LEXIS-NEXIS® Congressional Universe-Document
Federal News Service, Inc.
Federal News Service
OCTOBER 19, 1999, TUESDAY
SECTION: IN THE NEWS
LENGTH: 3441 words
HEADLINE: PREPARED STATEMENT OF
CORBIN A. MCNEILL, JR.
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
PECO ENERGY COMPANY
SENATE COMMITTEE ON FINANCE
SUBCOMMITTEE ON LONG-TERM GROWTH
& DEBT REDUCTION
SUBJECT - REGARDING FEDERAL TAX ISSUES RELATING
TO RESTRUCTURING OF THE ELECTRIC POWER INDUSTRY
Chairman Murkowski and Members of the Subcommittee:
I am Corbin McNeill, Chairman, President, and Chief Executive Officer of PECO
Energy Company. PECO Energy, headquartered in Philadelphia, is a diversified
energy company providing retail
electric service throughout southeastern Pennsylvania and retail gas service in
suburban Philadelphia. PECO Energy is also engaged in retail and wholesale
electricity markets throughout the United States. The company's retail
electric affiliate, Exelon Energy, is currently the largest non-utility supplier of
retail electricity in the nation in terms of customers served, and PECO's Power
Team is engaged in wholesale
electric and gas sales in 47 states and Canada.
PECO Energy is also a partner with British Energy in AmerGen Energy Company, a
limited liability corporation established in 1997 to acquire nuclear
power plants in the United States. To date, AmerGen has announced agreements to
acquire six nuclear reactors: Three Mile Island Unit 1 in Pennsylvania, the
Clinton Generating Station in Illinois, Nine Mile Point I and 59 percent of
Nine Mile Point 2 in New York, Oyster Creek in New Jersey, and Vermont
Yankee.My testimony today is on behalf of the Edison
Electric Institute (EEl), the Nuclear Energy Institute (NEI), and the Utility
EEl is the national association of U.S. shareholder-owned
electric utilities, their affiliates and associates worldwide. EEI's members serve
approximately 75 percent of the nation's
NEI is the national association of companies involved in the commercial nuclear
power industry. NEI's members include all utilities licensed to operate
commercial nuclear power plants in the United States, nuclear plant designers,
major architect-engineering firms, fuel fabrication facilities, materials
licensees, and other organizations and individuals involved in the nuclear
The Utility Decommissioning
Tax Group is composed of more than 60 nuclear utilities, investment advisory
companies and trust companies. The Group is currently pursuing legislative and
regulatory amendments to the
tax laws as nuclear utilities disaggregate and transition to competition.
Mr. Chairman, the
electric power industry in the United States is undergoing a profound change as a
result of Federal and state actions to deregulate both the wholesale and retail
electricity markets. In 1992, Congress passed the Energy Policy
Act in an effort to promote increased competition in the nation's wholesale
electric power market. More recently, 24 states have acted through legislation or
regulation to deregulate
electric sales at the retail level. These 24 slates include 17 states with nuclear
power plants, representing 60 of the nation's 103 operating reactors.These
actions have led to a fundamental change in the nature of the
electric power industry in general and in the shape of the
electric utility industry in particular: traditional, vertically-integrated utilities
are being forced to rethink the way in which they do business in a newly-
deregulated environment, new players are entering the market every day, and
creative partnerships are being formed to compete in the new energy marketplace.
Perhaps the most astonishing element of this restructuring of the industry is
the dramatic speed with which these changes are occurring.
tax law has not kept pace with the rapid changes taking place.
It is important to emphasize the speed with which the marketplace is reacting
to the changes caused by restructuring. As companies seek to respond to the
changing market, however, that task is complicated, and in many instances
frustrated, by the lack of certainty regarding the Federal
tax consequences of various transactions being considered. By way of example, I
would note that while AmerGen has announced five acquisition agreements to
date, none of those sales has closed. While some of these agreements were just
announced recently, AmerGen's purchase of Three Mile Island Unit One is
awaiting final action by the Internal Revenue Service prior to closing. The TMI
deal has received all Federal approvals necessary to complete the transaction
except for the IRS ruling. Until Congress provides the IRS with guidance to
predictable set of regulations, I fear that other transactions could be
similarly delayed in the future.
