Are the proceeds of a utility's PSC-mandated generating-asset auction gross earnings under section 186, and is distributing those proceeds to its holding company an excess dividend?

Plain-English summary

Consolidated Edison Company of New York, a section 186 utility, was carrying out the PSC's Competitive Opportunities restructuring -- divesting its electric and steam generating assets by auction and reorganizing under a holding company. It asked whether (1) the auction consideration is gross earnings under section 186 and (2) distributing the proceeds to its holding company is an excess dividend.

Following Adams Electric and Central Hudson, the Department held no to both:

• Gross earnings -- no. Being compelled by the PSC to restructure and auction its assets is not the employment of capital, so the auction consideration is not gross earnings taxable under section 186.
• Excess dividend -- no. Distributing the proceeds to the holding company as part of the mandated restructuring series does not represent a distribution of Con Ed's profits (Adams Electric), so it is not a dividend subject to the excess dividends tax. The same conclusion applies to the proceeds from the auction of the Waterside and East River steam-electric plants.

What this means for you

Forced divestiture is not employing capital

A PSC-mandated asset auction is a restructuring step the utility must take, so the proceeds are not section 186 gross earnings.

Mandated distributions to the holding company are not dividends

Moving the proceeds up to the holding company as part of the required restructuring is not a distribution of profits, so the excess dividends tax does not apply.

This is the established PowerChoice-era line

The result is consistent with the Department's other restructuring opinions to utilities reorganizing under the Competitive Opportunities proceeding.

Common questions

Q: Are the mandated auction proceeds gross earnings under section 186?
A: No. The forced divestiture is not the employment of capital.

Q: Is distributing the proceeds to the holding company an excess dividend?
A: No. As part of the mandated restructuring, it is not a distribution of profits.

Q: Does the steam-plant auction reach a different result?
A: No. The proceeds from the Waterside and East River steam-electric plants are treated the same way.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 186 (franchise tax on gas and electric companies; gross earnings; excess dividends tax)
- People ex rel Adams Electric Light Co v Graves, 272 NY 77
- Central Hudson Gas & Electric Corporation, TSB-A-98(12)C (July 29, 1998)
- Consolidated Edison Company of New York, Inc., TSB-A-99(1)C (Jan. 22, 1999)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a99_1c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(1)C
Corporation Tax
January 22, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C981006B

On October 6, 1998, a Petition for Advisory Opinion was received from Consolidated Edison
Company of New York, Inc., 4 Irving Place, Room 1875-S, New York, New York 10003.
The issues raised by Petitioner, Consolidated Edison Company of New York, Inc., result
from the proposed corporate restructuring of Petitioner implemented in fulfillment of the New York
State Public Service Commission's mandate under its Competitive Opportunities proceeding. The
specific questions are:
Question 1: Is any portion of the value of the consideration received by Petitioner from the sale of
the generating assets or other property, in accordance with its mandated divestiture of such assets
considered "gross earnings" subject to tax under section 186 of the Tax Law?
Question 2: Is the distribution of the proceeds from the sale of the generating assets or other
property from Petitioner to its holding company in accordance with its mandated corporate
restructuring and divestiture of the generating assets considered a dividend subject to the tax on
excess dividends ("Excess Dividends Tax") under section 186 of the Tax Law?
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a regulated public utility incorporated in New York State on November 10,
1884. Petitioner is a subsidiary of Consolidated Edison, Inc. ("CEI"), a public utility holding
company under the Public Utility Holding Company Act of 1935 ("PUCHA") and is exempt from
registration with the Securities and Exchange Commission ("SEC") in accordance with section
3(a)(1) of PUCHA. CEI was incorporated in New York State on September 3, 1997. Petitioner
supplies electricity and electric services in all of New York City (except a part of the Borough of
Queens) and most of Westchester County. It supplies gas and gas services in Manhattan, the Bronx
and parts of Queens and Westchester County, as well as steam and steam services in Manhattan.
In August 1994, the New York State Public Service Commission ("PSC") began hearings
with respect to restructuring the New York electric industry to foster competition in the generation
of electricity and offer customers a choice of energy providers (The Competitive Opportunities
Proceeding, Case No. 94-E-0952). On May 20, 1996, the PSC issued Opinion No. 96-12, Opinion
and Order Regarding Competitive Opportunities for Electric Service, effective May 20, 1996 (the
"Generic Order") in that proceeding. The Generic Order endorsed a fundamental restructuring of
the electric utility industry in New York State, based on competition in the generation and energy

