Utility proration depends on when interim and final rates apply

Plain-English summary

A regulated electric utility used a forecasted test year to set refundable interim rates that began during the test year, while final rates would take effect only after that year ended. The IRS ruled that final rates used a historical test period and therefore could compute accumulated deferred federal income taxes without the proration formula. Interim rates used a partly future period and had to apply proration beginning on the date those rates became effective. A later refund could reverse proration effects embedded in interim rates charged after the test year, when the projected reserve increases had already accrued. It could not reverse the proration effects for interim rates charged during the test year because that would be equivalent to never applying proration. Reducing recoverable tax or depreciation expense, or otherwise adjusting the refund to offset revenue produced by required proration, would also violate the normalization rules.

Ruling snapshot

• Question: How do the ADFIT proration and normalization rules apply to forecast-based interim rates, later final rates, and the resulting customer refund?
• Outcome: approved
• Key authorities: IRC § 168(i)(9); Treas. Reg. § 1.167(l)-1(h)(6)

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201739001                                            Third Party Communication: None
Release Date: 9/29/2017                                      Date of Communication: Not Applicable
Index Number: 167.22-01
                                                             Person To Contact:
-----------------                                            ------------------------, ID No. -------------
-------                                                      Telephone Number:
-------------------------------------                        ----------------------
--------------------------------------------------------     Refer Reply To:
----------------------------------------                     CC:PSI:B06
In Re: --------------------------------------------------    PLR-100199-17
----------------------------------                           Date:
                                                             June 20, 2017




Legend:

Parent                   =        ------------------------------
                                  --------------------------
Taxpayer                 =        -------------------------------------
                                  --------------------------
State A                  =        ---------------
State B                  =        -------------------
State C                  =        -------------------
Commission A             =        -------------------------------------------------------
Commission B             =        ----------------------------------------------------
Department               =        ---------------------------------------------------------------------------------
                         -------------------------------------------------------------------
OAG                      =        ---------------------------------------------------------------------------------
                         ----------------------------------------
Office                   =        ------------------------------------------------------------
Year 1                   =        -------
Year 2                   =        -------
Director                 =        -----------------------------------------------------------------
                         ------------------
Date 1                   =        --------------------
Date 2                   =        ----------------------
Date 3                   =        --------------------------
Date 4                   =        --------------------
Date 5                   =        --------------------
Date 6                   =        --------------------
Date 7                   =        ----------------------
Date 8                   =        --------------------------
Date 9                   =        ---------------------------
PLR-100199-17                                        2

Date 10              =      ----------------------
Date 11              =      ----------------------
Month 1              =      -------------
Month 2              =      ----------------
Month 3              =      -----------
Month 4              =      ------------


Dear -----------:

        This letter responds to the request, filed December 28, 2016, submitted on behalf
of Taxpayer for a ruling on the application of the depreciation normalization rules of
§ 168(i)(9) of the Internal Revenue Code (“Code”) and § 1.167(l)-1 of the Federal
Income Tax Regulations (“Regulations”) (together, the “Normalization Rules”) with
respect to the computation of accumulated deferred federal income taxes (“ADFIT”) in
its calculation of rate base in a rate proceeding.

       The representations set out in your letter follow.

       Parent is the common parent of a group of affiliated corporations that includes
Taxpayer and files a consolidated federal income tax return on a calendar year basis
employing the accrual method of accounting. Parent and Taxpayer are incorporated in
State A. Parent is currently under the audit jurisdiction of the Large Business and
International Division of the Internal Revenue Service.

        Taxpayer is a rate-regulated electric utility involved in the production,
transmission, distribution and sale of electric energy in State A, State B, and State C.
Taxpayer is subject to regulation of rates and other matters in each of the three states in
which it operates and by the Commission A for certain operations. Taxpayer is subject
to the jurisdiction of Commission B with respect to certain matters. Taxpayer’s most
recently-completed Commission B general rate case resulted in an order issued on
Date 1, and effective Date 2, granting an increase in rates.

