Technical Assistance Advisory No. 91-005 Re: A Municipality Will Be Treated As The Owner Of A Power Plant For Purposes Of The West Virginia Business And Occupation Tax Exemptions Set Forth In Section 11­13­2m(b) And Section 11-13-2n(b)(1) of the West Virginia Code, Where The Municipality Receives Substantial Revenues Or Benefits From The Operation Of The Facility And Where The Municipality Holds Legal Title To The Power Production Facility, Legal Title To Some Plant Site Realty, A License To Use Remaining Site Realty Not Owned By The Municipality, And All Easements, Rights Of Way, Licenses And Permits Relating To The Facility And Its Operation (Including The United States Federal Energy Regulatory Commission License To Construct, Operate And Maintain The Power Plant Project) And Where The Municipality Retains Substantial Legal Responsibilities And Sovereignty Relating To The Operation And Maintenance Of The Power Plant Facility The West Virginia Department of Tax and Revenue has received a request for a technical assistance advisory from a company (below designated Company A) which has certain contractual arrangements with a West Virginia municipality and other entities relating to the operation of a certain electrical power plant. The issue to be addressed in the requested technical assistance advisory is whether the power plant will constitute a municipally owned power plant which would not be subject to the tax imposed by Article thirteen, Chapter eleven of the West Virginia Code by reason of the statutory exemptions set forth in Sections 11-13-2m(b) and 11-13-2n(b)(1) of the West Virginia Code, notwithstanding certain contractual arrangements whereby the municipality subjects itself to security liens, trust agreements, indentures and deeds of trust and conveys away certain beneficial interests in the power plant facility. The power plant facility is located in the municipality. The United States Federal Energy Regulatory Commission License to construct, operate and maintain the power plant was issued to the municipality. The municipality holds record title to fee simple interests in the facility, surface interests in the facility, easements and rights-of-way relating to the facility, all licenses and permits relating to operation and maintenance of the facility, and the right of access to federal lands which comprise a portion of the plant site. The municipality and a large electrical power company entered into an electrical energy purchase agreement. Under the agreement, the municipality's obligations are secured by an indenture of realty, chattel mortgages, real property and chattel deeds of trust and other security arrangements. The municipality and Company A entered into an independent contract. The contract does not convey any of the municipality's title to plant property to Company A, and the municipality retains all rights and power necessary to carry out its responsibilities under the Federal Energy Regulatory Commission License. For federal income tax purposes, Company A is deemed by the contract to be the sole beneficial owner of the facility during the term of the contract. Company A agreed under the contract to construct the plant, and the municipality became the sole legal owner of the plant upon completion of construction. Revenues received by the municipality under the electrical energy purchase agreement are deposited with a trustee for the account of Company A, and certain payments are made to the municipality under the independent contract by the trustee relating to energy production. The municipality agreed under the contract to obtain all permits, licenses, easements, and rights necessary and sufficient for construction and operation of the power plant. The municipality agrees to obtain title to all non-federal site lands, and all other necessary licenses, permits, easements and rights necessary for entry upon federal lands on the site. Company A agreed to arrange the operation and maintenance of the plant facility. Under the contract, title to all improvements, repairs, alterations, renewals or other changes to the facility immediately vest in the municipality upon completion. Obligations of the municipality under the independent contract are secured by a lien on and security interest in the municipality's rights in the facility, the Federal Energy Regulatory Commission License and other permits, and the electrical energy purchase agreement. The contract term is for a period of over forty years, unless it is otherwise terminated or extended. Company A entered into an assignment and transfer whereby it sold its interests in the plant and site, the Federal Energy Regulatory Commission License, the electrical energy purchase agreement, and certain other rights to Company B, a trust company. Company B entered into a trust agreement with Company C, whereby the trustee, Company B, held all interests assigned and transferred from Company A, for the use and benefit of Company C. Company C owns no legal title to any part of the trust estate. Company B entered into a trust indenture with Company D, a bank, to secure payment of certain notes to the holders thereof, Company D, whereby a first priority security interest and lien were granted on all powers, privileges and interests of Company B, the trustee, in the facility, the agreements, and the property contributed by Company C under the trust agreement. The lendee of the notes was Company B. Proceeds of the notes were used to finance a portion of the building of the power plant by Company A or to provide working funds for the plant. Company B contributed funds to finance part of the building of the power plant. By a lease and assignment between Company B and Company A, Company B assigned to Company A all of Company B's rights and interests in the independent contract (originally executed between the municipality and Company A) other than rights under certain sections of the independent contract relating to ownership for federal income tax purposes and certain other items including the contractor's mortgage. This conveyance very much resembles a so called leaseback. The lease term is fifteen years, and the lease provides for payments to Company B by Company A. Company A has the option to purchase Company B's rights at fair market value on the last day of the lease term. Company A agrees to operate and maintain the facility and agrees that all title to improvements to the facility will vest in the municipality. Upon termination of the agreement, possession of the facility is transferred to Company B. A one year operating and maintenance agreement between Company A and Company E was entered into whereby Company E would be responsible for operation of the plant. A service contract for operation of the facility was entered into by Company E and Company F on the same day whereby Company F would actually operate and maintain the facility. It appears that the municipality holds legal title to all facility property, except that portion of plant site realty owned by the federal government, and the municipality holds the license to access the federally owned portion of the plant site. The municipality holds all easements, rights-of-way, licenses and permits necessary for the construction, operation and maintenance of the property, including the license to construct, operate and maintain the plant issued by the United States Federal Energy Regulatory Commission. The municipality is a party to an electrical energy purchase agreement with a power company, pursuant to which the municipality is obligated to sell, and the power company to buy, electrical energy produced by the power plant. The municipality has entered into an independent contract with Company A whereby Company A takes certain beneficial interests in the plant and agrees to construct the facility and arrange operation and maintenance of the plant. The contract does not appear to constitute a lease. Under the contract, the municipality retains ownership of, and legal title to, the plant, and retains all rights and power necessary to carry out its functions as the Federal Energy Regulatory Commission licensee with relation to the plant. Under the contract, the municipality receives certain payments from a trustee who receives revenues from the electrical energy purchase agreement and redistributes them to Company A and the municipality according to the terms of the independent contract. With relation to both the electrical energy purchase agreement and the independent contract with Company A, the municipality has agreed to subject itself to liens and security interests in the municipality's rights in the power plant facility, the Federal Energy Regulatory Commission License and other licenses and permits. It is the finding of this Department that the municipality has retained a substantial ownership and income interest in the power plant herein discussed. The municipality has retained substantial responsibility for the operation and maintenance of the plant under the Federal Energy Regulatory Commission License, and it has substantial sovereignty (as such licensee and as the owner of other relevant and material licenses, permits, easements, and rights­of­way) over operation and maintenance of the facility. Therefore, the municipality, notwithstanding its conveyance of certain beneficial and security interests (discussed above) relating to the plant, constitutes the owner of the power plant such that the exemptions from taxation for municipal power production set forth in Sections 11-13-2m(b) and 11-13-2n(b)(1) of the West Virginia Code must apply. ______________________________ L. Frederick Williams, Jr. Secretary, Tax and Revenue and State Tax CommissionerIssued: April 30, 1991