FPL Group, Inc. v. Comm'r

T.C. Memo. 2005-208

UNITED STATES TAX COURT

FPL GROUP, INC. AND SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5271-96. Filed August 31, 2005.

Robert T. Carney, Paul S. Manning, and Christopher

Faiferlick, for petitioner.

Benjamin A. DeLuna, James F. Kearney, Robert Dillard, and

Donald Burkhart, for respondent.
 - 2 -

CONTENTS

MEMORANDUM FINDINGS OF FACT AND OPINION . . . . . . . . . . . . 4

FINDINGS OF FACT . . . . . . . . . . . . . . . . . . . . . . . 5

A. Nuclear Fuel Assemblies . . . . . . . . . . . . . . . . . . 8

B. Miscellaneous Nuclear Property . . . . . . . . . . . . . 14
1. Main Steam Isolation Valve (MSIV) Air
Accumulation System . . . . . . . . . . . . . . . . 14
2. Surveillance System for Heat Exchangers . . . . . . 16
3. Reactor Vessel Probes . . . . . . . . . . . . . . . 18
4. Raceway Protection System . . . . . . . . . . . . . 19
5. Spent Fuel Rack Systems . . . . . . . . . . . . . . 21
6. Area Radiation Monitoring System . . . . . . . . . . 25
7. Nuclear Fuel Transfer System . . . . . . . . . . . . 27

C. Environmental Property . . . . . . . . . . . . . . . . . 29
1. Wastewater Neutralization Treatment System . . . . . 29
2. PCB Transformers . . . . . . . . . . . . . . . . . . 33

D. Simulator and Training Buildings . . . . . . . . . . . . 36

E. Load Management System . . . . . . . . . . . . . . . . . 41

F. St. Lucie Backfit Construction . . . . . . . . . . . . . 48
1. Underwater Intrusion System . . . . . . . . . . . . 49
2. Condensate Polisher Tie Line . . . . . . . . . . . . 52
3. Instrument Air Upgrade . . . . . . . . . . . . . . . 54

G. St. John’s River Power Park (SJRPP) . . . . . . . . . . 56

H. The Southern Company Contracts . . . . . . . . . . . . . 66

I. Integrated Transmission Line Systems . . . . . . . . . . 74

J. Distribution and Transmission Substations . . . . . . . 80

K. Regional Planning . . . . . . . . . . . . . . . . . . . 82

OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

A. The Statutory Landscape . . . . . . . . . . . . . . . . . 87

B. TRA Section 204(a)(3)--Supply or Service Contracts . . . 92
 - 3 -

1. Property Purchased and/or Installed Pursuant
to the Tariff . . . . . . . . . . . . . . . . . . . 94
a. The Tariff Is Not a Contract for
Purposes of TRA Section 204(a)(3) . . . . . 95
b. The Tariff Does Not Readily Identify the
Property in Issue . . . . . . . . . . . . . 101
c. Documents Incorporated by Reference Into
the Supply or Service Contract . . . . . . 102
d. Property Readily Identifiable From the
Related Documents . . . . . . . . . . . . . 106
e. Class Life of Nuclear Fuel Assemblies
Pursuant to TRA Section 203(b)(2) . . . . . 124
2. Are the Southern Company Contracts TRA Section
204(a)(3) Supply or Service Contracts? . . . . . . 128
3. Are the DRI Documents TRA Section 204(a)(3)
Supply Contracts? . . . . . . . . . . . . . . . . . 134

C. TRA Section 203(b)(1)(A)--The “Binding Contract” Rule . . 136
1. Nuclear Fuel Transfer System . . . . . . . . . . . . 138
2. Southern Interchange Contract . . . . . . . . . . . 140
3. LMS Equipment Under A.B. Chance Contract . . . . . . 144
4. St. John’s River Power Park (SJRPP) . . . . . . . . 147

D. TRA Section 203(b)(1)(B)--“Self-Constructed Property” . . 152
1. “Wrap Up” Work and “Enhancements and
Deficiencies” Work at the SJRPP . . . . . . . . . . 158
2. Distribution and Transmission Substations . . . . . 165
3. Transmission Line Systems . . . . . . . . . . . . 169
4. “Backfit” Items at St. Lucie . . . . . . . . . . . 176
a. Underwater Intrusion System . . . . . . . . 177
b. Condensate Polisher Tie Line . . . . . . . . 179
c. Instrument Air Upgrade . . . . . . . . . . . 181
5. Spent Fuel Rack Systems . . . . . . . . . . . . . . 184

E. TRA Section 203(b)(1)(C)--“Plant Facility Rule” . . . . 187
1. “Backfit” Items at St. Lucie . . . . . . . . . . . 189
2. “Wrap up” Work and “Enhancements and
Deficiencies” Work at the SJRPP . . . . . . . . . . 191
a. Written Specific Plan . . . . . . . . . . . 192
b. Costs Committed or Incurred . . . . . . . . 194
3. Distribution and Transmission Substations . . . . 196
a. Written Specific Plan . . . . . . . . . . . 197
b. Commencement of the Construction . . . . . . 199
c. Costs Committed or Incurred . . . . . . . . 202
 - 4 -

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . 204

Appendix A: Equipment Installed at Substations . . . . . . . 205

Appendix B: DRI Project . . . . . . . . . . . . . . . . . . 208

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judge: Respondent determined the following

deficiencies in petitioner’s Federal income taxes:

Year Deficiency

1988 $922,601
1989 15,183,930
1990 5,228,640
1991 1,788,565
1992 5,867,463

Petitioner did not make any claim for investment tax credits

(ITCs) in its original returns for the taxable years 1988, 1989,

and 1990. On the same date that respondent issued the notice of

deficiency, petitioner filed Forms 1120X, Amended U.S.

