rp-02-49.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

# 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 I, 61, 451, 1001)

Rev. Proc 2002-49

## SECTION 1. PURPOSE

This revenue procedure sets forth a manner in which an electric utility company
may treat a transaction in which the utility is issued a financing order by a State agency
authorizing the recovery of certain costs incurred by the utility.

## SECTION 2. BACKGROUND

In general, State public utility commissions set rates for public utility companies
that are calculated to allow for the recovery of prudently incurred costs. In the case of
capital expenditures, rates are set to allow recovery of costs over an extended period of
time. With the advent of restructuring and a competitive marketplace, these rates are
no longer guaranteed. Thus, the recovery of previously incurred costs associated with
generation facilities that have market values below their book value, as well as costs
associated with contracts to purchase electricity at above-market prices, have become
uncertain. Some States have enacted legislation to allow the recovery of these costs
through a non-bypassable surcharge to customers upon their consumption of electricity
within the utility s historic service area. These statutes, which also authorize
securitization of the surcharge, are unique to the regulated utility industry. Accordingly,
the law and analysis applied to these transactions is peculiar to this situation.

<!-- PageBreak -->

## SECTION 3. SCOPE

This revenue procedure applies to investor-owned public utility companies that,
pursuant to transition legislation, receive an irrevocable financing order from an
appropriate State agency determining the amount of transition costs the utility will be
permitted to recover through qualifying securitization of an intangible property right
created under the transition legislation.

## SECTION 4. DEFINITIONS

# .01 PUBLIC UTILITY COMPANY

For purposes of this revenue procedure, the terms public utility or utility refer
to a utility company that is subject to the regulatory authority of the State public utility
commission or other appropriate State agency.

## .02 TRANSITION LEGISLATION

For purposes of this revenue procedure, transition legislation is legislation that:

(1) is enacted by a State to facilitate the conversion from a wholly
regulated public utility regime to a competitive environment caused by restructuring of
the public utility industry within the State;

(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 transition 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 charges in a fixed amount
necessary to provide for the full recovery of the transition costs determined to be
recoverable, and assures that the charges are non-bypassable and will be paid by

<!-- PageBreak -->

customers within the utility s traditional service territory who receive electricity through
the utility s transmission and distribution system, even if those customers elect to
purchase electricity from a third-party generator;

(4) guarantees that neither the State nor any agency thereof has the
authority to rescind or amend the financing order, to revise the amount of transition
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 transition
legislation;

(5) provides procedures assuring that the sale, assignment or other
transfer of the intangible property right from the utility to a financing entity 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 transition costs through the issuance of bonds, notes, certificates of
participation or beneficial interest or other evidences of indebtedness issued pursuant
to an indenture, contract or other agreement of an electric utility or a financing entity.

<!-- PageBreak -->

## .03 TRANSITION COSTS

For purposes of this revenue procedure, transition costs are the utility s non-
economic costs caused by restructuring and the introduction of a competitive
marketplace for electric services, and such other related costs that the State legislature
may deem appropriate.

## .04 QUALIFYING SECURITIZATION

For purposes of this revenue procedure, qualifying securitization is an issuance
of any bonds, notes, certificates of participation or beneficial interests or other
evidences of indebtedness

(1) secured by the intangible property right to collect charges for the
recovery of transition costs and such other assets, if any, of the financing entity;

(2) initially capitalized by the utility with at least 0.5 percent of the total
principal amount of each series of evidences of indebtedness issued; and

(3) providing for self-amortizing level payments of interest and principal on
a quarterly or semiannual basis.

SECTION 5. 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 transition costs that may be recovered through securitization;

(2) the receipt of cash or other valuable consideration in exchange for the
transfer of that property right to a financing entity; or

(3) the receipt of cash or other valuable consideration in exchange for
securitized evidences of indebtedness issued by the financing entity.

<!-- PageBreak -->

.02 The securitized evidences of indebtedness described in Section 4.04 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 6. EFFECTIVE DATE

This revenue procedure is effective July 22, 2002.

#### SECTION 7. DRAFTING INFORMATION

The principal author of this revenue procedure is Thomas Preston of the Office
of the Associate Chief Counsel (Financial Institutions and Products). For further
information regarding this revenue procedure contact Mr. Preston on (202) 622-3940
(not a toll free call).