       On Date 3, Taxpayer filed a request with Commission B for an increase in
revenue recoverable under general base rates in State A. At Taxpayer’s option, this
general rate case was based on a forecasted Year 1 test year. Rates will not be final
until Year 2, after the close of the forecasted Year 1 test year. Until final rates are
implemented, Taxpayer is allowed to charge interim rates. In its filing, Taxpayer also
requested an interim rate increase in general base rates. An order of Commission B on
Date 4 approved interim rates, which became effective on Date 5. These interim rates
are subject to refund at the end of the rate case in Year 2, if final rates determined by
Commission B are less than interim rates.
PLR-100199-17                                 3

       Through this pending rate case proceeding, Taxpayer is also proposing to
recover, in base rates, revenue currently subject to recovery under riders. Decisions on
recovery of costs in these riders will not be made until Year 2, when the costs proposed
to be recovered will be historical.

        Taxpayer’s request for an interim rate increase was based on the anticipated
suspension by Commission B of the effective date of Taxpayer’s request for an increase
in revenue recoverable under general base rates in State A. Under State A law, interim
rates are issued before a full review of costs is completed and are based primarily on
the utility’s proposed final rates. Under State A law, interim rates are subject to refund
or credit to customers, plus interest (the “Interim Rate Refund”). An Interim Rate
Refund results if, at the end of the contested case, amounts collected under the interim
rate schedule exceed final rates and, if applicable, is typically a one-time refund/credit
based on the amount of excess of interim rates over final rates and the time period from
the implementation of interim rates until final rates become effective. Taxpayer’s final
rates are suspended until Date 6, with Commission B’s final rate order (subject to
reconsideration and other post order procedures) expected on or before Date 6.

        On Date 4, Commission B issued an order suspending the effective date of
Taxpayer’s requested rate increase until Date 7, and referred the matter to the Office to
receive testimony, conduct a contested case process, including potential evidentiary
hearing, and issue a recommendation to Commission B. Commission B determines
final rates, and they can accept, reject, or modify the recommendation from Office.

       On Date 4, Commission B also issued an order approving an interim rate
increase to the base rates, as modified and subject to the Interim Rate Refund. The
interim increase, subject to the Interim Rate Refund, became effective Date 5, and is
expected to remain in effect until Commission B makes a final determination on
Taxpayer’s overall request and final rates become effective. Taxpayer filed a letter on
Date 8, agreeing to extend the effective date of Taxpayer’s requested rate increase until
Date 6.

       Taxpayer computed interim rates by applying the proration methodology that is
required for future test periods to its ADFIT and proposed that final rates reflect ADFIT
proration. Taxpayer also asserted that, whether or not application of the proration
formula to final rates is required under the normalization rules, the incremental effect of
the revenue requirement on interim rates charged during the test period should not
cause or increase the Interim Rate Refund.

      In its Order dated Date 4, Commission B set interim rates with ADFIT proration.
No party filed an objection to the interim rates set by Commission B. Interim rates are
charged from Date 5 through the date in Year 2 when final rates will be implemented.
PLR-100199-17                                4

        The Department proposed that ADFIT proration not be reflected in final rates.
The Department stated that, because final rates in this proceeding will not go into effect
until Year 2, after the forecasted test year, final rates would be based on a then-
historical Year 1 test year. Specifically, the Department did not oppose the use of
ADFIT proration in setting the interim rates, but proposed that: (1) the level of the
Interim Rate Refund for Date 5 through Date 9, be determined without reflecting any
ADFIT proration for that period; (2) the level of the Interim Rate Refund for Date 10 until
implementation of final rates by Taxpayer by determined without reflecting any ADFIT
proration for that period; and (3) federal income tax expense used to set final rates
reflect the level of federal income taxes reflected in ADFIT with no proration.
Alternatively, the Department recommended that future rate cases rely solely on
historical test years.

        An evidentiary hearing was conducted by the Office. The report and
recommendation of the Office to Commission B is expected on Date 11. Oral
arguments before Commission B are expected to occur in Month 1 Year 2, and
Commission B’s “final” rate order (subject to reconsideration and other post order
procedures) is expected on or before Date 6. Final rates are expected to become
effective in Month 2 Year 2 and the potential Interim Rate Refund is expected to be paid
or credited in Month 3 Year 2.