Corporation Income Tax Returns (amended returns), for its taxable

years 1988, 1989, and 1990. In the amended returns, petitioner

claimed additional ITCs1 as follows:

Year Amount

1988 $33,308,287
1989 44,336,798
1990 55,760,749

On March 21, 1996, petitioner filed its petition in this

case listing these same amounts. In its first and second amended

1
In the amended returns, petitioner claimed refunds.
 - 5 -

petitions, petitioner reduced its claim for additional ITCs as

follows:

Year Amount

1988 $31,737,038
1989 41,553,822
1990 51,973,051

On January 14, 2002, petitioner submitted its trial

memorandum in which it further reduced the additional ITCs

claimed as follows:

Year Amount

1988 $7,681,335
1989 7,862,335
1990 13,320,979

The issue addressed in this opinion is whether FPL Group,

Inc., & Subsidiaries (FPL) is entitled to ITCs for certain

property and equipment it placed in service during the taxable

years 1988, 1989, and 1990.2 Resolution of this issue requires

us to explore the strictures of the Tax Reform Act of 1986 (TRA),

Pub. L. 99-514, 100 Stat. 2058, which repealed the ITC and

provided relief from the ITC repeal in transitional rules.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts, the first, second, third, and fourth

supplemental stipulations of facts, and the accompanying exhibits

2
This case involves multiple issues. The ITC issue
addressed in the opinion was tried and briefed separately.
 - 6 -

are incorporated herein by this reference. Petitioner’s

principal place of business was in North Palm Beach, Florida,

when its petition was filed.

Petitioner is the parent corporation of a publicly traded

holding company that filed consolidated Federal income tax

returns on a calendar year basis for its 1988 through 1992

taxable years. FPL is a first-tier, wholly owned subsidiary of

petitioner with operations throughout most of the east and lower

west coasts of the State of Florida and is a member of the

consolidated group. As a public utility, FPL is subject to

regulation by various State and Federal agencies, including the

Florida Public Service Commission (FPSC), the Federal Energy

Regulatory Commission (FERC), and the Nuclear Regulatory

Commission (NRC).

To generate electricity, FPL operates nuclear and nonnuclear

power plants. FPL owned and operated four nuclear electric

generating units, named: St. Lucie Unit 1, which was operational

commencing in 1976; St. Lucie Unit 2, which was operational

commencing in 1983; Turkey Point Unit 3, which was operational

commencing in 1972; and Turkey Point Unit 4, which was

operational commencing in 1973.

During the years at issue, FPL was under the jurisdiction of

the FPSC, which regulated and supervised the rates charged by and
 - 7 -

the services provided by FPL to its customers.3 FPL’s charges to

its customers for their use of electricity were based upon a

tariff. A tariff is a document that contains the terms,

conditions, rates, and charges that a company may charge and a

customer must pay for the service offered by a utility.

According to the tariff, “Service under the tariff is subject to

orders of governmental bodies having jurisdiction and to the

currently effective ‘General Rules and Regulations for Electric

Service’ on file with the Florida Public Service Commission.”

From time to time, FPL could, and did, request adjustments to the

tariff rates, terms, and conditions.4 FPL’s customers did not

3
Michael Wilson, FPL’s vice president of government
relations and a former FPSC commissioner, testified:

The Public Service Commissioner provided economic
regulation of those utilities which the legislature put
in their charge or their jurisdiction which entailed
setting rates for various classes of customers,
determining the investment level that companies had,
quality of service regulation, hearings on a number of
different issues regarding service and rates.
4
Mr. Wilson testified:

a company which decides that it is not receiving a
reasonable return on its investment or costs have gone
up would apply to the Public Service Commission for a
rate increase. * * *

Those would be the subject of hearings and
testimony by public counsel, by intervenors, large,
industrial customers * * *

Claude Villard was a nuclear fuel witness for FPL before the
FPSC from 1995 to 1997. He testified:

(continued...)
 - 8 -

sign the tariff. Under the tariff, a customer may obtain service

from FPL by applying in writing, by telephone, or in person. The

tariff included a fuel clause, which calculated the cost of fuel

and of purchased power in accordance with a formula “to reflect

the cost of fossil and nuclear fuels and purchased power for each

kilowatt-hour delivered”.

A. Nuclear Fuel Assemblies

FPL claims ITCs for nuclear fuel assemblies in the 1988,

1989, and 1990 taxable years. Generally, to generate electricity

at a power plant, a heat source heats water to form steam, which

drives a turbine of an electric generator. At a nuclear power

plant, the heat source is a nuclear fission reaction in a nuclear

reactor. The nuclear fission reaction occurs in the “core” of

the reactor where an arrangement of nuclear fuel assemblies (fuel

assemblies or nuclear fuel) is located. Essentially, a fuel

assembly is loaded with nuclear fuel rods, which house enriched

uranium pellets. Fuel fabrication refers to the process of

making the pellets, putting those pellets into a fuel rod, and

bundling these rods together into different support components to

make a fuel assembly.

4
(...continued)
under [F]PSC rules, every six months Florida Power and
Light has to submit to the [F]PSC the costs that it
intends to recover from the customer. And it has to
have it approved by the [F]PSC * * *.
 - 9 -

Nuclear fuel must be replaced because it wastes over time

and from use. During the years at issue, FPL’s nuclear reactor

units used an 18-month reloading cycle; it replaced one-third of

the fuel assemblies in the reactor core with new fuel assemblies

every 18 months.5 In 1988, 1989, and 1990, petitioner

depreciated the nuclear fuel over 5 years for tax purposes.

The fabrication of fuel assemblies is a multistep process.

The first step in the process is the acquisition of uranium from

the mines. The second step is to convert the uranium to uranium

hexafluoride (UF6), a gaseous compound. The third step is the

enrichment process, which is accomplished by increasing the

amount of uranium 235 in the gas. The fourth step is to convert

the gas into U2, a uranium oxide powder. The uranium oxide

powder is pressed into pellets, which are then loaded into tubes

or rods. The rods are then bundled together to form a fuel

assembly. The design of the fuel assemblies is specific to the

type of reactor used.6

5
Mr. Villard testified that the reload took about 1 week to
complete, during which time the power plant was shut down.
6
For example, one of FPL’s nuclear power plants, the St.
Lucie Unit 1 reactor, is a 14 by 14 array of fuel rods, whereas
another of FPL’s nuclear power plants, Turkey Point Units 3 and
4, uses a 15 by 15 array.
 - 10 -

FPL entered into a series of long-term contracts to meet its

expected fuel assemblies needs.7 In 1979, FPL entered into an

agreement of settlement with Westinghouse Electric Corp.

