or individuals.
Petitioner has applied for recognition as an exempt organization under section 501(c)(3) of
the Internal Revenue Code ("IRC").3 In order to be recognized as an exempt organization, Petitioner

3

In its application to the Internal Revenue Service for recognition as an exempt
organization under section 501(c)(3) of the IRC, Petitioner emphasized that it, as well as
independent system operators collectively, lessen the burden on the FERC and other state
regulatory agencies, like the PSC. Examples cited by Petitioner include:
•

Petitioner's responsibility to administer the spot market and maintain open and
nondiscriminatory access to the grid, thus permitting the competitive market to function
and the PSC to reduce substantially its rate regulation in favor of reliance upon the market
to protect the consuming public.

•

Petitioner's role in identifying and mitigating abuses of market power and sanctioning
market participants who use their market power to exert a discriminatory influence over
electric service.

•

ISOs' drafting, approving and implementation of intrastate, interstate, and international
transmission grid reliability standards.

•

ISOs' implementation of FERC promulgated transmission grid compatibility regulations.

-6­
TSB-A-00(1)C
Corporation Tax
January 14, 2000

must demonstrate that "no part of the net earnings of the corporation inure to the benefit of any
private shareholder or individual" and that it will be operated for a charitable purpose, in this case,
Petitioner believes that it is lessening the burden of government. If the Internal Revenue Service
denies Petitioner's application for such exemption, Petitioner will immediately file an application
for recognition as an exempt organization under section 501(c)(4) of the IRC. The case for
exemption under such section 501(c)(4) would be premised on the somewhat less rigorous standard
that not-for-profit organizations "organized and operated exclusively for the promotion of social
welfare are exempt." An organization is "organized and operated exclusively for the promotion of
social welfare, if it is primarily engaged in promoting in some way, the common good and general
welfare of the people of the community." Treas. Reg. 1.501(c)(4)-1 (a)(2). Petitioner states that the
Internal Revenue Service has held that organizations are entitled to recognition under section
501(c)(4) where the organization is operated for the benefit of the community and the organization's
primary activity is not a business activity conducted by for-profit entities.
Discussion
Section 209.1 of Article 9-A of the Tax Law imposes an annual franchise tax on domestic
or foreign corporations for the privilege of exercising a corporate franchise, doing business,
employing capital, owning or leasing property in a corporate or organized capacity, or maintaining
an office in New York State. Section 209.4 of the Tax Law, provides that a corporation liable for
tax under section 186 of Article 9 of the Tax Law is not subject to tax under Article 9-A of the Tax
Law.
To determine the classification and proper taxability of a corporation under either Article 9-A
or section 186 of Article 9, an examination of the nature of the corporation's activities is necessary,
regardless of the purposes for which the corporation was organized. See Matter of McAllister Bros.,
Inc. v Bates, 272 AD 511, 517. Ordinarily, a corporation is deemed to be principally engaged in the
activity from which more than 50 percent of its receipts are derived. See, e.g., Re Joseph Bucciero
Contracting Inc., Adv Op St Tax Commn, July 23, 1981, TSB-A-81(5)C.
Section 186 of the Tax Law imposes a franchise tax upon every corporation, joint-stock
company or association formed for or principally engaged in the business of supplying electricity,
for the privilege of exercising its corporate franchise or carrying on its business in such corporate
or organized capacity in this state.
Section 186-a of the Tax Law imposes an excise tax on the furnishing of utility services that
is equal to three and one-quarter percent from October 1, 1998 through December 31, 1999 (three

•

ISOs' facilitation of wheeling of bulk electricity pursuant to the OATT Tariff without
applications to the FERC.