        Taxpayer’s revenue requirement for the Year 1 general rate case utilized
calendar year, Year 1, as the test year. Amounts estimated for the Year 1 test year
include, but are not limited to operating costs (including depreciation expense on Year 1
additions and income tax expense) and rate base items (including plant additions during
Year 1, accumulated depreciation reflecting Year 1 depreciation and ADFIT). The Year
1 test year is the basis for both the interim rates (effective beginning on Date 5 and
expected to remain in effect until Month 2 Year 2) as well as the final rates (expected to
become effective in Month 2 Year 2).

        The amounts estimated for the Year 1 test year (including but not limited to
operating revenues, costs, plant additions, ADFIT, and other factors affecting the
computation of the revenue requirement) are not generally “trued-up” to actual amounts
after the end of Year 1 for the determination of final rates. Final rates reflect the
resolution of contested items such as the allowed return, recovery of specific categories
of operating expenses or the amount of certain operating expenses and inclusion of
specific investments and certain costs in rate base. In the case of the Year 1 general
rate case, the final rates will also consolidate into base rates the costs and investments
historically recovered as part of the riders.

       The following rulings are requested on behalf of Taxpayer:

1) The computation of ADFIT for purposes of final rates (apart from consideration of an
Interim Rate Refund) charged beginning in Month 2 Year 2 without applying the
PLR-100199-17                                  5

proration formula rules for future test periods or part-historical and part-future periods
under § 1.167(l)-1(h)(6) would not violate the normalization requirements of § 168(i)(9).

2) The computation of ADFIT for purposes of interim rates charged beginning on Date
5, without applying the proration formula rules for part-historical and part-future periods
under § 1.167(l)-1(h)(6) would violate the normalization requirements of § 168(i)(9).

3) The future portion of a part-historical and part-future period for purposes of interim
rates charged beginning on Date 5, began on Date 5 for purposes of determining the
total number of days in the future portion of the period under § 1.167(l)-1(h)(6).

4) The computation of an Interim Rate Refund in Year 2 such that the effects of the
proration formula rules under § 1.167(l)-1(h)(6) on interim rates charged in Year 2 are
returned in Year 2 (by causing or increasing an Interim Rate Refund) would not violate
the normalization requirements of § 168(i)(9).

5) The computation of an Interim Rate Refund in Year 2 such that the effects of the
proration formula rules under § 1.167(l)-1(h)(6) on interim rates charged in Year 1 are
returned in Year 2 (by causing or increasing an Interim Rate Refund) would violate the
normalization requirements of § 168(i)(9).

6) Any reduction in tax expense recoverable in final rates or the computation of any
Interim Rate Refund that has the effect of offsetting some or all of the level of revenues
resulting from prorated ADFIT that may be required (under the proration formula rules
for future test periods or part-historical and part-future periods under § 1.167(l)-1(h)(6)),
would violate the normalization requirements of § 168(i)(9).

7) Any reduction in the depreciation expense recoverable in final rates or the
computation of any Interim Rate Refund that has the effect of offsetting some or all of
the level of revenues resulting from prorated ADFIT that may be required (under the
proration formula rules for future test periods or part-historical and part-future periods
under § 1.167(l)-1(h)(6)), would violate the normalization requirements of § 168(i)(9).

                                     Law and Analysis

Issues 1, 2, and 3

       Section 1.167(l)-1(h)(6) of the Regulations sets forth normalization requirements
with respect to public utility property. Under § 1.167(l)-1(h)(6)(i), a taxpayer does not
use a normalization method of accounting if, for ratemaking purposes, the amount of the
reserve for deferred taxes excluded from the rate base, or treated as cost-free capital,
exceeds the amount of the reserve for the period used in determining the taxpayer’s
ratemaking tax expense. Section 1.167(l)-1(h)(6)(ii) also provides the procedure for
PLR-100199-17                                  6

determining the amount of the reserve for deferred taxes to be excluded from rate base
or to be included as no-cost capital.

