Are an independent power producer's receipts for maintaining electric generating capacity taxable as gross operating income under section 186-a?

Plain-English summary

NRG Energy, Inc., an independent power producer operating plants in New York, earned revenue both from selling electricity (all to resellers) and from selling electric generating capacity. Under NY-ISO rules, Load Serving Entities (LSEs) must buy capacity -- a generator's commitment to maintain capacity available if the grid needs it. NRG asked whether its capacity receipts are gross operating income taxable under section 186-a.

The Department held no:

• NRG's capacity receipts are receipts from furnishing electric service (section 186-a.2(d) reaches both sale of electricity and furnishing electric service).
• But the capacity commitment is a component of the electricity/electric service that the LSEs resell to their customers for ultimate consumption in New York.
• Because NRG furnishes the capacity service to the LSEs for resale -- not for the LSEs' own ultimate consumption -- it is a sale for resale, which section 186-a does not tax.
• Therefore NRG's capacity-agreement receipts do not constitute gross operating income under section 186-a.

What this means for you

Capacity payments are electric service -- but sold for resale

For an independent power producer, payments to maintain generating capacity count as furnishing electric service. That alone would look taxable, but section 186-a only reaches energy sold for ultimate consumption.

Resale to LSEs takes it out of the tax

Because the capacity is a component of what the LSEs resell to their own customers, the producer's sale to the LSEs is a sale for resale -- excluded from the section 186-a tax. The tax lands further down the chain, when the energy reaches end users.

Identify the customer's role

The key fact is that the buyer (the LSE) is a reseller, not the ultimate consumer. Where energy or capacity is bought for resale, the upstream receipts are not section 186-a gross operating income.

Common questions

Q: Are electric capacity payments receipts from furnishing electric service?
A: Yes, but that does not by itself make them taxable under section 186-a.

Q: Why are the producer's capacity receipts not gross operating income?
A: Because the capacity is resold by the load serving entities to their customers, so the producer's sale is a sale for resale, not for the buyer's ultimate consumption.

Q: When would such receipts be taxable?
A: The section 186-a tax applies when the energy or service is sold for ultimate consumption or use in New York, not when it is sold for resale.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 186-a (tax on utilities furnishing electricity or electric service)
- Tax Law section 186-a.2(d) (gross operating income; sale or furnishing of electricity for ultimate consumption)
- The New York Independent System Operator, Inc., TSB-A-00(1)C (Jan. 14, 2000)
- NRG Energy, Inc., TSB-A-02(18)C (Nov. 7, 2002)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a02_18c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(18)C
Corporation Tax
November 7, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C020412C

On April 12, 2002, a Petition for Advisory Opinion was received from NRG Energy, Inc.,
901 Marquette Avenue, Suite 2300, Minneapolis, Minnesota 55402.
The issue raised by Petitioner, NRG Energy, Inc., is whether its receipts for maintaining
electric generating capacity are taxable under section 186-a of the Tax Law as “gross operating
income” from the sale of electricity or the furnishing of electric service.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is an independent power producer operating electric power plants in New York
City and in upstate New York. Petitioner’s revenues from sources in New York State are derived
primarily in two ways: (1) the sale of electricity and (2) the sale of electric generating capacity. All
of Petitioner’s sales of electricity in New York are to resellers.
The New York regional power market is subject to supervision by the New York
Independent Systems Operator (NY-ISO). The NY-ISO must deal with the physical fact that, for
the electric grid to function properly, electricity supply must equal electricity demand at every
instant in time. Because electricity demand by all but the largest consumers cannot be readily
regulated, the NY-ISO attempts to match supply and demand by regulating the persons who buy the
electricity for resale to end-users, such as public utilities or unregulated electricity marketers.
Collectively, these resellers are called Load Serving Entities (LSEs). Under the NY-ISO’s rules,
an LSE must not only purchase the electricity which it will resell to its customers but must also
purchase an amount of electric capacity from businesses which generate electricity (“electricity
generators”) based upon the anticipated demand for electricity by the customers who have contracted
with that LSE to supply them with electricity. The supply of electric capacity represents the
commitment by an electricity generator to maintain the capacity needed to supply a certain amount
of electricity to the market if the NY-ISO deems that such electricity is needed to meet demand.
Petitioner typically enters into capacity agreements with LSEs whereby Petitioner will
commit to maintain a certain amount of electric generating capacity to satisfy the LSEs’ commitment
to the NY-ISO to purchase capacity. The capacity agreement does not commit Petitioner to sell any
electricity to any particular power reseller or at any particular price. To purchase electricity, LSEs
can either negotiate bilaterally with electric generators or they can participate in the NY-ISO’s
auction.

