LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

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
BEFORE THE SENATE COMMITTEE ON FINANCE
SUBCOMMITTEE ON LONG-TERM GROWTH & DEBT REDUCTION
SUBJECT - REGARDING FEDERAL TAX ISSUES RELATING
TO RESTRUCTURING OF THE ELECTRIC POWER INDUSTRY

BODY:

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 Decommissioning Tax Group.
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 electric customers.
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 energy industry.
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. Unfortunately, Federal 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 provide a 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 electric industry.
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.
Background
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 when needed.
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 Electric Restructuring
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 tax law.
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 to limitations.
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 three instances 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 Qualified Fund.
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 not deregulated.
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 proposed electric restructuring proposal, the Comprehensive Electricity Competition Act.
License Transfers
A second case relates to license transfers and plant sales. Current law permits the 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 restructure the 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 close them.
Closing 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.
From an 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
The final 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 prior through 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 energy.
Conflicts Between State and Federal Law and the Federal Tax Code
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 arbitrarily increasing 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 electric market.
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.
Conclusion
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.
END

LOAD-DATE: October 21, 1999