       Section 1.167(l)-1(h)(6)(ii) of the Regulations provides that for the purpose of
determining the maximum amount of the reserve to be excluded from the rate base (or
to be included as no-cost capital) under § 1.167(l)-1(h)(6)(i), if solely an historical period
is used to determine depreciation for federal income tax expense for ratemaking
purposes, then the amount of the reserve account for the period is the amount of the
reserve (determined under § 1.167(l)-1(h)(2)) at the end of the historical period. Section
1.167(l)-1(h)(6)(ii) provides that if solely a future period is used for such determination,
the amount of the reserve account for the period is the amount of the reserve at the
beginning of the period and a pro rata portion of the amount of any projected increase to
be credited or decrease to be charged to the account during such period.

       Section 1.167(l)-1(h)(6)(ii) of the Regulations provides if, in determining
depreciation for ratemaking tax expense, a period (the “test period”) is used which is
part historical and part future, then the amount of the reserve account for this period is
the amount of the reserve at the end of the historical portion of the period and a pro rata
amount of any projected increase to be credited to the account during the future portion
of the period. The pro rata amount of any increase during the future portion of the
period is determined by multiplying the increase by a fraction, the numerator of which is
the number of days remaining in the period at the time the increase is to accrue, and the
denominator of which is the total number of days in the future portion of the period.

        Section 1.167(l)-1(h)(6)(i) of the Regulations makes it clear that the reserve
excluded from rate base must be determined by reference to the same period as is
used in determining ratemaking tax expense. A taxpayer may use either historical data
or projected data in calculating these two amounts, but it must be consistent. As
explained in § 1.167(l)-1(a)(1), the rules provided in § 1.167(l)-1(h)(6)(i) are to insure
that the same time period is used to determine the deferred tax reserve amount
resulting from the use of an accelerated method of depreciation for cost of service
purposes and the reserve amount that may be excluded from the rate base or included
in no-cost capital in determining such cost of services.

       If a taxpayer chooses to compute its ratemaking tax expense and rate base
exclusion amount using projected data then it must use the formula provided in
§ 1.167(l)-1(h)(6)(ii) of the Regulations to calculate the amount of deferred taxes subject
to exclusion from the rate base. This formula prorates the projected accruals to the
reserve so as to account for the actual time these amounts are expected to be in the
reserve. As explained in § 1.167(l)-1(a)(1), the formula in § 1.167(l)-1(h)(6)(ii) provides
a method to determine the period of time during which the taxpayer will be treated as
having received amounts credited or charged to the reserve account so that the
disallowance of earnings with respect to such amounts through rate base exclusion or
PLR-100199-17                                  7

treatment as no-cost capital will take into account the factor of time for which such
amounts are held by the taxpayer.

       The purpose of the proration formula is the same as that of the requirement for
consistent periods discussed above: to prevent the immediate flow-through of the
benefits of accelerated depreciation to ratepayers. The proration formula stops flow-
through by limiting the deferred tax reserve accruals that may be excluded from rate
base, and thus the earnings on rate base that may be disallowed, according to the
length of time these accruals are actually in the reserve account.

        The effectiveness of § 1.167(l)-1(h)(6)(ii) of the Regulations in resolving the
timing issue has been limited by its failure to define some key terms. Nowhere does
this provision state what is meant by the terms “historical” and “future” in relation to the
test period for determining depreciation for ratemaking tax expense. How are these
time periods to be measured? One interpretation focuses on the type or quality of the
data used in the ratemaking process. According to this interpretation, the historical
period is that portion of the test period for which actual data is used, while the portion of
the period for which data is estimated is the future period. The second interpretation
focuses on when the utility rates become effective. Under this interpretation, the
historical period is that portion of the test period before rates go into effect, while the
portion of the test period after the effective date of the rate order is the future period.