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Corporation Tax
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Petitioner states the following are representative provisions of a typical capacity agreement:
1. Petitioner agrees to “maintain the electric generating capability of the [plant] at
specified levels ... and whereby, during certain periods, [the LSE] will purchase from
[the plant and the plant] will sell to [the LSE], specified amounts of Installed
Capacity.” The term “Installed Capacity” is defined to mean electric generating
capacity of the plants that satisfies all the requirements applicable to installed
capacity imposed on the LSE by the NY-ISO or its predecessor, the New York
Power Pool.
2. During the term of the agreement, Petitioner agrees to use commercially
reasonable efforts to maintain the electric generating capability of the plants at
specified levels.
3. The LSE remits a Capacity Payment on a monthly basis to each power plant
equivalent to the annual rate of $X per kilowatt of Installed Capacity. In the event
the plants do not maintain adequate capacity, the owner of the plant is required to
submit a Capacity Deficiency Payment to the LSE.
Applicable Law
Section 186-a.2(d) of the Tax Law provides that the words “gross operating income” mean
and include:
receipts received in or by reason of any sale, conditional or otherwise, made
for ultimate consumption or use by the purchaser of gas, electricity, steam, water or
refrigeration, or in or by reason of the furnishing for such consumption or use of gas,
electric, steam, water or refrigerator service in this state, including cash, credits and
property of any kind or nature, without any deduction therefrom on account of the
cost of the property sold, the cost of materials used, labor or services or other costs,
interest or discount paid, or any other expenses whatsoever. . . .
Opinion
The NY-ISO is a 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

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Corporation Tax
November 7, 2002

general public. As an independent and disinterested entity, the NY-ISO is aiding in the
transformation of the electric industry in New York from a monopoly 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. For the public to benefit fully from competition, the bulk electricity
transmission system (the electric grid) 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 electric grid. The NY-ISO is responsible for the operational
control of the electric grid and the administration of the spot markets for electricity. (The New York
Independent System Operator, Inc., Adv Op Comm T&F, January 14, 2000, TSB-A-00(1)C)
In order for the electric grid to function properly, electricity supply must equal electricity
demand at every instant in time. Therefore, the NY-ISO attempts to match supply and demand by
regulating the LSEs, the resellers of electricity. In addition to purchasing the electricity that it will
sell to its customers, an LSE must also purchase an amount of electric capacity from electricity
generators as required by the NY-ISO. The supply of electric capacity represents the commitment
by an electricity generator to maintain the capacity needed to supply a certain amount of electricity
to the market if the NY-ISO deems that such electricity is needed to meet demand.
Petitioner, as an electricity generator, enters into capacity agreements with the LSEs whereby
Petitioner commits to maintain a certain level of electric generating capacity necessary to meet the
LSEs’ anticipated demand for electricity by the market, based on requirements imposed on the LSEs
by the NY-ISO. This commitment is necessary in order to fulfill the NY-ISO’s responsibility for
the assurance of safe and reliable electric service in the New York regional power market at all
times.
Thus, Petitioner’s receipts for maintaining electric generating capacity, pursuant to its
capacity agreements with the LSEs, are directly connected to the furnishing of electricity. The
definition of gross operating income under section 186-a.2(d) of the Tax Law includes receipts from
the furnishing of electric service for ultimate consumption in New York State, as well as receipts
from the sale of electricity for such consumption. Although Petitioner’s capacity agreements do not
commit Petitioner to sell electricity to any particular LSE at any particular price, Petitioner does
furnish an electric service pursuant to these agreements for purposes of section 186-a.2(d).
Accordingly, Petitioner’s receipts from its capacity agreements constitute receipts from the
furnishing of electric service. However, the commitment to maintain electric generating capacity
is a component of the electricity or electric service resold by the LSEs to the LSEs’ customers
for ultimate consumption or use in New York State. Accordingly, since the furnishing of
such electric service is not for the ultimate consumption or use by the LSEs (but a sale for resale),

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Corporation Tax
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Petitioner’s receipts from such capacity agreements do not constitute gross operating income under
section 186-a of the Tax Law.

DATED: November 7, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

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