REVISED SCHEDULE OF RULING AMOUNTS APPROVED.

UIL Number(s) 0468A.04-02, 0165.00-00

                                             Date: April 25, 1996

[1] This letter responds to your request dated May 30, 1995, and additional correspondence, that was submitted on behalf of the Taxpayer by your authorized legal representative. The request is for a revised schedule of ruling amounts in accordance with section 1.468A-3(i)(2) of the Income Tax Regulations for the Taxpayer's nuclear decommissioning fund (the "Fund") under the jurisdiction of the Commission. In addition, a ruling is requested relating to the costs associated with constructing and decommissioning an Independent Spent Fuel Storage Installation ("ISFSI"). The required information for the schedule of ruling amounts was submitted on behalf of the Taxpayer pursuant to section 1.468A-3(h)(2).

[2] The Taxpayer has represented the following facts and information relating to its request for a revised schedule of ruling amounts:

[3] The Taxpayer is an investor-owned electric utility incorporated in State X and is a wholly-owned subsidiary of the Parent. The Taxpayer is engaged in the operation of an electric public utility system involving the generation, transmission, distribution, and sale of electric energy in State X. In addition, the Taxpayer also has generation and transmission facilities in States. The Taxpayer is subject to the audit jurisdiction of the District.

[4] The Taxpayer directly owns an undivided * * * percent interest as tenant in common in the Plant near Location. The Taxpayer's nuclear decommissioning costs that are included in the Taxpayer's cost of service for ratemaking purposes for the Plant are subject to the jurisdiction of the Commission. The Commission has authorized nuclear decommissioning costs to be included in the Taxpayer's cost of service for ratemaking purposes. The Plant began commercial operations in * * * The Nuclear Regulatory Commission (NRC) had issued an operating license for the Plant that was scheduled to expire at midnight on * * *.

[5] The Plant contains four steam generators. The Taxpayer represents that the generators had badly degraded starting in * * * By * * * the Taxpayer had plugged or sleeved more than * * * percent of the steam generator tubes. In * * * the Taxpayer decided to close the Plant in * * * On * * * as a result of further steam generator degradation, the Taxpayer shut the Plant down.

[6] On * * * the Taxpayer notified the NRC of its decision to permanently cease power operations. On * * * the NRC amended the Taxpayer's operating license for the Plant to a "possession only" license. The Taxpayer represents that it has claimed an abandonment loss for its remaining tax basis in the Plant on its * * * Federal income tax return.

[7] On * * * the Taxpayer submitted the Plant Decommissioning Plan to the NRC for approval. The Plan adopts the prompt removal/dismantlement method, with the transfer of the spent fuel currently stored in the spent fuel pool of the Plant to the ISFSI. The ISFSI will be constructed on the site of the Plant. Relocation of the spent fuel and other high-level radioactive waste stored in the pool to the ISFSI will allow for decontamination and dismantlement of the structures, systems, and components throughout the Plant. This action will allow earlier termination of the possession only license. The Taxpayer specifically represents that only the spent fuel from the Plant will be stored in the ISFSI constructed on site of the Plant. No spent fuel from any other nuclear reactor will be stored in that ISFSI.

[8] The ISFSI will consist of a reinforced concrete pad approximately * * * inches thick upon which * * * steel-lines, thick- walled concrete casks will be placed. The concrete pad will encompass approximately * * * square feet of area. The casks will hold the spent fuel. The ISFSI is not an enclosed building; it has no walls nor roof. It located within the confines of the abandoned Plant and within * * * yards of the fuel building containing the spent fuel pool. The Taxpayer represents that the ISFSI does not increase the value of the Taxpayer's nuclear facilities nor prolong the useful life of the abandoned Plant. The ISFSI does not adapt the Plant to a new or different use. The Plant is no longer capable of producing income and the ISFSI will not produce any income. The construction costs of the ISFSI are not included in the Taxpayer's rate base for ratemaking purposes, but are recovered from the Taxpayer's ratepayers as a current decommissioning expenses of the Plant. Decommissioning of the Plant began with the removal of the steam generators.

[9] The Taxpayer also represents that its litigation against the Department of Energy (DOE), in Docket Nos. * * * and * * * the * * * Circuit, does not include a claim for reimbursement of the cost associated with construction of the ISFSI. The Taxpayer has represented that it has not sought and has no plans to seek the recovery of such costs in any other forum.