        The first interpretation, which focuses on the quality of the ratemaking data, is an
attractive one. It proposes a simple rule, easy to follow and to enforce: any portion of
the reserve for deferred taxes based on estimated data must be prorated in determining
the amount to be deducted from rate base. The actual passage of time between the
date ratemaking data is submitted and the date rates become effective is of no
importance. But this interpretation of the regulations achieves simplicity at the expense
of precision; in other words, it is overbroad. The proration of all estimated deferred tax
data does serve to magnify the benefits of accelerated depreciation to the utility, but this
is not the purpose of normalization. Congress was explicit: normalization “in no way
diminishes whatever power the [utility regulatory] agency may have to require that the
deferred taxes reserve be excluded from the base upon which the utility’s permitted rate
of return is calculated.” H.R. Rep. No. 413, 91st Cong., 1st Sess. 133 (1969).

        In contrast, the second interpretation of § 1.167(l)-1(h)(6)(ii) of the Regulations is
consistent with the purpose of normalization, which is to preserve for regulated utilities
the benefits of accelerated depreciation as a source of cost-free capital. The availability
of this capital is ensured by prohibiting flow-through. But whether or not flow-through
can even be accomplished by means of rate base exclusions depends primarily on
whether, at the time rates become effective, the amounts originally projected to accrue
to the deferred tax reserve have actually accrued.
PLR-100199-17                                 8

         If rates go into effect before the end of the test period, and the rate base
reduction is not prorated, the utility commission is denying a current return for
accelerated depreciation benefits the utility is only projected to have. This procedure is
a form of flow-through, for current rates are reduced to reflect the capital cost savings of
accelerated depreciation deductions not yet claimed or accrued by the utility. Yet
projected data is often necessary in determining rates, since historical data by itself is
rarely an accurate indication of future utility operating results. Thus, the regulations
provide that as long as the portion of the deferred tax reserve based on truly projected
(future estimated) data is prorated according to the formula in § 1.167(l)-1(h)(6)(ii) of the
Regulations, a regulator may deduct this reserve from rate base in determining a utility’s
allowable return. In other words, a utility regulator using projected data in computing
ratemaking tax expense and rate base exclusion must account for the passage of time if
it is to avoid flow-through.

        But if rates go into effect after the end of the test period, the opportunity to flow
through the benefits of future accelerated depreciation to current ratepayers is gone,
and so too is the need to apply the proration formula. In this situation, the only question
that is important for the purpose of rate base exclusion is the amount in the deferred tax
reserve, whether actual or estimated. Once the future period, the period over which
accruals to the reserve were projected, is no longer future, the question of when the
amounts in the reserve accrued is no longer relevant (at the time the new rate order
takes effect, the projected increases have accrued, and the amounts to be excluded
from rate base are no longer projected but historical, even though based on estimates).

        Taxpayer’s computation of ADFIT for purposes of final rates occurs after the end
of the test period on which those amounts are based. The calculation is determined by
reference to a purely historical period. Thus, the test period is one that occurs prior to
the effective date of the rates which result from the computation. Accordingly, the
computation of ADFIT for purposes of final rates employs an historical test period and is
not subject to the proration formula rules under § 1.167-1(h)(6) of the Regulations; there
is no need to follow the proration formula rules designed for future test periods or part-
historical and part-future periods to calculate the differences between Taxpayer's
projected ADFIT balance and the actual ADFIT balance during the period.

        In contrast, Taxpayer calculates its ADFIT for purposes of interim rates charged
beginning on Date 5. The rate is based on costs Taxpayer projects it will incur during
the test year, Year 1. Rates go into effect as of Date 5. Therefore, rates go into effect
before the end of the test period. Accordingly, the test period for Taxpayer’s interim
rates is a future test period, subject to the proration formula rules under § 1.167-1(h)(6)
of the Regulations, and Taxpayer is required to apply the proration formula rules for
part-historical and part-future periods to calculate the differences between Taxpayer’s
projected ADFIT balance and the actual ADFIT balance during that period.
PLR-100199-17                                 9

        The revenue requirement for the interim rates, subject to refund, became
effective Date 5, pursuant to a Commission B order issued on Date 4. The interim rates
were based on a calendar year, Year 1, test year, but excluded costs and return
associated with public utility property recovered through riders. Rate base for the Year
1 test year was computed as an average rate base. The average ADFIT amount was
based on a simple average based on the estimate of ADFIT as of the beginning of the
Year 1 test year and the estimate of ADFIT as of the end of the Year 1 test year, as
prorated. The future portion of a part-historical and part-future period for purposes of
interim rates charged began on Date 5, for purposes of determining the total number of
days in the future portion of the period under § 1.167(l)-1(h)(6) of the Regulations.