(Westinghouse) to supply FPL with uranium. Under the agreement,

Westinghouse agreed to supply FPL with uranium at a rate of

135,000 pounds per year beginning in 1987 and continuing for 7

years, through and including 1994, or a total of 1,080,000

pounds. The agreement gave FPL the option to terminate the

agreement upon 6 months’ prior written notice to Westinghouse

with no consequences. Additionally, FPL could cancel the

agreement if Westinghouse failed to meet specific delivery

deadlines.

Similarly, on July 25, 1978, FPL entered into a sales

agreement with International Minerals & Chemical Corp. (IMC) to

deliver a minimum of 400,000 pounds of “uranium concentrates” per

year for 13 years. IMC and FPL entered into a second sales

agreement on October 4, 1978, under which FPL purchased uranium

concentrate.

On September 9, 1974, Potomac Electric Power Co. (PEPCO) and

Kerr-McGee Nuclear Corp. executed a contract to chemically

process uranium. This agreement called for the conversion of

7
Mr. Villard testified that to change to another NRC-
approved supplier, it would take at least 3 to 4 years before
actually getting the first new full batch to be delivered. The
process of changing to a supplier not approved by the NRC took 5
to 10 years.
 - 11 -

10,190,700 pounds of uranium concentrates into UF6 from 1978

through 1990. On February 10, 1978, this agreement was assigned

to FPL. The contract was never terminated.

On October 23, 1984, FPL entered into a contract with the

Department of Energy (DOE) under which the DOE agreed to provide

FPL with a minimum of 70 percent of FPL’s enrichment services.8

The term of the contract was the lesser of the life of the

nuclear power facility or 30 years. FPL could terminate the

contract at no cost with 10 years’ advance notice. On April 29,

1985, FPL and the DOE entered into an amendment to the contract

to provide additional supply. On February 11, 1985, FPL entered

into a contract for sale with AGIP URANIO S.p.A. for certain

uranium enrichment services. The contract was terminated as of

September 30, 1987.

On November 5, 1979, FPL entered into a contract with

Westinghouse for the purchase of services to design and fabricate

fuel assemblies for Turkey Point Units 3 and 4. FPL could

terminate the contract “only if Turkey Point 3, or Turkey Point 4

is permanently shut down for any reason whatsoever.”

On January 30, 1982, FPL entered into a contract with Exxon

Nuclear Co. for the supply and delivery of fuel assemblies.

According to the contract, “FPL may terminate Reload Regions

8
The contract provided that FPL had no obligation to
purchase enrichment services from the DOE in the fiscal years
1984, 1987, and 1988.
 - 12 -

other than [Region] XN-1 for convenience by giving Seller notice

of such termination no later than seventeen (17) months prior to

the * * * [preliminary scheduled delivery date] that is to be

terminated.”

FPL budgeted the costs associated for each step in the fuel

assembly process. Carl R. Bible, Jr., an FPL engineering

manager, testified that “Budget items are used to authorize funds

to be expended on various activities.” A 1986 Capital

Expenditures Budget Item (budget item or BI) No. 562 lists the

gross cost of expenses to convert uranium concentrates to UF6 as

$1,925,000.9 A 1986 BI No. 563 lists the gross cost of

enrichment services as $21,397,000.10 A 1986 BI No. 564 for

fabrication of nuclear fuel for St. Lucie Unit 1 (including

engineering and design work) lists the gross cost as $600,000.11

9
The budget item breaks down the expenditure as $1,717,000
in gross property additions and $208,000 for an allowance of
funds during construction. This budget item was approved on Oct.
14, 1985, and contemplated a projected 5-year schedule for
conversion as follows: $1,717,000 for 1986; $2,282,000 for 1987;
$2,794,000 for 1988; $4,097,000 for 1989; and $3,673,000 for
1990.
10
The budget item breaks down the expenditure as
$19,266,000 in gross property additions and $2,131,000 for an
allowance of funds during construction. This budget item was
approved on Oct. 14, 1985, and contemplated a projected 5-year
schedule for enrichment as follows: $19,266,000 for 1986;
$20,318,000 for 1987; $43,826,000 for 1988; $29,544,000 for 1989;
and $33,786,000 for 1990.
11
The date that this budget item was approved is illegible
on the Court’s copy. The budget item contemplated a projected 5-
(continued...)
 - 13 -

A 1986 BI No. 565 for fabrication of nuclear fuel for St. Lucie

Unit 2 (including engineering and design work) lists the gross

cost as $2,151,000.12 A 1986 BI No. 566 for fabrication of

nuclear fuel for Turkey Point Unit 3 lists the gross cost as

$4,640,000.13 A 1986 BI No. 567 for fabrication of nuclear fuel

for Turkey Point Unit 4 lists the gross cost as $760,000.14 A

1986 BI No. 561 for uranium purchases for Turkey Point Units 3

11
(...continued)
year schedule for fabrication expenses as follows: $600,000 for
1986; $9,921,000 for 1987; $9,775,000 for 1988; zero for 1989;
and $10,940,000 for 1990.
12
The budget item breaks down the expenditure as $1,651,000
in gross property additions and $500,000 for an allowance of
funds during construction. This budget item was approved on Oct.
14, 1985, and contemplates a projected 5-year schedule for
fabrication expenses as follows: $1,651,000 for 1986;
$10,932,000 for 1987; $9,310,000 for 1988; $3,984,000 for 1989;
and $12,009,000 for 1990.
13
The budget item breaks down the expenditure as $4,433,000
in gross property additions and $207,000 for an allowance of
funds during construction. This budget item was approved on Oct.
14, 1985, and contemplates a projected 5-year schedule for
fabrication expenses as follows: $4,433,000 for 1986; $1,337,000
for 1987; $3,593,000 for 1988; $4,556,000 for 1989; and
$2,450,000 for 1990.
14
The budget item breaks down the expenditure as $355,000
in gross property additions and $405,000 for an allowance of
funds during construction. This budget item was approved on Oct.
14, 1985, and contemplates a projected 5-year schedule for
fabrication expenses as follows: $355,000 for 1986; $4,320,000
for 1987; $3,097,000 for 1988; $2,258,000 for 1989; and
$5,253,000 for 1990.
 - 14 -

and 4 and St Lucie Units 1 and 2 lists the gross cost as

$44,545,000.15

FPL placed fuel assemblies in service with total capitalized

costs (tax basis) of $51,684,173, $70,782,440, and $133,263,604

in the 1988, 1989, and 1990 taxable years, respectively.

