Utility plant priced under a special (non rate-of-return) method is not "public utility property," so no normalization is required

Plain-English summary

A regulated electric and gas utility owns a power plant. It asked the IRS how
the depreciation rules treat certain plant assets it is acquiring, given that
its state commission will set the rates for that plant using a special
ratemaking method rather than the usual cost-of-service, rate-of-return
approach. The tax stakes turn on whether the assets are "public utility
property" under § 168(i)(10). If they are, the utility must use a
"normalization method of accounting" (which spreads the benefit of accelerated
depreciation to customers over time) in order to claim accelerated
depreciation under § 168. The IRS explained that public utility property
requires three things, and the third is that rates be set on a rate-of-return
basis. Because the commission will price this plant under a special method that
is not rate-of-return ratemaking, the assets fail that test. The IRS ruled the
assets are not public utility property and that the utility is therefore not
required to normalize to claim accelerated depreciation on them. This matters
as states move to non-traditional ratemaking: assets priced outside
rate-of-return regulation can fall outside the normalization rules, giving the
utility faster depreciation without the normalization strings attached.

Ruling snapshot

• Question: Are plant assets whose rates are set under a special (non rate-of-return) ratemaking method "public utility property" under § 168(i)(10), and must the utility use normalization to claim accelerated depreciation on them?
• Outcome: Approved (ruled the assets are not public utility property; normalization not required)
• Key authorities: IRC §§ 168(f)(2), 168(i)(9), 168(i)(10), 167(l)(3)(A); Treas. Reg. §§ 1.167(l)-1, 1.46-3(g)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202617002
Release Date: 4/24/2026
Index Number: 167.22-00, 167.22-01, 168.00-00

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact: --------------------, ID No. -----------------
Telephone Number: --------------------
Refer Reply To: CC:ECE:B02
PLR-112695-25
In Re: --------------------
Date: January 30, 2026

Legend

Taxpayer = --------------------
Parent = --------------------
State = --------------------
Commission A = --------------------
Commission B = --------------------
Plant = --------------------
Date 1 = --------------------
Date 2 = --------------------
Date 3 = --------------------
Date 4 = --------------------
Date 5 = --------------------
Year A = --------------------
Year B = --------------------

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

This letter responds to a letter dated Date 1, submitted on Taxpayer's behalf by its authorized representatives, requesting a ruling regarding the application of § 168(i)(9) and (10)1 to the relevant facts that are represented in Taxpayer's submission and set forth below:

Background

Taxpayer is a State corporation and a regulated public utility that provides electricity generation, transmission, and distribution services, as well as natural gas utility services, throughout State. It is the primary operating subsidiary of Parent and joins Parent and Parent's other subsidiaries in the filing of a consolidated federal income tax return on a calendar year basis using the accrual method of accounting.

1 Unless otherwise specified, all "section" or "§" references are to sections of the Internal Revenue Code (Title 26 U.S.C.) or the Income Tax Regulations (26 C.F.R. part 1).

Commission A and Commission B regulate the rates Taxpayer may charge for the services it provides. Generally, both commissions set rates using the cost-of-service, rate-of-return ratemaking method, which allows a utility to recover the costs of providing services and earn a reasonable return on invested capital (rate base). Commission A regulates Taxpayer's electricity transmission rates, which are reviewed and updated annually to reflect any changes in Taxpayer's costs of service. Commission B regulates the rates for Taxpayer's remaining utility services, determining rates in general rate case proceedings conducted every four years, with other proceedings conducted as necessary to address issues not addressed in those proceedings.

Taxpayer owns and operates Plant, a -------------------- plant consisting of -------------------- Unit 1 and Unit 2, which have been in operation since Year A and Year B, respectively. Unit 1 and Unit 2 are licensed -------------------- to operate until Date 2 and Date 3, respectively. --------------------

-------------------- State -------------------- provides a -------------------- framework --------------------. This framework consists largely of three interrelated steps. -------------------- Finally, it prescribes a special ratemaking method to be used in lieu of cost-of-service, rate-of-return ratemaking in setting rates --------------------.

Under the special ratemaking method, Plant's revenue requirement is determined by estimating its market revenues and production tax credits (if any) and then subtracting its estimated costs of service. --------------------

Rulings Requested

1. The assets that Taxpayer acquires --------------------, the costs of which must be capitalized and depreciated for federal income tax purposes and not included in Taxpayer's rate base --------------------, are not public utility property (as defined in § 168(i)(10)).