Issues 4 and 5

        The interim rates set by the order of Commission B dated Date 5, are charged
during the pendency of the rate case until final rates are implemented (expected to be in
Month 2 Year 2). A separate set of interim rates are not determined for Year 2. Once
final rates are determined, the Interim Rate Refund is calculated, based on the
difference between final rates and interim rates for the period during which interim rates
have been collected.

       The determination of the Interim Rate Refund includes the question of how to
calculate the Interim Rate Refund for interim rates collected in Year 2 (that is, after the
test year is completed.) Issue # 4 focuses on the calculation of the Interim Rate Refund
based on the difference between final rates and the interim rates that are charged
starting in Month 4 Year 2 and collected until final rates are implemented.

        Similarly, the determination of the Interim Rate Refund includes the question of
how to calculate the Interim Rate Refund for interim rates collected in Year 1. Issue # 5
focuses on the calculation of the Interim Rate Refund based on the difference between
final rates and the interim rates that were charged during the Year 1 test year.

       Once the future portion of the part-historical and part-future test year is no longer
future (for example, for rates charged after the end of the test year), the question of
when the amounts in the reserve for deferred taxes accrued is no longer relevant.
Specifically, while interim rates are charged in Year 2, the projected Year 1 ADFIT
increases have accrued, and the amounts to be excluded from rate base are no longer
projected but historical, even though based on estimates. Thus, the purpose of the
proration formula has been accomplished and associated prevention of flowthrough
accounting has been avoided as of the beginning of Year 2 (that is, after the end of the
Year 1 test year).

        Commission B will use the Interim Rate Refund to adjust Taxpayer’s interim rates
charged after the end of the test year. Commission B is not adjusting interim rates but
is instead using the approach to reflect the Year 2 incremental effects of the proration
PLR-100199-17                                 10

formula on the revenue requirement on which interim rates are based in the Interim
Rate Refund. Accordingly, the computation of an Interim Rate Refund in Year 2 such
that the effects of the proration formula rules under § 1.167(l)-1(h)(6) of the Regulations
on interim rates charged in Year 2 are returned in Year 2 (by causing or increasing an
Interim Rate Refund) would not violate the normalization requirements of § 168(i)(9) of
the Code.

       The issue of whether it is appropriate to permit the Interim Rate Refund to
reverse the effects of the proration formula on interim rates charged during the Year 1
test year differs from the issue of the proration formula to interim rates charged after the
Year 1 test year. The purpose of the proration formula is to prevent the immediate
flow-through of the benefits of accelerated depreciation to ratepayers. The proration
formula stops flow-through by limiting the deferred tax reserve accruals that may be
excluded from rate base, and thus the earnings on rate base that may be disallowed,
according to the length of time these accruals are actually in the reserve account. To
permit the effects of the proration formula on interim rates charged during the Year 1
test year to be reversed in a subsequent phase of the ratemaking would be
economically equivalent to not applying the proration formula in the first place.

       Accordingly, the computation of an Interim Rate Refund in Year 2 such that the
effects of the proration formula rules under § 1.167(l)-1(h)(6) of the Regulations on
interim rates charged in Year 1 are returned in Year 2 (by causing or increasing an
Interim Rate Refund) would violate the normalization requirements of § 168(i)(9) of the
Code.