-7­
TSB-A-00(1)C
Corporation Tax
January 14, 2000

and one-half percent prior to October 1, 1998 and two and one-half percent on and after January 1,
2000) of the gross income of a utility that is subject to the supervision of the PSC or the gross
operating income of every other utility doing business in New York State. For purposes of section
186-a, a "utility" includes a person subject to the supervision of the PSC and every person (whether
or not such person is subject to such supervision) who sells electricity or furnishes electric service,
regardless of whether such activities are the main business of such person or are only incidental
thereto. The word "person" is defined in section 186-a.2(b) of the Tax Law and includes
corporations, companies, associations, joint-stock companies or associations, partnerships and LLCs.
The tax imposed under section 186-a of the Tax Law is imposed in addition to the franchise tax
imposed under Article 9-A or under section 186 of Article 9 of the Tax Law.
In this case, Petitioner will have operational control of the bulk electric transmission system,
be responsible for the administration of markets for electric energy, capacity and ancillary services,
implement system reliability and compatibility standards, and monitor and mitigate market power
and sanctioning of market power abuses. However, Petitioner will not: (1) own the power grid or
transmission lines, (2) transmit power, (3) take title to power transferred over the grid, (4) bear the
risk of loss of energy on the power grid, (5) buy or sell bulk electricity for its own account, or (6) set
wholesale or retail prices. Under these circumstances, Petitioner is not supplying electricity pursuant
to section 186 of the Tax Law, and is not subject to the tax imposed under such section 186. Further,
Petitioner is not selling electricity or furnishing electric service pursuant to section 186-a of the Tax
Law, and is not subject to the tax imposed under such section 186-a.
Since Petitioner is not subject to the franchise tax imposed under section 186 of the Tax Law,
Petitioner would be subject to the franchise tax imposed on general business corporations under
Article 9-A of the Tax Law, unless it is exempt pursuant to section 1-3.4(b)(6) of the Business
Corporation Franchise Tax Regulations ("Article 9-A Regulations") which provides an exemption
for
corporations organized other than for profit which do not have stock or shares or
certificates for stock or for shares and which are operated on a nonprofit basis no part
of the net earnings of which inures to the benefit of any officer, director, or member,
including Not-for -Profit Corporations and Religious Corporations.
(i) A corporation organized other than for profit, as described in this
paragraph, which is exempt from Federal income taxation pursuant to subsection (a)
of section 501 of the Internal Revenue Code, will be presumed to be exempt from tax
under article 9-A.
(ii) The determination of the Internal Revenue Service, denying or revoking
exemption from Federal taxation under the Internal Revenue Code, will ordinarily
be followed.

-8­
TSB-A-00(1)C
Corporation Tax
January 14, 2000

Accordingly, if the Internal Revenue Service determines that Petitioner is a corporation that
is exempt from federal income taxation pursuant to section 501(a) of the IRC, under either section
501(c)(3) or (4) of the IRC, Petitioner would be presumed to be exempt from taxation under Article
9-A of the Tax Law pursuant to section 1-3.4(b)(6) of the Article 9-A Regulations. However, if the
Internal Revenue Service determines that Petitioner is not exempt from federal taxation under the
IRC, Petitioner, may be exempt from the franchise tax imposed under Article 9-A of the Tax Law.
Based on the facts presented herein, Petitioner is a not-for-profit corporation which does not have
stock or shares or certificates for stock or for shares, and it is assumed that, pursuant to its
organizational documents, it is operated on a nonprofit basis no part of the net earnings of which
inures to the benefit of any officer, director, or member. Therefore, Petitioner will meet the
requirements of section 1-3.4(b)(6) of the Article 9-A Regulations, in which case, Petitioner will
be exempt from the franchise tax imposed under Article 9-A of the Tax Law.
Summary
Issue 1. Petitioner's operations, as described herein, will not constitute a business that is taxable
under sections 186 and 186-a of Article 9 of the Tax Law, regardless of whether it is recognized as
an exempt organization under section 501(c) of the IRC. Further, based on the facts presented,
Petitioner, pursuant to section 1-3.4(b)(6) of the Article 9-A Regulations, will not be subject to the
tax imposed under Article 9-A of the Tax Law.
Issue 2. As stated above, Petitioner's operations, as described herein, will not constitute a business
that is taxable under section 186 and 186-a of Article 9 of the Tax Law.

DATED: January 14, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.