B. Miscellaneous Nuclear Property

1. Main Steam Isolation Valve (MSIV) Air Accumulation
System

The MSIV air accumulation system is a safety item, required

by the NRC, that shuts down a nuclear power plant and protects

the reactor core in an emergency. FPL claims ITCs for the MSIV

air accumulation system in the 1989 and 1990 taxable years.

On July 29, 1985, FPL issued a licensee event report

(licensee event report),16 in which its engineering department

determined that the valves at Turkey Point Units 3 and 4 were

unable to close the MSIV in accordance with its original

15
The budget item breaks down the expenditure as
$36,836,000 in gross property additions and $7,709,000 for an
allowance of funds during construction. This budget item was
approved on Oct. 14, 1985, and contemplates a projected 5-year
schedule for fabrication expenses as follows: $36,836,000 for
1986; $42,633,000 for 1987; $50,889,000 for 1988; $63,267,000 for
1989; and $54,725,000 for 1990.
16
A licensee event report is a document required to be
written and submitted to the NRC. When something at the plant
does not meet design requirements, the report describes the
problem and the corrective action taken.
 - 15 -

design.17 The licensee event report indicates that the design of

the valves will be upgraded to ensure that each valve meets the

final safety analysis report. An FPL engineering study, issued

in July 1985, “recommended that design modifications be

implemented on an expedited basis” and that continued operation

was warranted.

A 1987 BI No. 155 includes, inter alia, Main Stream

Isolation. The budget item contains an October 13, 1986, date

underneath “APPROVED BY - CORPORATE OFFICER”. FPL issued an

expenditure requisition (ER)18 No. 4573 to “Install a low

pressure air accumulator system”. The ER also states: “This

emergency ER is being prepared due to the length of time it takes

to obtain ER approval. The work is currently scheduled for the

1988 Refueling Outage. We anticipate this ER to be revised by

October 1988.” The earliest date on the ER is October 1, 1988,

17
Mr. Bible testified that in the licensee event report,
FPL committed to the NRC to resolve the valve problem.
18
Richard Engstrom, FPL’s supervisor of power plant
accounting, testified as to the distinction between an ER and a
work order as follows:

A work order is basically * * * issued to capture and
record costs associated with a specific project at a
specific location. An ER which stands for expenditure
requisition, it basically identifies the type of work
order such as a transmission work order, distribution
work order, a specific work order. However, sometimes
they are used interchangeably, particularly when it
comes to a specific work order.
* * *
 - 16 -

which is under a “received” stamp. Additionally, the ER bears an

October 3, 1988, date underneath a stamp that reads

“Authorization Certified Accounting Department”. The ER was

revised in early 1989 “to reflect a definitive construction

estimate” and again in early 1991.

With respect to the installation of the MSIV air

accumulation system, petitioner incurred capitalized costs (tax

basis) of $2,846,306 and $126,666, for equipment placed in

service in the 1989 and 1990 taxable years, respectively.

2. Surveillance System for Heat Exchangers

The surveillance system for heat exchangers (surveillance

system) consisted of temperature and flow instruments to ensure

that the heat exchanger, which is designed to remove heat,

performed properly. FPL claims ITCs for the surveillance system

in the 1989 and 1990 taxable years.

On April 15, 1985, FPL responded to a notice of violation

issued by the NRC with respect to its nuclear generating facility

at Turkey Point. One of the corrective steps articulated in the

letter was the “development of a surveillance program”.19

19
Mr. Bible testified that this letter was FPL’s
“commitment to the NRC to perform these modifications and put
this system in place. It’s a written commitment from the
officers of our company to the NRC, requiring us to perform these
actions.”
 - 17 -

FPL developed or established an action item20 to oversee the

development of a surveillance program, which is a system that

monitors the heat exchangers.21 In a request for engineering

assistance, dated November 5, 1985, Turkey Point requested a

modification of its plant.22

ER No. 3811, dated March 1988, and supplemented in October

1988, discussed upgrading the surveillance system at Turkey Point

Unit 3. Similarly, ER No. 3854, dated April 1988, with

supplements dated October 1988 and May 1991, discussed the same

scope of work with respect to Turkey Point Unit 4.

With respect to the acquisition and installation of the

surveillance system, petitioner incurred capitalized costs (tax

basis) of $123,742 and $324,668 for equipment placed in service

during the 1989 and 1990 taxable years, respectively.

20
An action item is the method by which FPL tracks its
commitments to the NRC.
21
Mr. Bible testified that there is typically a 3-year lag
time to comply with the NRC requirements.
22
Mr. Bible testified that a “Request for engineering
assistance is how engineering gets a turn on to perform a project
here.” He explained:

What will happen is engineering will produce a
design package, which is how you install things. It
will show drawings, specifications from buying
equipment, instructions from the field as to how to
install that equipment and update all the associated
designs for the power plant.
 - 18 -

3. Reactor Vessel Probes

A reactor vessel probe measures the water level in a nuclear

reactor core. A reactor vessel probe is custom made and takes up

to 45 weeks to obtain. FPL claims ITCs for the reactor vessel

probes in the 1988 taxable year.23

As a result of an accident at the Three Mile Island nuclear

facility (TMI),24 the NRC imposed “Action Plan Requirements”,

known as “NUREG-0737”, to prevent similar accidents at other

nuclear plants. One of the regulatory guidelines25 that resulted

from the TMI accident was the requirement that nuclear plants

monitor coolant inventory. FPL’s nuclear plants were designed

before this guideline and did not have reactor vessel probes; as

a result, FPL installed reactor vessel level monitoring

instrumentation. On July 18, 1986, FPL sent a letter to the

Office of Nuclear Reactor Regulation, which detailed the

technical specifications concerning its proposed reactor vessel

monitoring system. On December 5, 1986, the NRC sent FPL a

23
In the taxable years 1989 and 1990, petitioner claims
reductions in the amount of the ITC, which resulted from
reductions in the amount of the qualified costs (tax basis) of
the property.
24
The TMI nuclear plant failed to maintain the proper water
level in the nuclear reactor, which resulted in a partial
meltdown in its core.
25
Many of the guidelines were embodied in Regulatory
Guideline 1.97, Instrumentation for Light-Water-Cooled Nuclear
Power Plants to Assess Plant and Environs Conditions During and
Following an Accident, issued by the NRC and dated May 1983.
 - 19 -

letter detailing modifications to FPL’s proposed changes. On

July 28, 1987, the NRC sent a letter to FPL advising it that the

technical specifications as modified were approved.