Issues 6 and 7

       Regarding issues six and seven, reduction of Taxpayer’s tax expense or
depreciation expense recoverable in final rates or the computation of any Interim Rate
Refund that has the effect of offsetting some or all of the level of revenues resulting
from prorated ADFIT that may be required would, in effect, flow through the tax benefits
of accelerated depreciation deductions to rate payers. This is so even if the intent of
such reduction is not specifically to mitigate the effects of the normalization rules. In
general, taxpayers may not adopt any accounting treatment that directly or indirectly
circumvents the normalization rules. See generally, § 1.46-6(b)(2)(ii) (In determining
whether, or to what extent, the investment tax credit has been used to reduce cost of
service, reference shall be made to any accounting treatment that affects cost of
service); Rev. Proc. 88-12, 1988-1 C.B. 637, 638 (It is a violation of the normalization
rules for taxpayers to adopt any accounting treatment that, directly or indirectly flows
excess tax reserves to ratepayers prior to the time that the amounts in the vintage
accounts reverse).

        Accordingly, any reduction in tax expense or depreciation expense recoverable in
final rates or the computation of any Interim Rate Refund that has the effect of offsetting
PLR-100199-17                                  11

some or all of the level of revenues resulting from prorated ADFIT in setting interim
rates that may be required (under the proration formula rules for future test periods or
part-historical and part-future test periods under § 1.167(l)-1(h)(6) of the Regulations),
would violate the normalization requirements of § 168(i)(9) of the Code.

       Therefore, we rule as follows:

1) The computation of ADFIT for purposes of final rates (apart from consideration of an
Interim Rate Refund) charged beginning in Month 2 Year 2 without applying the
proration formula rules for future test periods or part-historical and part-future periods
under § 1.167(l)-1(h)(6) would not violate the normalization requirements of § 168(i)(9).

2) The computation of ADFIT for purposes of interim rates charged beginning on Date
5, without applying the proration formula rules for part-historical and part-future periods
under § 1.167(l)-1(h)(6) would violate the normalization requirements of § 168(i)(9).

3) The future portion of a part-historical and part-future period for purposes of interim
rates charged beginning on Date 5, began on Date 5 for purposes of determining the
total number of days in the future portion of the period under § 1.167(l)-1(h)(6).

4) The computation of an Interim Rate Refund in Year 2 such that the effects of the
proration formula rules under § 1.167(l)-1(h)(6) on interim rates charged in Year 2 are
returned in Year 2 (by causing or increasing an Interim Rate Refund) would not violate
the normalization requirements of § 168(i)(9).

5) The computation of an Interim Rate Refund in Year 2 such that the effects of the
proration formula rules under § 1.167(l)-1(h)(6) on interim rates charged in Year 1 are
returned in Year 2 (by causing or increasing an Interim Rate Refund) would violate the
normalization requirements of § 168(i)(9).

6) Any reduction in tax expense recoverable in final rates or the computation of any
Interim Rate Refund that has the effect of offsetting some or all of the level of revenues
resulting from prorated ADFIT that may be required (under the proration formula rules
for future test periods or part-historical and part-future periods under § 1.167(l)-1(h)(6)),
would violate the normalization requirements of § 168(i)(9).

7) Any reduction in the depreciation expense recoverable in final rates or the
computation of any Interim Rate Refund that has the effect of offsetting some or all of
the level of revenues resulting from prorated ADFIT that may be required (under the
proration formula rules for future test periods or part-historical and part-future periods
under § 1.167(l)-1(h)(6)), would violate the normalization requirements of § 168(i)(9).
PLR-100199-17                               12

       These rulings are based on the representations submitted by Taxpayer and are
only valid if those representations are accurate. The accuracy of these representations
is subject to verification on audit.

       Except as specifically determined above, no opinion is expressed or implied
concerning the Federal income tax consequences of the matters described above.
This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the
Code provides it may not be used or cited as precedent. In accordance with the
power of attorney on file with this office, a copy of this letter is being sent to your
authorized representative. We are also sending a copy of this letter ruling to the
Director.



                                     Sincerely,



                                     Patrick S. Kirwan
                                     Chief, Branch 6
                                     Office of Associate Chief Counsel
                                     (Passthroughs & Special Industries)




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