SECTION 2. BACKGROUND

.01 A Utility is required pursuant to Federal Energy Regulatory Commission (FERC) rules and policy to accommodate any request from a Generator to interconnect the Generator to the Utility’s Transmission System. In general, for a Generator to begin providing electricity from its facility to its customers over a Utility’s Transmission System, certain Network Upgrades must be made to the Transmission System to accommodate the addition of the facility’s electricity. Under FERC policy, costs of the Network Upgrades generally must be paid in advance to the Utility in the form of an Up-front Payment by the interconnecting Generator. To comply with FERC policy, the Interconnection Agreement between the Utility and the Generator typically requires that the Generator’s Up-front Payment to the Utility be reimbursed by the Utility.

.02 The FERC standard Interconnection Agreement, FERC Order No. 2003–B

issued December 20, 2004 (70 FR 265), requires that the Utility reimburse the Generator’s Up-front Payment in cash, plus make additional payments to the Generator that are designated as interest by FERC Order No. 2003–B (“FERC Interest”). Prior FERC approved Interconnection Agreements permit the Utility to make reimbursements in cash, in assignable transmission credits that may be used to offset the cost of transmission services, or in a combination of cash and assignable transmission credits.

.03 The IRS has received numerous inquiries about how Utilities should treat Up-front Payments for federal income tax purposes.

.04 Section 1.446–1(e)(3)(ii) of the Income Tax Regulations authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to change a method of accounting.

.05 Rev. Proc. 2002–9, 2002–1 C.B. 327 (as modified and clarified by Announcement 2002–17, 2002–1 C.B. 561, modified and amplified by Rev. Proc. 2002–19, 2002–1 C.B. 696, and amplified, clarified, and modified by Rev. Proc. 2002–54, 2002–2 C.B. 432) provides procedures by which a taxpayer may obtain automatic consent to change to a method of accounting described in the Appendix of Rev. Proc. 2002–9.

.06 Section 2.04 of Rev. Proc. 2002–9 provides that unless specifically authorized by the Commissioner, a taxpayer may not request, or otherwise make, a retroactive change in method of accounting, regardless of whether the change is from a permissible or an impermissible method. See generally Rev. Rul. 90–38, 1990–1 C.B. 57.