ER No. 9302 details the purchase of two spare reactor vessel

level probes in the authorized amount of $348,000. The earliest

date on the ER is November 1, 1985. The ER was revised to

account for an increase in cost of the project to $798,223, which

was approved in late 1989.

With respect to the acquisition of the reactor vessel

probes, petitioner incurred capitalized costs (tax basis) of

$862,757, -$126,353,26 and -$12,983 for equipment placed in

service during the 1988, 1989, and 1990 taxable years,

respectively.

4. Raceway Protection System

A “raceway” is a system of metal conduits or trays that is

used to transport electric cables from one place to another

throughout a facility and protects the cables from fire hazards.

FPL claims ITCs for the raceway protection system in the 1989 and

1990 taxable years.

Appendix R--Fire Protection Program for Nuclear Power

Facilities Operating Prior to January 1, 1979, 45 Fed. Reg. 76611

26
Mr. Engstrom testified that negative numbers were a
result of FPL’s debit/credit accounting system. On brief,
petitioner explained that the amount of qualified costs (tax
basis) was reduced in the taxable years 1989 and 1990; as a
result, the ITC must be reduced in those years.
 - 20 -

(Nov. 19, 1980), contains general and specific requirements for

protecting electric cables from fire hazards. The specific

requirements section of appendix R provides detailed requirements

for “separation of cables and equipment” and “enclosure of cable

and equipment”. In a letter dated October 11, 1985, FPL

explained to the Office of Nuclear Reactor Regulation that:

[FPL] notified the NRC in late August 1985 concerning
an additional scope of work identified relating to * *
* Appendix R requirements at our Turkey Point Nuclear
facility.

The additional scope of Appendix R work was
identified as a result of an evaluation of the original
Appendix R Safe Shutdown analysis, and was completed in
September 1985. In August 1985, based on preliminary
results of the evaluation, FPL committed to provide a
report detailing the additional scope of work and a
proposed schedule for completion of the modifications.

With respect to the St. Lucie plant, a 1984 BI No. 147 Rev.

2 budgeted $19 million to meet the requirements of appendix R and

was approved on February 21, 1984. FPL revised this BI several

times to increase the budgeted amount to $26 million for the St.

Lucie plant.

A 1984 BI No. 933 Rev. 3, approved on March 23, 1984,

budgeted $45 million to “Upgrade the present fire protection

capabilities at Turkey Point Units #3 and #4 to meet * * *

appendix ‘R’” requirements. FPL revised this BI several times,

and the ultimate authorization was approved in August 1986 for

$87 million.
 - 21 -

ER No. 4276, approved in 1988, authorized $1.8 million for

fire protection modifications to the raceway protection for

Turkey Point. This ER was revised in 1989 to decrease the amount

authorized for the expenditure to $1,081,459. Similarly, ER No.

6256, approved in 1989, authorized $10 for the raceway protection

for Turkey Point, which was revised in late 1989 to $358,000, and

revised again in early 1991 to decrease the amount authorized to

$263,722.

With respect to the installation of the raceway protection

system, petitioner incurred capitalized costs (tax basis) of

$969,676 and $239,161 for equipment placed in service in the 1989

and 1990 taxable years, respectively.

5. Spent Fuel Rack Systems

FPL’s use of nuclear fuel to generate electricity requires

it to replace one-third of the fuel assemblies every 18 months.

FPL uses spent fuel racks to store its used nuclear fuel. FPL

claims ITCs for the spent fuel rack systems in the 1988, 1989,

and 1990 taxable years.

Under the Nuclear Waste Policy Act of 1982, Pub. L. 97-425,

sec. 302, 96 Stat. 2257 (nuclear waste act), the Federal

Government was required, in exchange for fees paid by electric

utilities, to handle the disposal and permanent storage of spent

or used fuel beginning in 1998. The purpose of the nuclear waste

act was to develop repositories for disposing of high-level
 - 22 -

radioactive waste and spent nuclear fuel. The nuclear waste act

provided that persons owning and operating civilian nuclear power

reactors were primarily responsible for providing interim storage

of spent nuclear fuel.

Accordingly, FPL was required to store spent nuclear fuel

until 1998; as a result, FPL needed to expand its on-site spent

fuel rack system at each of its nuclear generating plants. As of

January 7, 1983, the enactment date of the nuclear waste act, FPL

knew the amount of spent fuel it would need to store and the

design of the expanded spent fuel rack systems at St. Lucie and

Turkey Point.

FPL removed spent nuclear fuel from the reactor and

transferred it via the fuel transfer system to a containment

building, using a series of underwater tunnels. The spent fuel

was then transferred from the containment building to the fuel

handling building.

The spent fuel rack system at each of FPL’s nuclear

generating plants consisted of two large pools of water,

approximately 40 feet deep, with metal storage racks at the

bottom. Each pool and system of racks was located proximately to

one of the two nuclear reactors, which were located side by side.

Because FPL had additional space in the pools, it expanded its

storage facilities by increasing the number of storage racks in

the pool. FPL designed its system so that each pool could
 - 23 -

accommodate the spent fuel of either reactor; in the past, FPL

had obtained licenses to transfer spent fuel from one pool to the

other.

A 1982 BI No. 139, approved on August 30, 1982, budgeted

$300,000 to procure and install spent fuel storage racks to

increase capacity at Turkey Point Unit 3. A section of the BI

labeled “purpose and necessity” states:

The original design for Turkey Point Unit #3 had a
spent fuel storage capacity of 217 assemblies. In 1977
the original racks were replaced with high density
stainless steel racks which provided a capacity of 621
assemblies. The capacity was increased due to the lack
of off-site spent fuel reprocessing facilities.