Thus, if there is a single message that I can leave with you today, it would be
this: Congress can not afford to wait for the passage of comprehensive
electric restructuring legislation to address some of the
tax issues raised by
deregulation. The market is moving forward, but the development of a mature competitive
electric market will be hampered and the continuedoperation of low-cost, competitive,
reliable nuclear generating assets may be placed at risk if Congress does not
act quickly to address the unintended
tax consequences of the transition to a deregulated
While restructuring of the industry has raised many
tax-related issues, I will limit my comments today to the implications of
electric restructuring for the Federal
tax treatment of nuclear decommissioning trust funds.
Decommissioning nuclear power plants after they no longer produce electricity
is a public health and safety imperative. The companies that own and operate
nuclear power plants have a responsibility under Nuclear Regulatory Commission
regulations to ensure that the necessary decommissioning funds are available
Similarly, state and federal policymakers have a long-held interest in ensuring
there is adequate decommissioning funding for two important reasons:
accumulating funds over 40 years saves electricity consumers money in the long
run; and having adequate decommissioning funding assures that nuclear power
plants will not be subject to Superfund- type cleanup issues.
Decommissioning a nuclear power plant requires that nuclear power plant owners
accumulate $400-500 million per plant over the plants' 40-year operating
period. These trust funds are
segregated from a company's other assets, dedicated exclusively to
decommissioning, cannot be spent for any other purpose, and can only be spent
with the express approval of the Nuclear Regulatory Commission.
Since 1984, U.S.
tax policy has recognized that decommissioning represents a unique financial
undertaking and thus qualifies for specialized treatment under the
tax laws. Specifically, theInternal Revenue Code and Internal Revenue Service
regulations treat annual contributions to decommissioning funds as a deductible
expense. This policy was appropriate for utilities in the regulated
cost-of-service environment, but the Code must be updated to reflect the
competitive electricity market.
Issues Raised by
The problems raised by
electric restructuring with regard to nuclear decommissioning trust funds fall into two
categories: first, cases in which similarly-situated taxpayers will be treated
differently depending upon whether they operate in a state in which
deregulation has occurred, and second, cases in which state and Federal legislation or
regulatory requirements will conflict with the intent of existing Federal
Let me provide a brief- and somewhat simplified - summary of current
tax law before elaborating on each of these issues.
Section 468A of the Internal Revenue Code of 1986, as amended, allows an
electric utility company which owns or leases a nuclear power plant to deduct
contributions made to a Qualified Nuclear Decommissioning Reserve Fund, subject
Contributions are limited to the lesser of: (1) the amount that a state
commission allows to be collected for decommissioning (the cost of service
amount), or (2) an amount approved by the Treasury Department (the ruling
amount) as consistent with the concept of level funding.
Under level funding, the
amount a plant owner is permitted to contribute is based on the projected
decommissioning costs yet to be collected and the estimated remaining operating
life of the plant. For example, if decommissioning costs were expected to be
$200 million above what has beencollected and the remaining life of the plant
is 20 years, the owner can contribute $10 million annually to a Qualified Fund.
These limitations on deductible contributions were put in place to prevent
nuclear power plant owners from arbitrarily managing their contributions in
order to take excessive deductions in any single year. Under current law, the
level funding amount acts as a ceiling on the amount a power plant owner can
contribute to a Qualified Fund in any single year.
Let me now elaborate on each of the issues I identified earlier. There are
in which similarly-situated taxpayers are likely to be treated differently as a
result of restructuring.
Cost of Service Requirement
The first relates to what is commonly called the
"cost of service" issue. As I said, current
tax law limits contributions to a Qualified Trust Fund to the lesser of an amount
approved by a state public service commission or to the level funding amount.
Since in a restructured environment, many state commissions now have no
ratemaking authority over generating plants, the cost of service amount is
zero. As a result, nuclear plant owners whose plants are no longer regulated
under cost of service regulation will be prohibited from making contributions
to a Qualified Fund.