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services sectors of the industry. The PSC directed Petitioner to file a restructuring plan, addressing,
among other things, retail access, divestiture and a corporate reorganization. Petitioner filed its plan
on October 1, 1996.
On September 23, 1997, the PSC issued its Order Adopting Terms of Settlement Subject to
Conditions and Understandings in Cases 96-E-0897 and 96-E-0916 (the "Order")1 Among other
things, the Order, with the conditions and understandings set forth therein, adopted and incorporated
the terms of the Amended and Restated Settlement Agreement dated September 19, 1997 among
Petitioner, the PSC staff and other parties (the "Settlement Agreement"). The Settlement Agreement
provides for a transition to a competitive electric market through the development of a retail access
plan, a rate plan for the period ending March 31, 2002 (the "Transition"), and a reasonable
opportunity for recovery of "strandable costs". The retail access plan will eventually permit all of
Petitioner's electric customers to buy electricity from other suppliers. The delivery of electricity to
customers will continue to be through Petitioner's transmission and distribution systems. Further,
the Settlement Agreement required the divestiture by Petitioner to unaffiliated third parties of at least
50 percent of its New York City ("in-City") electric generating fossil-fueled capacity. Under the
Settlement Agreement, Petitioner's electric generating fossil-fueled capacity not divested to third
parties would have been transferred to an unregulated subsidiary of CEI.
As a result of the Order, Petitioner altered its corporate structure and is in the process of
disposing of generating assets.
The Restructuring
A. Holding Company: Petitioner was the parent corporation of an affiliated group of
corporations as defined by section 1504 of the Internal Revenue Code ("IRC"). Petitioner's affiliated
group of corporations files a consolidated return for federal income tax purposes. On January 1,
1998, pursuant to a mechanism of a binding share exchange, authorized by the New York Business
Corporation Law, Petitioner formed a holding company structure. The share exchange was a tax-free
reorganization under section 351 of the IRC. The restructuring was accomplished as followed:
1. Petitioner created a wholly-owned subsidiary, CEI, a non-regulated company
incorporated in New York on September 3, 1997.
2. Prior to the consummation of the Share Exchange, infra, Petitioner made a capital
contribution of cash and the shares of two of its wholly-owned subsidiaries to CEI.

1

The Order was confirmed by the full PSC by Confirming Order, issued October 1, 1997, and
readopted in Opinion No. 97-16, issued November 3, 1997.

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3. Subsequent to the formation of CEI, Petitioner and CEI executed a share exchange
   agreement, which was approved by Petitioner's shareholders in December 1997.
   Pursuant to the share exchange, on January 1, 1998, Petitioner's common stock
   shareholders, by operation of law, exchanged Petitioner's common stock for CEI
   common stock on a one-for-one basis ("Share Exchange"). After the Share Exchange
   was completed, the former Petitioner common shareholders became common
   shareholders of CEI. Petitioner's preferred stock and debt are not affected by the
   Share Exchange and remain outstanding securities of Petitioner.
4. After completion of the Share Exchange, Petitioner became a subsidiary of CEI.
   The consolidated group of corporations of which, prior to the Share Exchange,
   Petitioner was the common parent for federal income tax purposes, continues after
   the Share Exchange with CEI as the new common parent corporation.
5. CEI is subject to tax pursuant to Article 9-A of the Tax Law.
6. Petitioner is subject to tax under sections 186 and 186-a of Article 9 of the Tax
   Law.
   B. The Electric Divestiture Plan: On March 2, 1998, Petitioner filed a Generation Divestiture
   Plan and Petition ("Divestiture Plan")2 with the PSC. Pursuant to the Divestiture Plan, Petitioner
   proposed to divest two-thirds of its in-city electric generating capacity, which totals approximately
   5,500 megawatts. This capacity is divided into three separate groups or bundles. The three bundles
   are described as the "Ravenswood", "Astoria" and "Arthur Kill" bundles. The Ravenswood bundle
   includes the Ravenswood Generating Station located in Queens and 16 gas turbines also located at
   the Ravenswood facility in Queens. The Astoria bundle includes the Astoria Generating Station in
   Queens; 32 gas turbines located in the Gowanus section of Brooklyn and 16 gas turbines located in
   the Sunset Park section of Brooklyn (the "Narrows Turbines"). The Arthur Kill bundle includes the
   Arthur Kill Generating Station in Staten Island and 20 gas turbines located at the Astoria facility in
   Queens.
   In addition, the Divestiture Plan identified properties that are available for sale to third parties
   for the purpose of constructing new generating facilities. These sites include (but are not limited to)
   (1) Astoria (portions not included in the bundles; (2) Hellgate; (3) Kent Avenue; and (4) Sherman
   Creek. Following the sale of the three asset bundles, Petitioner will solicit offers for its potential
   generating sites from all bidders.