The BI went through several revisions.

Similarly, FPL began expansion of the spent fuel facility at

St. Lucie Unit 1 in 1982. A 1982 BI No. 177, approved on July

13, 1982, budgeted $46 million for various projects at St. Lucie,

including spent fuel storage racks. This BI also underwent a

series of revisions. ER No. 9304, dated December 1985,

authorized $1.5 million for “phase I” of the project for design

engineering, to remove the existing spent fuel racks, and to

install new high density racks.27 This ER was revised in late

1986 and processed in March 1987 to include construction and

material costs, increasing the amount authorized by about $9.5

27
This ER was associated with BI No. 190, approved in late
1985, which budgeted $1.5 million for engineering costs for the
St. Lucie Unit 1 spent fuel storage rack project.
 - 24 -

million to $11 million. This ER was again revised in late

1988/early 1989 to decrease the amount of the authorization by

$2,067,000 to the “present estimate” of $8,933,000.

ER No. 1760, dated late 1986/early 1987, authorized the

expenditure of $12 million to procure and install spent fuel

storage racks for Turkey Point Unit 4. FPL revised this ER in

late 1988/early 1989 to decrease the amount authorized by $4

million.

A 1986 BI No. 190, approved in late 1985, budgeted $1.5

million to remove the existing spent fuel storage racks at St.

Lucie Unit 1 and install new high density spent fuel storage

racks. The allotted amount was authorized for engineering with a

total estimated cost of $10.3 million.28

A 1987 BI No. 19829 budgeted $12 million for Turkey Point

Unit 4 to “Procure and install spent fuel storage racks to

increase capacity from 614 assemblies to provide sufficient

storage capacity through the end of licensed operation in

2007.”30

28
Mr. Bible testified on cross-examination that this
document showed that no costs were incurred before January 1986.
29
The date that BI No. 198 was approved is illegible.
30
Mr. Bible testified that, according to the document, no
construction costs were incurred before January 1987, and only $1
million was scheduled to be incurred in 1987 and $11 million
thereafter.
 - 25 -

With respect to the acquisition and installation of the

spent fuel rack system, petitioner incurred capitalized costs

(tax basis) of $6,713,729, $532,892, and $6,646,960 for equipment

placed in service in the 1988, 1989, and 1990 taxable years,

respectively.

6. Area Radiation Monitoring System

An area radiation monitoring system measures the radiation

throughout a nuclear electric generating plant. The system

consists of a local monitor that measures radiation and cabling

to the control room where readouts from all the monitors are

displayed. FPL claims an ITC for the area radiation monitoring

system in the 1990 taxable year.

NUREG 0737 and Supplement 1 to NUREG 0737, dated December

17, 1982, provide regulatory guidelines for radiation

monitoring.31 On February 23, 1984, the NRC issued an order

confirming FPL’s commitments to comply with Supplement 1 to NUREG

0737 with respect to Turkey Point Units 3 and 4.

A 1988 BI No. 145, approved on August 20, 1987, budgeted

$1.9 million to replace the area radiation monitoring system. A

section of the BI labeled “purpose and necessity” states:

31
According to these regulatory guidelines:

It is our intent that the guidance documents themselves
* * * are not to be used as requirements, but rather
they are to be used as sources of guidance for NRC
reviewers and licensees regarding acceptable means for
meeting the basic requirements.
 - 26 -

The existing equipment has high maintenance due to
equipment age and unavailability of parts. The
equipment is obsolete. The replacement of the
equipment is a Nuclear Regulatory Commission (NRC)
Requirement to meet the recommendations of Regulatory
Guideline 1.97. The full scope of work has not been
defined.

Phase I - Engineering and Procurement $1,900,000

Phase II - Construction

The total cost of the project is estimated to be
$3,800,000 to $12,500,000 depending on which
alternative is implemented. The expected completion
date of Phase II is December, 1990.

This BI was revised twice in 1989, decreasing the amount budgeted

for phase I of the project to $550,000.

ER No. 5339, processed on March 3, 1989, authorized $950,000

for an area radiation monitoring system. The ER states:

This project is to replace the entire existing
Area Radiation Monitoring System with new state of the
art components for Turkey Point.

Purpose and Necessity:
The existing Area Radiation Monitoring System
requires very high maintenance, also the equipment is
obsolete. Replacement of the Area Radiation Monitoring
System has been committed to the NRC under compliance
of R.G. 1.97 Rev. 3.

This is a phased ER:

Phase I - Engineering & Procurement

Phase II - Construction

This ER is for engineering and procurement only.
The ER will be revised later to include construction.
Removal costs and property retirements will be
addressed when the ER is revised for Phase II. The
authorized amount is included in the 1989 Capital
Budget.
 - 27 -

As indicated above, the ER was revised in late 1990/early 1991 to

increase the amount authorized to $1,350,000.

With respect to the acquisition and installation of the area

radiation monitoring system, petitioner incurred capitalized cost

(tax basis) of $657,253 for equipment placed in service in the

1990 taxable year.

7. Nuclear Fuel Transfer System

A nuclear fuel transfer system is an underwater system

consisting of motors and equipment that transports spent nuclear

fuel from the reactor to the spent fuel pool. FPL reconstructed

its nuclear fuel transfer system at Turkey Point. The

reconstruction modernized the system by installing a two-cable

hoist, changing a number of monitors that measured the load, and

changing a number of drive motors and associated equipment. FPL

claims ITCs for the nuclear fuel transfer system in the 1988,

1989, and 1990 taxable years.

A 1984 BI No. 569, approved on October 24, 1983, budgeted

$1,178,000 for the fuel transfer system upgrade for Turkey Point

Units 3 and 4. The BI describes the work to be performed as:

Upgrade the nuclear fuel transfer system on Unit
#3 & #4, with out [sic] of water electric drive motor
(replaces underwater air drive motor), counter weights
on the upenders, winch load monitors for the upenders,
quick opening transfer tube closures, dual cables and
hoist load monitors for the spent fuel pit bridge crane
hoists.
 - 28 -

BI No. 569 appears to be a revision of BI No. 934, which

originally authorized $831,000 in 1982. This budget item was

also revised in late 1984 and late 1985.