Section 468A was written at a time when all nuclear plants were regulated by
state public utility commissions. The failure of the Code to
envision nuclear plants operating in a deregulated environment may lead to the
unintended consequence of plant owners being unable to make contributions to a
While the IRS has issued some Private Letter Rulings to address this issue,
Congress should act to address this now-antiquated provision in the Code and
provide uniform rules for the new deregulated marketplace. Failure to address
this issue would result in one set of rules for power plant owners in states
that have deregulated and another set of rules for those in states that have
Since the level funding method serves as a ceiling for contributions under
current law, the industry supports amending Section 468A to permit
contributions to a Qualified Fund using the level funding method.
The Clinton Administration has also expressed support for this solution
both as part of its budget proposal for fiscal year 2000 and as part of its
electric restructuring proposal, the Comprehensive Electricity Competition Act.
A second case relates to license transfers and plant sales. Current law permits
tax-free transfer of Qualified Funds in connection with the sale of a nuclear
plant from one regulated entity to another. Thus, if two
traditionally-regulated utilities were involved in the sale of a nuclear plant,
the transfer of the Qualified Fund would not be taxed. If, however, a regulated
utility sold the plant to a buyer that is no longer regulated by a public
service commission, the IRS has indicated that the transfer could be considered
a taxable event. Such a ruling could effectively prevent a sale from taking
place and, in some cases, could lead to the closure of plants.
As a result of state laws to
electric power industry, some nuclear plant owners have chosen (and in some cases been
required) to sell their generating plants. Because of the decommissioning
liabilities associated with nuclear plants, the buyers of these plants are
requiringcurrent plant owners to fully fund the projected cost of
decommissioning as part of the sales agreement. Under current law, only a
portion of the fully-funded amount could be contributed to a Qualified Fund.
There are important public policy reasons to address this particular issue.
With the transition to a deregulated environment, companies which own a single
nuclear plant are often finding that it is uneconomic to operate these plants
in a competitive marketplace. The overhead costs associated with the operation
of a single unit plant make it inefficient to operate in isolation. In some
instances, plant owners have announced that they will either sell the plants or
nuclear power plants before the end of their useful lives has important public
health and safety, energy security,
electric reliability, environmental, and economic consequences. In the two nuclear
plant sales approved to date, the Nuclear Regulatory Commission has recognized
the public health and safety implications of closing plants prematurely and has
required full funding of decommissioning trust funds as a condition of license
transfers that they have approved to date.
From an energy security perspective, nuclear power provides 20 percent of the
electricity generated in the United States each year, second only to coal.
Since the oil crisis of the 1970s, nuclear power has significantly decreased
the dependence of the United States on imported oil. Closing nuclear plants
prematurely will decrease the diversity of our energy mix.
electric reliability standpoint, nuclear power contributes large amounts of electricity
in those areas of the country most prone to lapses in
electric reliability as a result of transmission and power supply constraints. For
example, in the summer of 1998, the Midwest experienced unprecedented price
spikes in wholesale electricity markets because of the unavailability of
several power plants - nuclear and fossil. During the summer of 1999, however,
the powersupply in the Midwest was much more stable, due largely to the fact
that all of the region's nuclear power plants operated throughout the summer.
Nuclear power also provides significant environmental benefits since it
generates electricity without burning fuel. As a result, nuclear power does not
emit any greenhouse gases or air pollutants that contribute to acid rain or
smog. In many cases, nuclear plants are located in precisely those regions that
benefit the most from its clean air profile, such as the Northeast. If plants
were forced to
close unnecessarily, they would have to be replaced with plants that would
worsen the region's strained air quality. Finally, from an economic
perspective, the unnecessary closure of nuclear plants would result in
significant job loses and could have serious impacts, both direct and indirect,
on local and regional economies.
Failure to address this issue could lead to the closure of some marginal
nuclear plants since potential purchasers of nuclear plants have shown an
unwillingness to purchase plants where sellers refuse to fully fund nuclear
decommissioning trust funds as a condition of the sale.
Section 468A should be amended to allow power plant owners to contribute to a
Qualified Fund where, in connection with the transfer of a nuclear power plant,
the transferor or transferee (or both) is required to contribute a greater
amount for nuclear decommissioning costs as part of the transfer of the plant.