[10] On June 6, 1991, the Internal Revenue Service approved an initial schedule of ruling amounts for decommissioning costs included in the Taxpayer's cost of service by the Commission for the Plant. The Taxpayer's request for a revised schedule of rulings amounts results from the Commission's order in Order No. * * * dated * * * (the "Order"), in which decommissioning costs for the Plant were increased effective. The Taxpayer represents that there are no pending proceedings before the Commission that may result in an increase or decrease in the amount of decommissioning costs included in the Taxpayer's cost of service for ratemaking purposes.

[11] The Order relies on a site-specific decommissioning cost study for the Plant prepared by the Firm dated * * * The record of the ratemaking proceeding for the Order demonstrates that the Commission reviewed the amendments made by section 1917 of the Energy Policy Act of 1992 (the "Energy Act") to section 468A of the Code when it determined the amount of decommissioning costs included in the Taxpayer's cost of service. The amendments repealed the investment restrictions contained in former section 468A(e)(4)(C), for taxable years beginning after December 31, 1992, and lowered the tax rate applicable to a nuclear decommissioning fund in section 468A(e)(2), for taxable years beginning after December 31, 1993.

[12] The total estimated cost of decommissioning the Taxpayer's interest in the Plant is * * * (in * * * dollars). The estimated cost includes the amount of * * * which represents the Taxpayer's share of the costs associated with constructing and decommissioning of the ISFSI. Escalating that amount by * * * percent per year results in an estimated future decommissioning cost of * * * (in * * * dollars). In the Order, the Commission determined the annual amount of decommissioning costs to be included in the Taxpayer's cost of service from * * * through * * * to be * * *. As of * * * the asset balance of the Fund was * * * The assumed after-tax rate of return to be earned by the Fund ranges from * * * percent to * * * percent.

[13] The estimated date in which the Plant will no longer be included in the Taxpayer's rate base for ratemaking purposes by the Commission is * * * The level funding limitation period and the funding period extend from * * * through * * * The estimated period for which the Fund will be in effect is * * * years * * * through * * * The estimated useful life of the Plant is * * * years * * * through * * * Thus, the Taxpayer has calculated the qualifying percentage to be * * * percent.

[14] Section 468A of the Code provides that a taxpayer may elect to deduct the amount of payments made to a qualified nuclear decommissioning fund. However, section 468A(b) limits the amount paid into the fund for any taxable year to the lesser of the amount of nuclear decommissioning costs allocable to the fund that is included in the taxpayer's cost of service for ratemaking purposes for the taxable year or the ruling amount applicable to that year. Moreover, section 468A(c)(2) provides that in addition to any deduction under section 468A(a), there shall be allowable as a deduction for any taxable year the amount of the nuclear decommissioning costs with respect to which economic performance (within the meaning of section 461(h)(2)) occurs during such taxable year.

[15] Section 468A(d)(1) of the Code provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the Secretary a schedule of ruling amounts. The "ruling amount" for any taxable year is defined under section 468A(d)(2) as the amount which the Secretary determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the nuclear power plant as the period for which the fund is in effect bears to the estimated useful life of the plant. This term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level funding, taking into account such discount rates as the Secretary deems appropriate.

[16] Section 468A(g) of the Code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the taxable year if the payment is made on account of the taxable year within 2 1/2 months after the close of the taxable year.

[17] Section 1.468A-1(a) of the regulations provides, in part, that an eligible taxpayer may elect to deduct nuclear decommissioning costs under section 468A of the Code. An "eligible taxpayer," as defined under section 1.468A-1(b)(1), is a taxpayer that has a qualifying interest in a nuclear power plant. As defined under section 1.468A-1(b)(2), a "qualifying interest" is, among other things, a direct ownership interest, including an interest held as a tenant in common or joint tenant.

[18] Section 1.468A-1(b)(5) of the regulations defines the term "nuclear decommissioning costs" or "decommissioning costs" to mean all otherwise deductible expenses to be incurred in connection with the entombment, decontamination, dismantlement, removal and disposal of the structures, systems and components of a nuclear power plant that has permanently ceased the production of electric energy. Such term includes all otherwise deductible expenses to be incurred in connection with the preparation for decommissioning, such as engineering and other planning expenses, and all otherwise deductible expenses to be incurred with respect to the plant after the actual decommissioning occurs, such as physical security and radiation monitoring expenses. Such term does not include otherwise deductible expenses to be incurred in connection with the disposal of spent nuclear fuel under the Nuclear Waste Policy Act of 1982 (Pub. L. 97- 425). An expense is otherwise deductible for purposes of section 1.468A-1(b)(5) if it would be deductible under chapter 1 of the Code without regard to section 280B.