ER No. 7031 authorized $417,879 to upgrade the fuel transfer

system for Turkey Point Unit 4. This ER was revised in 1989 to

increase the amount authorized by $712,217. The ER includes a

description that states that the modifications were designed by

Stearns Catalytic Corp. (Stearns Catalytic). Effective December

17, 1984, FPL issued a purchase order to Stearns Catalytic,

authorizing $663,975 to provide labor and materials for the

transfer upgrade modification of Turkey Point Units 3 and 4. A

nuclear safety change order was issued to Stearns Catalytic, with

an effective date of December 19, 1985, to reopen, clarify, and

revise the purchase order.

ER No. 4133, approved and processed in 1988, authorized

$200,000 for modification to convert a single cable hoist to a

dual cable hoist, and for the installation of a new hoist load

indicator system for Turkey Point Unit 4.

With respect to the acquisition and installation of the fuel

transfer system, petitioner incurred capitalized costs (tax
 - 29 -

basis) of $430,432, $391,294, and $662 for equipment placed in

service in the 1988, 1989, and 1990 taxable years, respectively.

C. Environmental Property

As a utility company, FPL is subject to environmental

regulations by Federal, State, and local governmental agencies,

including the Environmental Protection Agency (EPA), U.S. Coast

Guard, and the Florida Department of Environmental Protection.

Environmental regulations applicable to FPL relate to several

natural resources, including air, water, waste, animals, and

plants. The purpose of environmental regulations, as applicable

to FPL, is to ensure that FPL generates, transmits, and

distributes electricity in a manner that will protect human

health and the environment.

1. Wastewater Neutralization Treatment System

A wastewater neutralization treatment system treats the

wastewater coming from the mineralizer regenerate. The

mineralizer water is ultrapure water that is placed into the

boiler to generate the steam, which ultimately drives the

generator to create electricity. Wastewater is hazardous for

corrosivity. FPL claims ITCs for the wastewater neutralization

treatment system in the 1988 and 1990 taxable years.

FPL received temporary operating permits (TOPs) from the

State of Florida, Department of Environmental Regulation, for its
 - 30 -

Martin County and Port Everglades plants.32 The TOPs were issued

pursuant to the Resource Conservation Recovery Act.

On May 7, 1985, the Department of Environmental Regulation

issued permit Nos. HT 43-068555 and HT 06-068527, each of which

allowed FPL “to operate two hazardous waste surface impoundments

for the treatment of corrosive wastes (D002) by

neutralization”.33 According to the TOPs, FPL was required to

“inspect and/or certify the surface impoundment, dikes, liners

and other associated structural and monitoring equipment as

required by * * * [Florida statute] and in accordance” with EPA

regulations. Additionally, the TOPs state:

Within 30 days issuance of this permit, the permittee
[FPL] shall submit to the department for approval a
schedule for closure of the existing surface

32
The parties each requested that we find as fact that FPL
received TOPs for each of its nine fossil fuel power plants.
However, the documentary evidence reflects TOPs issued were for
FPL’s Martin County and Port Everglades plants. Each of the TOPs
in the record had an effective date of May 1985, and one permit
expired on July 15, 1986, and the other had an expiration date of
May 15, 1987.
33
Ray Butts, FPL’s manager for strategic and regulatory
planning, testified that the TOPs required FPL to install new
wastewater neutralization treatment systems at its fossil plants.
He further testified that FPL was required to install:

new tanks for the actual treatment of the water, the
ancillary piping that goes with that, as well as the
various pieces of equipment to support that activity
including monitoring equipment such as pH meters or
water level meters. It also included the maintenance
of the existing basins to ensure that they had liners
that did not leak as well as embankments or retaining
walls that would prevent any over-topping of water.
 - 31 -

impoundment(s) with a binding committment [sic] to
construct and have operational an elementary
neutralization unit or total enclosed treatment
facility. This binding committment [sic] shall include
the authorization to commit funds by F P & L for the
engineering, design, and construction of said units.
The elementary neutralization unit or total enclosed
system shall be constructed and operational within
fifty (50) weeks from issuance of this permit. * * *

If FPL failed to provide a binding commitment, it then had: (1)

90 days to submit a groundwater monitoring plan; (2) 30 days from

the approval of the groundwater monitoring plan to install the

necessary monitoring wells; (3) within 15 days after completion

of the installation of the monitoring wells, to submit a

certification of the well construction by the engineer of record

for approval; and (4) 15 days from approval of well construction

and certification, to begin sampling the groundwater monitoring

well.

A 1986 BI No. 951, approved on October 15, 1985, budgeted

$1.4 million to “Design and construct neutralization tanks for

fossil fuel power plants” that controlled the pH level of water

discharged from the plant. A section of the BI labeled “purpose

and necessity” states:

Existing and pending state and federal
environmental regulations require the control of the pH
range of water discharged from water treatment
facilities at power plants. * * * State and federal
regulatory agencies no longer recognize the present
means of using existing open neutralization basins to
be in compliance with regulations.

Installation of neutralization tanks is the most
cost effective means of regulatory compliance. * * *
 - 32 -

Another alternative considered was to obtain new
permits for the water treatment plants to operate as
hazardous waste treatment facilities.

To continue operating without modification or
obtaining a new permit to operate as a hazardous waste
treatment facility would not meet federal and state
statutory requirements. * * *

ER No. 9956, processed on December 5, 1988, authorized

$93,603 for the purchase and installation of neutralization basin

liners at the Port Everglades plant. A section of the ER labeled

“purpose and necessity” states:

The existing liner is approaching the end of its
serviceable life. These basins are now regulated by
State and Federal law. Any breech [sic] of the liner
must be reported to State regulatory authorities.
Excess reporting of leaks could bring about enforcement
action. The existing liners will not be removed; the
new liner will be placed on top of the existing liners.