Unequal Treatment of Plants Due to Age
case in which similarly-situated taxpayers will be treated differently relates
to a disparity that is already written into the
tax code but which will be exacerbated by
deregulation. Section 468A provides more favorable
tax treatment for funds collected to decommission those portions ofnuclear plants
in service since 1984. Thus, newer plants receive more favorable
tax treatment than older plants.
When Section 468A was enacted in 1984, Congress drew a distinction between
amounts contributed to decommissioning funds for plants in service prior to
1984 and plants in service after 1983. Specifically, contributions to Qualified
Funds are limited in the aggregate to the portion of total decommissioning
costs allocable to the portion of the post-1983 operating life of the plant.
Amounts collected to pay decommissioning costs for the portion of the plant
1984 are not deductible and must be placed in a Non-Qualified Fund.
The distinction between pre- and post-1984 contributions is completely
arbitrary and is not based on any substantive policy rationale. The distinction
treats taxpayers with identical decommissioning expenses differently based
solely upon the age of the plant. This produces inequitable results,
particularly in the new competitive marketplace for power supply, and the
provision should be abandoned.
Congress should act to eliminate the distinction between plants based on their
age by allowing all future contributions to be made to Qualified Funds. This
would prevent different treatment of similarly- situated taxpayers and would
place all nuclear plants on the same footing in the competitive marketplace for
Conflicts Between State and Federal Law and the Federal
There are two areas in which state and Federal regulations or legislation
will conflict with the intent of existing Federal
tax law. These issues arise where states have directed nuclear plant owners to
accelerate the collection of decommissioning funds as part of restructuring
orders, or where agencies such as the Nuclear Regulatory Commission have
required pre-payment of decommissioning funds as a condition of a plant sale.As
part of some state restructuring proceedings in conjunction with
deregulation, many nuclear power plant owners have been directed to accelerate their
collection of decommissioning costs to assure that the plants will have
adequate funds to decommission the plants at the end of their operating lives.
As noted above, under current law, the Internal Revenue Service could reject
the accelerated funding as exceeding the more traditional level funding amount,
thus barring the plant owner from contributing the total amount collected to a
Qualified Fund and denying the owner the corresponding deduction associated
with such a contribution.
From a public
policy perspective, nuclear plant owners should be encouraged to fund their
decommissioning trusts earlier rather than later. The Department of Energy and
the Nuclear Regulatory Commission have both expressed concerns about
decommissioning trust funds being under-funded. Permitting accelerated
contributions to trust funds where required by state or Federal orders would
serve a strong public policy interest.
The industry believes that Section 468A should be amended to permit power plant
owners to contribute the full amount collected to a Qualified Fund where
Federal or State law or regulation requires or permits the accelerated
collection of decommissioning funds. This would allow plant owners to comply
with applicable Federal or state laws without being penalized for exceeding the
level funding amount. Such accelerated funding would only be permitted as
required by Federal or state law, thus preventing a plant owner from
contributions in an effort to increase deductions.
S. 1308: Nuclear Decommissioning Trust Fund Clarification Act
Mr. Chairman, let me thank you for your personal leadership in trying to
address these critical issues. Your legislation, cosponsored by Senator Breaux,
seeks to deal with the unintended taxconsequences of
electric restructuring by ensuring that
electric consumers are not unnecessarily penalized by the transition to a deregulated
Companion legislation, HR. 2038, has been introduced in the House by
Congressmen Jerry Weller and Ben Cardin and enjoys strong bipartisan support
among members of the House Ways and Means Committee.
As you know, many of the core provisions of the Nuclear Decommissioning Trust
Fund Clarification Act were included in HR. 2488, the Financial Freedom Act of
1999. Although that bill was vetoed by President Clinton, Congress should be
commended for recognizing the need to deal with this issue expeditiously.
Mr. Chairman, without the Nuclear Decommissioning Trust Fund Clarification Act,
similarly situated taxpayers will be treated differently depending on whether
they are in states that have deregulated their
electric markets. The benefits of lower energy prices in those state with retail
competition could be offset by increased
taxes that consumers in those same states may have to pay if current law is not
changed. Clearly, Congress did not intend, or even envision, such a result.
I urge the committee to act quickly to avoid such unintended consequences.
Thank you for the opportunity to appear before you today. I would be pleased to
answer any questions you may have.
LOAD-DATE: October 21, 1999