2. To claim accelerated depreciation under § 168, Taxpayer is not required to use a normalization method of accounting for Plant property acquired -------------------- that is not public utility property (as defined in § 168(i)(10)).

Law and Analysis

Section 168(f)(2) provides that the depreciation deduction determined under § 168 shall not apply to any public utility property (within the meaning of § 168(i)(10)) if the taxpayer does not use a normalization method of accounting.

Section 168(i)(10) defines the term "public utility property," in relevant part, as property used predominantly in the trade or business of the furnishing or sale of electrical energy, if the rates for such furnishing or sale, as the case may be, have been established or approved by a public utility commission of any state or political subdivision thereof.

Prior to the Revenue Reconciliation Act of 1990, Pub. L. No. 101-508, 104 Stat. 1388-400 (1990), § 168(i)(10) defined public utility property by cross-reference to § 167(l)(3)(A). Section 167(l)(3)(A), as then in effect, contained the same definition of public utility property that is currently in § 168(i)(10). Section 1.167(l)-1(b) provides that under § 167(l)(3)(A), property is public utility property during any period in which it used predominantly in a § 167(l) public utility activity. The term "section 167(l) public utility activity" means, in relevant part, the trade or business of the furnishing or sale of electrical energy, if the rates for such furnishing or sale, as the case may be, are regulated, i.e., have been established or approved by a regulatory body described in § 167(l)(3)(A). The term "regulated body described in section 167(l)(3)(A)" means a state (including the District of Columbia) or political subdivision thereof, any agency or instrumentality of the United States, or a public service or public utility commission or other body of any state or political subdivision thereof similar to such a commission. The term "established or approved" includes the filing of a schedule of rates with a regulatory body which has the power to approve such rates, though such body has taken no action on the filed schedule or generally leaves undisturbed rates filed by the taxpayer.

Further, prior to the Revenue Reconciliation Act of 1990, § 46(f) required a taxpayer claiming the investment tax credit with respect to public utility property to use the normalization method of accounting. The definitions of public utility property contained in § 168(i)(10) and former § 46(f)(5) are essentially identical. However, § 1.46-3(g)(2)(iii) expands the term "regulated rates" to embody the notion of rates established or approved on a rate-of-return basis, which notion is not provided for in the § 167(l) regulations. Nevertheless, § 1.167(l)-1(h)(6) requires the deferred tax reserve to be excluded from the rate base to which a rate of return is applied. This requirement and its use of the terms "rate base" and "rate of return" imply rate-of-return ratemaking as these terms are concepts of rate-of-return ratemaking and their use is logical only in that context. Thus, under the § 168(i)(9) normalization rules for depreciation, a facility must meet three requirements to be considered public utility property:

1. It must be used predominantly in the trade or business of the furnishing or sale of electrical energy, water, or sewage disposal services, or the other services enumerated in § 168(i)(10)(B) through (D);

2. The rates for such furnishing or sale must be established or approved by a state or political subdivision thereof, any agency or instrumentality of the United States, or by a public service or public utility commission or similar body of any state or political subdivision thereof; and

3. The rates so established or approved must be determined on a rate-of-return basis.

-------------------- Taxpayer will use Plant predominantly in the trade or business of the furnishing or sale of electrical energy. Commission B, the public utility commission of State, will establish or approve the rates Taxpayer may charge for Plant's electricity. As a result, Plant satisfies the first and second requirements to be considered public utility property.

-------------------- Commission B will set rates using the special ratemaking method --------------------. -------------------- Because Commission B will set rates using the special ratemaking method rather than the cost-of-service, rate-of-return method, applying the normalization rules to the special ratemaking method would not be appropriate --------------------. Plant thus fails the third requirement to be considered public utility property.

Accordingly, we rule that:

1. The assets that Taxpayer acquires --------------------, the costs of which must be capitalized and depreciated for federal income tax purposes and not included in Taxpayer's rate base --------------------, are not public utility property (as defined in § 168(i)(10)).

2. To claim accelerated depreciation under § 168, Taxpayer is not required to use a normalization method of accounting for Plant property acquired -------------------- that is not public utility property (as defined in § 168(i)(10)).

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that 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 representatives.

A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling.

The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

Sincerely,

Maggie Stehn
Senior Counsel, Branch 2
Office of the Associate Chief Counsel
(Energy, Credits, and Excise Tax)

Enclosure:
Copy for § 6110 purposes

cc: --------------------