[19] Section 1.468A-2(b)(1) of the regulations provides, in part, that the maximum amount of cash payments made (or deemed made) to a nuclear decommissioning fund during any taxable year shall not exceed the lesser of (i) the cost of service amount applicable to the nuclear decommissioning fund for such taxable year; (ii) or the ruling amount applicable to the nuclear decommissioning fund for such taxable year.

[20] Section 1.468A-3(a)(1) of the regulations generally provides, in part, that a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that, over the taxable years remaining in the "funding period" as of the date the schedule first applies, will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding period equal to (and in no event more than) the "amount of decommissioning costs allocable to the fund."

[21] Section 1.468A-3(a)(2) of the regulations provides that, to the extent consistent with the principles and provisions of section 1.468A-3, each schedule of ruling amounts shall be based on the reasonable assumptions and determinations used by the applicable public utility commission(s) in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes, taking into account amounts that are otherwise required to be included in the taxpayer's income under section 88 of the Code and the regulations thereunder. Thus, for example, each schedule of ruling amounts shall be based on the public utility commission's reasonable assumptions concerning (i) the after-tax rate of return to be earned by the amounts collected for decommissioning; (ii) the total estimated cost of decommissioning the nuclear power plant; and (iii) the frequency of contributions to the nuclear decommissioning fund for a taxable year.

[22] Under section 1.468A-3(a)(3) of the regulations, the Internal Revenue Service shall provide a schedule of ruling amounts that is identical to the schedule proposed by the taxpayer, but no such schedule shall be provided unless the taxpayer's proposed schedule is consistent with the principles and provisions of section 1.468A-3.

[23] Section 1.468A-3(b)(1) of the regulations provides that the ruling amount, specified in a schedule of ruling amounts, for any taxable year in the level funding limitation period shall not be less than the ruling amount specified in such schedule for any earlier taxable year. Under section 1.468A-3(b)(2)(i) and (ii), the level funding limitation period begins on the first day of the first taxable year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes.

[24] Section 1.468A-3(c)(1)(i) and (ii) of the regulations provides that the funding period for a nuclear decommissioning fund is the period that begins on the first day of the first taxable year for which a deductible payment is made (or deemed to be made) to such nuclear decommissioning fund and ends the later of the last day of the taxable year that includes the estimated date on which decommissioning costs of the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer's cost of service for ratemaking purposes; or the last day of the taxable year that includes the estimated date on which the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer's rate base for ratemaking purposes.

[25] Section 1.468A-3(d)(1) of the regulations provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage.

[26] Section 1.468A-3(d)(2)(i) of the regulations provides, in part, that the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public utility commission in establishing or approving the amount of these costs, to be included in cost of service for ratemaking purposes.

[27] Section 1.468A-3(d)(3) of the regulations provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning the plant multiplied by the taxpayer's qualifying interest in the plant.

[28] Section 1.468A-3(d)(4)(i) of the regulations provides that the qualifying percentage for any nuclear decommissioning fund is equal to the fraction, the numerator of which is the number of taxable years in the estimated period for which the nuclear decommissioning fund is to be in effect and the denominator of which is the number of taxable years in the estimated useful life of the applicable nuclear power plant.

[29] Under section 1.468A-3(d)(4)(ii) of the regulations, the estimated period for which a nuclear decommissioning fund is to be in effect (A) begins on the later of the first day of the first taxable year for which a deductible payment is made to the nuclear decommissioning fund or the first day of the taxable year that includes the date that the nuclear power plant begins commercial operations; and (B) ends on the last day of the taxable year that includes the estimated date on which the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer's rate base for ratemaking purposes. Likewise, under section 1.468A-3(d)(4)(iii), the estimated useful life of a nuclear power plant (A) begins on the first day of the taxable year that includes the date that the plant begins commercial operations; and (B) ends on the last day of the taxable year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes.

[30] Section 1.468A-3(e)(3) of the regulations provides that, for purposes of section 1.468A-3(d)(4)(ii) and (iii), the estimated date on which the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer's rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer's rate base.

[31] Section 468A(f) of the Code defines the term "nuclear powerplant" as including any unit thereof. Section 1.468A-1(b)(4) of the regulations further defines the term "nuclear power plant" as any nuclear power reactor that is used predominantly in the trade or business of the furnishing or sale of electric energy, if the rates for such furnishing or sale, as the case may be, have been established or approved by a public utility commission. Each unit (i.e., nuclear reactor) located on a multi-unit site is a separate nuclear power plant.