2

PSC Case No. 96-E-0897.

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By Order issued and effective July 21, 1998, the PSC authorized Petitioner to auction its
generation facilities as described in its Divestiture Plan subject to certain conditions, including
allowing Petitioner to keep the first $50 million in net gains from the auction. The PSC also
instructed Petitioner to provide a detailed plan for divestiture of its excess property. By Order issued
and effective August 5, 19983, the PSC modified its July 21st Order and ordered the sale of all of its
in-city electric generating fossil-fueled capacity to third parties, and provides that Petitioner is
granted the authority to use at least an additional $50 million in net gains on the auction until 2013,
when the operating license for the Indian Point No. 2 nuclear plant expires, after which such funds
would be used to pay down the then-existing depreciation expense of Indian Point No. 2 that would
otherwise be charged to ratepayers.
The divestiture of Petitioner's electric generation will also include its two-thirds interest in
the Bowline Point Generating Station in West Haverstraw, New York that it co-owns with Orange
and Rockland Utilities ("O&R"), which owns the remaining one-third interest. By agreement with
O&R, Petitioner will offer this two-third (810 megawatt) interest jointly with O&R (with O&R
acting as Petitioner's agent) in connection with O&R's independent auction of its electric generating
assets. In its Electric Rate and Restructuring Plan, dated November 6, 1996, which the PSC
approved in its orders dated November 26, and December 31, 1997, O&R agreed to divest all of its
electric generating assets. On April 16, 1998, the PSC approved the process for the auctioning of
O&R's electric generating assets, which includes its share of Bowline Point.
Petitioner also proposes to sell its 40 percent share of the Roseton generating station located
in Newburgh, New York, in conjunction with Central Hudson's divestiture auction. The Roseton
station is co-owned by Central Hudson, 35 percent, and Niagara Mohawk, 25 percent. Pursuant to
Rev Rul 68-344, 1968-1 CB 569, the ownership and operation of the Roseton Plant by the owners
thereof, as tenants-in-common is considered to be a venture classified as a partnership for federal
income tax purposes under section 7701(a)(2) of the IRC. The co-tenant owners of the Roseton
Plant did not elect, under section 761(a) of the IRC to be excluded from the application of all or part
of Subchapter K of the IRC. The Roseton Plant co-tenants have filed, annually, a partnership return
Form 1065. Petitioner submits that its 40 percent interest in the Roseton Plant is a partnership
interest for purposes of this advisory opinion. The sale of this plant will not be completed until June
30, 2001, and is governed by Central Hudson's modified Restated Settlement Agreement, as entered
into on February 26, 1998, with the PSC.

3

This Order was confirmed by the full PSC by Confirming Order, issued and effective
August 19, 1998.

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C. The Steam System Plan: In Opinion No. 97-154, the PSC directed that a long range steam
plan be submitted in time for the PSC's contemporaneous consideration with the electric divestiture
plan. On April 15, 1998, Petitioner filed a divestiture plan for its electric/steam generating stations
("Steam Plan") in compliance with Opinion No. 97-15. The Steam Plan proposes the sale, through
auction, of the Waterside and East River steam-electric plants. The Steam Plan also proposes the
sale of Petitioner's steam only plants.
In each of the aforementioned transactions, it is anticipated that Petitioner, the regulated
utility, will sell all of its electric generating assets, except for its nuclear unit, Indian Point No. 2.
All of the proceeds from the sales will be paid to Petitioner, the regulated utility. Once Petitioner
receives the cash, it may distribute all or part of the money to CEI, its parent holding company.
Discussion
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 gas, when
delivered through mains or pipes, or electricity, "for the privilege of exercising its corporate
franchise or carrying on its business in such corporate or organized capacity in this state". The tax
is three-quarters of one percent on the taxpayer's gross earnings from all sources within New York
State, and four and one-half percent on the amount of dividends paid during each year ending on the
thirty-first day of December in excess of four percent on the actual amount of paid-in capital
employed in New York State by the taxpayer.
When section 186 of the Tax Law was enacted in 1896, it provided for a franchise tax
measured by "gross earnings from all sources within this state". In 1907, the Legislature amended
section 186 by providing a statutory definition of gross earnings. Gross earnings is defined as "all
receipts from the employment of capital without any deduction."
The definition of gross earnings was added to address a 1906 New York State Appellate
Division decision holding that in order to arrive at taxable "gross earnings", the cost of raw materials
used in producing the utility service was to be deducted from the company’s gross receipts. (See
People ex rel Brooklyn Union Gas Co. v Morgan, 114 App Div 266, affd 195 NY 616).
In 1969, the New York State Court of Appeals stated that "the 1907 amendment [of section
186] did not contemplate a substitution of 'capital' or 'gross receipts' for 'gross earnings' as the basis

