In a seemingly counterproductive move, the Department of Treasury and the Internal Revenue Service have determined that smart grid grants awarded under the American Reinvestment and Recovery Act (ARRA) are taxable. ARRA directs the Department of Energy to issue $3.4 billion in smart grid investment grants and $615 million in smart grid demonstration project grants.
While the federal government’s determination does not appear to be final yet, the National Association of Regulatory Utility Commissioners (NARUC) has protested the tax move. NARUC is the national body that represents state public utility commissions. In a letter dated January 25, 2010 to Treasury Secretary Tim Geithner, NARUC urged the Treasury and IRS to find a way to insure that smart grid grants are nontaxable. The letter said:
“Because ARRA was designed to stimulate the economy, we believe that taxing the smart grid grants is counterproductive and inconsistent with other energy provisions in the Act such as the nontaxable renewable energy grants that are provided in lieu of investment or production tax credits.”
The state regulators claim that taxing smart grid grants would burden consumers
because grant recipients would probably ask their state commissions to pass the
tax burden onto rate payers. Furthermore, a smart grid tax burden will decrease
the capital available and create investment costs; both undesirable outcomes.
The uncertainty over grant taxability has spooked some utilities seeking the smart grid stimulus awards. Industry analysts have warned that some grant recipients may say “no thanks” and abandon their planned projects rather than accept taxable funds. Furthermore, non-utility award recipients such as GE Energy would be disproportionately affected by the taxation issue because large percentages of their expected contracted meters are due to stimulus grants.
The federal government has not yet responded to NARUC’s plea, so smart grid proponents have yet another complicating wrinkle to address.