[32] Section 1.468A-3(g) of the regulations provides that the Service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public utility commission that establishes or approves the rates for electric energy generated by the plant to which the nuclear decommissioning fund relates has (1) determined the amount of decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes; and (2) has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount.

[33] Section 1.468A-3(h)(2) of the regulations enumerates the information required to be submitted by a taxpayer in order to receive a ruling amount for any taxable year.

[34] Section 1.468A-3(i)(1)(iii) of the regulations provides that a taxpayer is required to request a revised schedule of ruling amounts for a nuclear decommissioning fund if (A) any public utility commission that establishes or approves rates for the furnishing or sale of electric energy generated by a nuclear power plant to which the nuclear decommissioning fund relates (1) increases the proposed period over which decommissioning costs of the nuclear power plant will be included in cost of service for ratemaking purposes; (2) adjusts the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes; or (3) reduces the amount of decommissioning costs to be included in cost of service for any taxable year; and (B) the taxpayer's most recent request for a schedule of ruling amounts did not provide notice to the Service of the action by the public utility commission.

[35] Section 1.468A-3(i)(2) of the regulations provides that any taxpayer that has obtained a schedule of ruling amounts pursuant to section 1.468A-3(h) can request a revised schedule of ruling amounts. Such a request must be made in accordance with the rules of section 1.468A-3(h); thus, the Service shall not provide a revised ruling amount applicable to a taxable year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable year.

[36] Section 1.468A-7(a) of the regulations provides, in general, that an eligible taxpayer is allowed a deduction for the taxable year in which the taxpayer makes a cash payment (or is deemed to make a cash payment) to a nuclear decommissioning fund only if the taxpayer elects the application of section 468A of the Code. A separate election is required for each nuclear decommissioning fund and for each taxable year with respect to which payments are to be deducted under section 468A. In the case of an affiliated group of corporations that join in filing a consolidated return for a taxable year, the common parent must make a separate election on behalf of each member whose payments to a nuclear decommissioning fund during such taxable year are to be deducted under section 468A. The election under section 468A for any taxable year is irrevocable and must be made by attaching a statement ("Election Statement") and a copy of the schedule of ruling amounts provided pursuant to the rules of section 1.468A-3 to the taxpayer's federal income tax return (or, in the case of an affiliated group of corporations that join in filing a consolidated return, the consolidated return) for such taxable year. The return to which the Election Statement and a copy of the schedule of ruling amounts is attached must be filed on or before the time prescribed by law (including extensions) for filing the return for the taxable year with respect to which payments are to be deducted under section 468A.

[37] The Taxpayer has requested a ruling regarding whether the costs associated with constructing and decommissioning the ISFSI constitute decommissioning costs under section 1.468A-1(b)(5) of the regulations because they are otherwise deductible under section 165 of the Code.

[38] "Nuclear decommissioning costs" are broadly defined in section 1.468A-1(b)(5) of the regulations to include expenses incurred before, during and after the actual decommissioning process for the nuclear power plant unit that has ceased operations. This broad definition is consistent with Congress' recognition in enacting section 468A of the Code in 1984 that "the establishment of segregated reserve funds for paying future decommissioning costs is of sufficient national importance that a tax deduction, subject to limitations, should be provided for future amounts contributed to a qualified fund." Joint Committee on Taxation Staff, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, 98th Cong., 2d Sess. 270 (1984).

[39] The Taxpayer argues that the cost of constructing the ISFSI is an integral part of the decommissioning process of the Plant and that these costs are decommissioning costs within the meaning of section 468A(c)(2) of the Code and section 1.468A-1(b)(5) of the regulations. As such, when economic performance occurs under section 461(h)(2), the costs are currently deductible.

[40] In our view, costs meeting the definition of "nuclear decommissioning costs" under section 468A of the Code are not automatically deductible. The costs are deductible when economic performance occurs under section 461(h)(2) if the costs are deductible under section 165 or are otherwise deductible under another provision of the Code.

[41] Section 165 of the Code provides that there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

[42] Section 1.165-1(b) of the regulations provides that to be allowable as a deduction under section 165(a), a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and actually sustained during the taxable year.

[43] Section 165-2(c) of the regulations states, "For the allowance under section 165(a) of losses arising from the permanent withdrawal of depreciable property from use in the trade or business or in the production of income, see section 1.167(a)-8." That section provides that in order to qualify for the recognition of loss from physical abandonment, the intent of the taxpayer must be irrevocably to discard the asset so that it will neither be used again nor retrieved for sale, exchange, or other disposition.