4

In this Opinion, the PSC also approved, subject to certain conditions, a rate settlement
agreement that established steam rates for Petitioner for the three year period ending
September 30, 2000. Cases 96-S-1065 and 96-S-1121, Opinion and Order Adopting Terms
of Settlement Agreement Subject to Conditions, issued September 25, 1997.

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for taxation. It merely sought to include that portion of capital which the Brooklyn Union Gas Co.
case [supra] required to be deducted from 'gross earnings' to arrive at the proper basis. This is only
that portion of 'gross earnings' which represents the 'employment of capital' to manufacture,
distribute and sell various public utility services." (Matter of Consolidated Edison Co. of NY v State
Tax Commission, 24 NY2d 114, 119). In the Con Ed case, the court determined that the proceeds
received by the company for property damage and insurance claims and from the sale of capital
assets no longer employed in its business, consisting of real property, scrap and used machinery, are
amounts realized from the destruction or confiscation of capital, not from the employment of capital.
In People ex rel Adams Electric Light Co v Graves, 272 NY 77,79, the Court of Appeals
stated that under the franchise tax imposed by section 186 of the Tax Law "[a] dividend on corporate
stock implies a division or distribution of corporate profits." In that case, the Court held that the
transfer of a portion of earned surplus to its non-par capital stock account, pursuant to a resolution
of its board of directors, was not a distribution of dividends for tax purposes. Neither money nor
property nor stock dividend went into the hands of stockholders. No stockholder acquired a right
to receive any equivalent of the amount transferred unless further corporate action was taken.
Petitioner is one of several utilities in New York State being compelled by the PSC to
reorganize their corporate structure and sell off some of their business to unrelated third parties
pursuant to the PSC's Competitive Opportunities Proceeding and the PSC's policy objectives set
forth in the Order (Opinion No. 96-12). With respect to such mandated restructuring and divestiture,
the Commissioner of Taxation and Finance has issued an advisory opinion to Central Hudson Gas
& Electric Corporation, Adv Op Comm T&F, July 29, 1998, TSB-A-98(12)C. (See also, Long
Island Lighting Company, Adv Op Comm T&F, February 27, 1998, TSB-A-98(3)C ("LILCO-II")
and New York State Electric & Gas Corporation, Adv Op Comm T&F, July 29, 1998, TSB-A­
98(11)C.) The Central Hudson, supra, advisory opinion, reached several conclusions, including the
following:
1. The sale of electric generation assets pursuant to the auction process, implementing the
petitioner's restructuring agreement that was confirmed by a PSC order, does not represent the
employment of capital, and that the consideration received by the petitioner for the generation assets
does not constitute "gross earnings" taxable under section 186 of the Tax Law.
2. Petitioner's distribution to Holdco, directly after the Share Exchange, of all of the common
stock of the corporations included in the Existing Subsidiaries Spin-Off and any Genco Spin-Off,
is part of the series of transactions being entered into by Petitioner as mandated by the PSC pursuant
to the Competitive Opportunities Proceeding and the PSC's policy objectives set forth in the Order
(Opinion No. 96-12), and implemented under the restructuring plan described in the Restated
Settlement Agreement dated January 2, 1998 and modified February 26, 1998, whereby Petitioner
is reorganized into the holding company structure. It does not represent a distribution of the profits
of Petitioner. Accordingly, these restructuring distributions are not treated as dividends subject to

