rp-05-62.pdf

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CASE MIS No.: RP-115797-05

Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement;
determination of correct tax liability.
(Also: Part 1, §§61, 451, 1001)

Rev. Proc. 2005-62

SECTION 1. PURPOSE
This revenue procedure sets forth the manner in which a public utility company
may treat the issuance of a financing order by a State agency authorizing the recovery
of certain specified costs incurred by the utility and the securitization of the rights
created by that financing order.

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SECTION 2. BACKGROUND
Revenue Procedure 2002-49, 2002-2 C.B. 172, provides a safe-harbor regarding
the treatment of legislatively authorized transactions entered into by investor-owned
electric utilities to recover transition costs resulting from the restructuring of the electric
utility industry and the institution of a competitive marketplace. Some States enacted
legislation to allow the recovery of these transition costs through a non-bypassable
surcharge to customers within a utility’s historic service area.
Utilities continue to operate in wholly or partially regulated environments and
maintain exclusive distribution networks for customers in their historic service areas.
Rates charged for these operations are determined by local authorities to allow for the
recovery of costs and an appropriate return on capital. Some States have enacted
legislation that allows utilities to recover certain specified costs through a surcharge
based on consumption by customers within the utilities’ historic service areas and also
authorizes securitization of the surcharge. These statutes are unique to regulated
utilities. Accordingly, the tax treatment allowed by this revenue procedure for these
transactions is peculiar to this situation. See Revenue Procedure 2005-61, page
[INSERT PAGE NUMBER], this Bulletin, which adds certain related issues to areas in
which rulings or determination letters will not be issued.
SECTION 3. CHANGES
The scope of Revenue Procedure 2002-49 was limited to transition costs that
resulted from the deregulation of the generation operations of electric utility companies.

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This revenue procedure expands the scope of Revenue Procedure 2002-49 to all public
utility companies, and costs that are recoverable through a securitization mechanism
are not limited to transition costs. Additionally, this revenue procedure eliminates
certain requirements in section 4.04(3) of Revenue Procedure 2002-49 relating to level
payments and now requires that payments be made on a quarterly or semiannual basis.
SECTION 4. SCOPE
This revenue procedure applies to investor owned public utility companies that,
pursuant to specified cost recovery legislation, receive an irrevocable financing order
from an appropriate State agency that determines the amount of certain specified costs
the utility will be permitted to recover through qualifying securitization of an intangible
property right created by the special legislation.
SECTION 5. DEFINITIONS
.01 PUBLIC UTILITY

For purposes of this revenue procedure, the terms “public utility” or “utility” refer
to any investor owned utility company (electric or non-electric) that is subject to the
regulatory authority of a State public utility commission or other appropriate State
agency.
.02 SPECIFIED COST RECOVERY LEGISLATION
For purposes of this revenue procedure, specified cost recovery legislation is
legislation that—
(1) Is enacted by a State to facilitate the recovery of certain specified costs
incurred by a public utility company;

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(2) Authorizes the utility to apply for, and authorizes the public utility
commission or other appropriate State agency to issue, a financing order determining
the amount of specified costs the utility will be allowed to recover;
(3) Provides that pursuant to the financing order, the utility acquires an
intangible property right to charge, collect, and receive amounts necessary to provide
for the full recovery of the specified costs determined to be recoverable, and assures
that the charges are non-bypassable and will be paid by customers within the utility’s
historic service territory who receive utility goods or services through the utility’s
transmission and distribution system, even if those customers elect to purchase these
goods or services from a third party;
(4) Guarantees that neither the State nor any of its agencies has the
authority to rescind or amend the financing order, to revise the amount of specified
costs, or in any way to reduce or impair the value of the intangible property right, except
as may be contemplated by periodic adjustments authorized by the specified cost
recovery legislation;
(5) Provides procedures assuring that the sale, assignment, or other
transfer of the intangible property right from the utility to a financing entity that is wholly
owned, directly or indirectly, by the utility will be perfected under State law as an
absolute transfer of the utility’s right, title, and interest in the property; and
(6) Authorizes the securitization of the intangible property right to recover
the fixed amount of specified costs through the issuance of bonds, notes, other
evidences of indebtedness, or certificates of participation or beneficial interest that are

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issued pursuant to an indenture, contract, or other agreement of a utility or a financing
entity that is wholly owned, directly or indirectly, by the utility.
.03 SPECIFIED COSTS
For purposes of this revenue procedure, specified costs are those costs identified
by the State legislature as appropriate for recovery through the securitization
mechanism of the specified cost recovery legislation.
.04 QUALIFYING SECURITIZATION
For purposes of this revenue procedure, a qualifying securitization is an issuance
of any bonds, notes, other evidences of indebtedness, or certificates of participation or
beneficial interests that—
(1) Is secured by the intangible property right to collect charges for the
recovery of specified costs and such other assets, if any, of the financing entity that is
wholly owned, directly or indirectly, by the utility;
(2) Is issued by a financing entity that is wholly owned, directly or
indirectly, by the utility that is initially capitalized by the utility in such a way that equity
interests in the financing entity are at least 0.5 percent of the aggregate principal
amount of the non-equity instruments issued; and
(3) Provides for payments on a quarterly or semiannual basis.
SECTION 6. APPLICATION
.01 The utility will be treated as not recognizing gross income upon—
(1) The receipt of a financing order that creates an intangible property right
in the amount of the specified costs that may be recovered through securitization;

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(2) The receipt of cash or other valuable consideration in exchange for the
transfer of that property right to a financing entity that is wholly owned, directly or
indirectly, by the utility; or
(3) The receipt of cash or other valuable consideration in exchange for
securitized instruments issued by the financing entity that is wholly owned, directly or
indirectly, by the utility.
.02 The securitized instruments described in Section 5.04 will be treated as
obligations of the utility.
.03 The non-bypassable charges are gross income to the utility recognized under
the utility’s usual method of accounting.
SECTION 7. EFFECT ON OTHER DOCUMENTS
This document modifies, amplifies, and supersedes Rev. Proc. 2002-49.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective [INSERT DATE THIS DOCUMENT IS
PUBLISHED IN THE INTERNAL REVENUE BULLETIN.]
SECTION 9. DRAFTING INFORMATION
The principal author of this revenue procedure is Thomas M. Preston of the
Office of Associate Chief Counsel (Financial Institutions & Products). For further
information regarding this revenue procedure contact Mr. Preston at (202) 622-3970
(not a toll free call).