Some Utilities Considering Rejecting Smart Grid Stimulus Funds?

Updated: Smart meter maker Itron (s ITRI) reported better than expected fourth quarter and annual 2009 earnings late Wednesday. That wasn’t too shocking given Itron has been expected to turn around this year as it has started shipping significant volumes of smart meters to utilities. But what was surprising in the company’s conference call was this nugget that CEO Malcolm Unsworth let out about how some utilities might potentially be thinking about rejecting the smart grid stimulus funds because of certain tax restrictions. That was the first time I’ve heard that.

In response to a question from Stuart Bush, an analyst for RBC Capital Markets, about a debate among utilities over tax implications of the stimulus funds, Unsworth says:

Obviously, I can’t talk for what the utilities are discussing. We had some of those that actually have said that they – I think it was been public statements that they may turn it down because of certain restrictions or whatever. I really don’t know, but it’s going to be a case-by-case business, I’m assuming. So, we just work with our utility potential customers and work through as we go case-by-case.

At issue is the uncertainty over whether the smart grid stimulus grants are taxable or not. According to SmartGridNews “the Treasury Department and the Internal Revenue Service have determined that Smart Grid stimulus grant awards are taxable.” But “The National Association of Regulatory Utility Commissioners (NARUC) thinks it’s a really bad idea.”

The implication of taxable smart grid stimulus awards could be that “some if not many grant recipients could just say ‘No thanks’ and walk away from their planned projects,” says SmartGridNews. Wow, after all that work applying for the over $4 billion in smart grid stimulus funds, it would be shocking if any of the award winners decided to actively reject the funds.

Ben Schuman, analyst with Pacific Crest Security, tells us that he hasn’t yet seen any utilities definitively say, if we have to pay taxes on the grants we won’t take the money. “Right now I think there’s a lot of posturing on both sides.”

Update: Pike Research says even more important than if some utilities reject stimulus funds is the reality that there will be “even more uncertainty and delays in utilities’ program executions.” If utilities have to take another look at project costs with the taxation that will require another cycle of state PUC approvals, says Pike, and “eliminating the taxation requirement may require federal legislation, with the obvious uncertainties.” In addition Pike says that two companies — GE Energy and Silver Spring Networks -– will be disproportionately affected by the taxation issue because large percentages (potentially over 60 percent) of their expected contracted meters are stimulus grantees.

Update: Other smart grid industry execs are more skeptical that the stimulus grants are considered taxable income. eMeter’s Chief Regulatory Officer Chris King writes in a blog post that “Thankfully, the IRS says the grants are not gross income.”

If Unsworth is talking about any Itron utility customers, then who could that be? As we explained after the stimulus funds were announced Itron has contracts with CenterPoint Energy (which snagged a $200 million award for 2.2 million smart meters), San Diego Gas & Electric ($28.12 million for wireless smart grid network), DTE Energy ($83.83 million for 660,000 smart meters and 300 smart appliances) and City of Glendale Water and Power ($20 million for 84,000 smart meters).