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the Excess Dividends Tax under section 186 of the Tax Law. The opinion held further that the
answer would not change if Petitioner invests up to $100 million of equity in the Existing
Subsidiaries prior to the Share Exchange and the Existing Subsidiaries Spin-Off.
Conclusions
Issue 1. The sale of the generating assets and other property representing the other potential
generating sites, including Astoria, Hellgate, Kent Avenue and Sherman Creek, pursuant to the
auction process is part of a series of transactions being entered into by Petitioner as mandated by the
PSC pursuant to the Competitive Opportunities Proceeding and the PSC's policy objectives set forth
in the Generic Order (Opinion No. 96-12), and implemented under Petitioner's Order dated
September 19, 1997 and confirmed by the PSC in Opinion No. 97-16, issued November 3, 1997, and
in accordance with the Divestiture Plan, Order issued and effective July 21, 1998, modified by Order
issued and effective August 5, 1998, and confirmed by the full PSC by Confirming Order, issued and
effective August 19, 1998. Through this series of transactions, Petitioner is to divest itself of all of
its in-city electric generating fossil-fueled capacity to third parties and excess property that is
available for the purpose of constructing new generating facilities, its two-third interest in the
Bowline Point Generating Station and its 40 percent share of the Roseton Generating Station via
auction. Like Con Ed, supra, and Central Hudson, supra, Petitioner does not employ its capital
within the meaning of section 186 of the Tax Law for the purpose of being forced to restructure its
organization and auction its assets. Therefore, the amounts received by Petitioner for these assets
as a result of the auction process are not receipts from the employment of capital, and do not
constitute "gross earnings". Accordingly, the amounts received from the divestiture of these
generating assets and potential generating sites pursuant to the Order are not taxable under the gross
earnings tax imposed by section 186 of the Tax Law.
With respect to the Steam Plan, if the auction of the Waterside and East River steam-electric
plants is conducted pursuant to an Order of the PSC approving and confirming Petitioner's proposed
divestiture plan for its electric/steam generating stations in compliance with Opinion 97-15, the
amounts received by Petitioner for these electric/steam generating stations as a result of the auction
process would not be receipts from the employment of capital, and would not constitute "gross
earnings". Accordingly, the amounts received from the divestiture of the these generating assets
pursuant to the PSC's Order approving and confirming Petitioner' s proposed Steam Plan would not
be taxable under the gross earnings tax imposed by section 186 of the Tax Law.
Issue 2. The distribution of the proceeds from the sale of the generating assets and other property
representing the other potential generating sites, including Astoria, Hellgate, Kent Avenue and
Sherman Creek, from Petitioner to CEI is part of a series of transactions being entered into by
Petitioner as mandated by the PSC pursuant to the Competitive Opportunities Proceeding and the
PSC's policy objectives set forth in the Generic Order (Opinion No. 96-12), and implemented under
Petitioner's Order dated September 19, 1997 and confirmed by the PSC in Opinion No 97-16, issued

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November 3, 1997, and in accordance with the Divestiture Plan, Order issued and effective July 21,
1998, modified by Order issued and effective August 5, 1998, and confirmed by the full PSC by
Confirming Order, issued and effective August 19, 1998. Through this series of transactions,
Petitioner is reorganized into the holding company structure and is divesting itself of its generation
assets and other potential generating sites. Such distribution of the auction proceeds does not
represent a distribution of the profits of Petitioner as contemplated in Adams Electric, supra.
Accordingly, the distribution of the proceeds from the sale, at auction, of the generating assets and
other property representing the other potential generating sites, would not be distributions treated
as dividends subject to the Excess Dividends Tax under section 186 of the Tax Law.
With respect to the Steam Plan, if the distribution of the proceeds from the Waterside and
East River steam-electric plants is a transaction that is part of a series of transactions being entered
into by Petitioner pursuant to an Order of the PSC approving and confirming Petitioner's proposed
divestiture plan for its electric/steam generating stations in compliance with Opinion 97-15, whereby
Petitioner is reorganized into the holding company structure and is divesting itself of these
electric/steam generating stations, such transaction would not represent a distribution of the profits
of Petitioner as contemplated in Adams Electric, supra. Accordingly, the distribution of the proceeds
from the sale, at auction, of the Waterside and East River steam-electric plants, would not be
distributions treated as dividends subject to the Excess Dividends Tax under section 186 of the Tax
Law.

DATED: January 22, 1999

NOTE:

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

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