[44] Although the ISFSI is constructed after the Plant has ceased operation, we view the ISFSI as an integral component of the Plant itself, and construction of the ISFSI as a necessary step in the process of decommissioning the abandoned Plant. The ISFSI is located within the perimeter of the Plant. The spent fuel must be moved in order to proceed with dismantlement and decommissioning. The spent fuel to be stored in the ISFSI consists only of spent fuel from the Plant; the ISFSI will not store spent fuel from other nuclear generating facilities. The Plant is not being, and cannot be, used to produce additional income, and construction of the ISFSI will not facilitate conversion to other uses. Furthermore, storage of the spent fuel in the ISFSI is the only economic option for the Taxpayer, given the cost of other decommissioning methods, and local environmental regulations.

[45] Like the Plant itself, the ISFSI is subject to legal restrictions upon its physical disposition. However, legal restrictions upon the physical disposition of property will not in themselves preclude a finding of abandonment, if all other facts and circumstances demonstrate an intention to Irrevocably retire property from use, and the requisite overt acts related to abandonment have occurred.

[46] Therefore, assuming the Plant itself qualifies for an abandonment loss under section 165 of the Code, we conclude that in this unique, heavily-regulated context, costs associated with the construction of the ISFSI are also deductible under section 165, as those costs are irrevocably committed to the decommissioning process.

[47] Because we have concluded that the ISFSI is an integral component of the Plant, in order to treat the ISFSI as abandoned, the Taxpayer must have taken the steps necessary to abandon the Plant itself, such as obtaining a possession only license, deactivating equipment not necessary in order to safely store spent fuel, altering its insurance to a level indicative of a non-operational status, and including in its financial reports statements regarding the abandonment of the Plant.

[48] In addition to these steps, the ISFSI may be considered abandoned only as it is irrevocably committed to the process of decommissioning the abandoned Plant. Costs related to an asset that can be sold or used for another purpose cannot qualify, even though the taxpayer intends to use it in the decommissioning process. We view the concrete pad as irrevocably committed to the decommissioning process as costs are incurred to build it. We view the casks as irrevocably committed to the decommissioning process as they are filled with spent fuel and placed on the concrete pad.

[49] The Taxpayer is involved in litigation with the DOE concerning the problem of finding a permanent storage facility for its nuclear waste. Under section 1.165-1(d)(2)(i) of the regulations, if an event occurs which may result in a loss and, in the year of the event, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. However, the Taxpayer represents that the litigation does not request reimbursement for any costs associated with construction of the ISFSI, and that the Taxpayer has not sought and has no plans to seek the recovery of such costs in any other forum. Our conclusion is expressly conditioned on this representation.

[50] Accordingly, we rule that the costs associated with the constructing and decommissioning of the ISFSI constitute decommissioning costs within the meaning of section 1.468A-1(b)(5) of the regulations because they are incurred in connection with dismantlement and decontamination of the Plant and are otherwise deductible under section 165 of the Code. As such, they are included in the calculation of the revised schedule of ruling amounts.

[51] We have examined the representations and information submitted by the Taxpayer in relation to the requirements set forth in the section 468A of the Code and the regulations thereunder. Based solely on these representations, we reach the following conclusions:

     1. The Taxpayer has a qualifying interest in the Plant and is,

             APPROVED REVISED SCHEDULE OF RULING AMOUNTS

[54] The approved schedule of ruling amounts is relevant only to those payments made to the Fund. Payments allocable to any funds other than the Fund cannot qualify for purposes of the deduction under the provisions of section 468A of the Code. As stated above, PAYMENTS MADE TO THE FUND CAN QUALIFY ONLY TO THE EXTENT THAT THEY DO NOT EXCEED THE LESSER OF THE DECOMMISSIONING COSTS APPLICABLE TO THE FUND OR THE RULING AMOUNTS APPLICABLE TO THE FUND IN THE TAXABLE YEAR.

[55] Except as specifically set forth above, no opinion is expressed concerning the federal income tax consequences of the above described facts under any other provision of the Code or regulations. This letter ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that this ruling may not be used or cited as precedent.

[56] In accordance with the power of attorney on file, a copy of this letter is being sent to your authorized legal representative. Pursuant to section 1.468A-7(a) of the regulations, a copy of this letter must be attached (with the required Election Statement) to the Taxpayer's federal income tax return for each taxable year in which the Taxpayer claims a deduction for payments made to the Fund.

                                   Sincerely yours,