ER No. 2286, processed on September 4, 1987, authorized the

expenditure of $70,290 to install a neutralization tank for FPL’s

Riviera fossil plant. ER No. 306834 authorized the purchase and

installation of a pH meter for the neutralization tank at FPL’s

Fort Myers fossil plant. ER No. 8831, processed on September 6,

1985, authorized $19,440 to “Construct in place a concrete block

retention wall around the Water Treatment Plant neutralization

basin” at the Turkey Point fossil plant.35

34
Because of the quality of the copy in the record, neither
the date nor the amount can be determined.
35
Mr. Butts testified that FPL purchased all the property
(continued...)
 - 33 -

With respect to the installation of wastewater

neutralization treatment system, petitioner incurred capitalized

costs (tax basis) of $241,469 and $233,742 for equipment placed

in service in the 1988 and 1989 taxable years, respectively.

2. PCB Transformers

Polychlorinated biphenyls (PCBs) are a hydrocarbon that has

been chlorinated. PCBs have been identified by environmental

regulators as a potential risk to human health and the

environment. The Toxic Substance Control Act of 1976, Pub. L.

94-469, 90 Stat. 2003, current version at 15 U.S.C. sec. 2605

(2000), prohibits the manufacture, processing, or distribution in

commerce or use of PCBs in any manner other than in a totally

enclosed manner. FPL previously used PCBs in its fossil fuel

power plant transformers. FPL claims ITCs for the replacement of

PCB transformers in the 1988, 1989, and 1990 taxable years.

In 1982, the EPA promulgated a rule, 40 C.F.R. sec. 761

(1982) (the PCB rule), that regulates the use of PCBs. The PCB

rule, inter alia: (1) “Prohibits the use of PCB Transformers and

PCB-filled electromagnets (with a PCB concentration of 500 ppm or

greater) * * * after October 1, 1985, and requires a weekly

inspection of this equipment for leaks of dielectric fluid until

that date”; (2) “Authorizes the use of all other PCB Transformers

35
(...continued)
according to the specific conditions of the TOPs.
 - 34 -

for the remainder of their useful lives, and requires a quarterly

inspection of this equipment for leaks of dielectric fluid”; and

(3) “Prohibits the use of all other large PCB Capacitors after

October 1, 1988”. According to the PCB rule:

If a PCB Transformer is found to have a leak which
results in any quantity of PCBs running off or about to
run off the external surface of the transformer, then
the transformer must be repaired or replaced to
eliminate the source of the leak. In all cases any
leaking material must be cleaned up and properly
disposed of * * * in no case later than 48 hours of its
discovery. * * *

In response to the PCB rule, FPL commenced a program to remove

PCBs from its electrical equipment, including all power

transformers at its power plants.36

A 1986 BI No. 895, approved in October 1985, budgeted $16.4

million to “Replace all PCB filled distribution capacitors” over

a 6-year period “to conform with new EPA regulations, and

commenced in the first quarter of 1983 and are to be completed in

the third quarter, 1988.” A section of the BI labeled “purpose

and necessity” states that “Recent EPA regulations released

August 25, 1982 prohibit the use of all large PCB-filled

capacitors after October 1, 1988.”

A 1986 BI No. 904, approved in October 1985, budgeted $13

million to “Replace all PCB filled distribution transformers”

over a 3-year period to commence in the first quarter of 1984 and

36
Mr. Butts testified that a PCB leak was a “reportable
event” to the EPA.
 - 35 -

to be completed in the fourth quarter of 1986. A section of the

BI labeled “purpose and necessity” states that “Recent concerns

with PCB fluids and by-products of PCB’s resulting from fire have

made it advantageous to replace these transformers before end of

life.”

The record contains copies of ER Nos. 1997, 3042, 3043,

3331, 3337, 3498, 3567, 3568, 4210, 4211, 4213, 3971, and 4455,

which authorized the expenditure of funds to “replace the

existing generator grounding transformer (containing PCB

contaminants) with a PCB free transformer”37 at FPL’s power

plants.38 Similarly, ER No. 4440, processed on December 8, 1988,

authorized $341,396 to “replace Pressurizer Heater P.C.B. oil

filled transformers with Non-P.C.B. dry type” at St. Lucie Unit

2. A section of the ER labeled “purpose and necessity” states

that “Having transformers on site filled with this oil containing

P.C.B.’s in this Regulatory, Environmental, and litigious climate

is a liability” for FPL.39

With respect to the replacement of PCB transformers,

petitioner incurred capitalized costs (tax basis) of $886,616,

37
Although not all of these ER’s contain the exact quoted
language, they each contain similar language.
38
Mr. Butts testified that these ERs were the result of the
PCB rule.
39
Mr. Butts testified that this ER was the result of the
PCB rule.
 - 36 -

$748,411, and $36,053 for equipment placed in service in the

1988, 1989, and 1990 taxable years, respectively.

D. Simulator and Training Buildings

At some point, the NRC and FPL’s management held various

management and enforcement conferences concerning Turkey Point.40

In February 1984, FPL presented a performance enhancement program

for Turkey Point to the NRC.41 Part of the performance

enhancement program was to establish on-site training facilities

and to obtain plant reference simulators. FPL claims ITCs for

the simulator and training buildings in the 1988, 1989, and 1990

taxable years.

On July 13, 1984, the NRC sent a letter to FPL, which states

in part:

Based on recent NRC inspection activities and the
enforcement history of the Turkey Point Facility, we
conclude that * * * [FPL] has not given sufficient
management attention to ensuring adherence to
regulatory requirements. * * *

The NRC included a confirmatory order with the letter, which

states in part:

40
Thomas J. DePlonty, FPL’s project manager, testified that
during this period Turkey Point was placed on a “watch list” and
was considered one of the 10 worst nuclear plants operating at
that time.
41
The performance enhancement program stated: “This
document is specific to Turkey Point Plant however, where
appropriate, the results and lessons learned will be applied to
the St. Lucie Plant.”
 - 37 -

Because of NRC concerns regarding the extent of
problems at the Turkey Point Plant, FPL presented
information on January 13, 1984 describing management
actions taken to improve operational performance at the
site. A more comprehensive FPL program was developed
and presented to the NRC on February 17, 1984. * * *

Accordingly, on July 11, 1984, the NRC ordered FPL to, inter

alia, “implement the Turkey Point Performance Enhancement

Program”.

A 1983 BI No. 543, approved in late 1982, budgeted $100,000

to “Purchase and install a plant control room specific simulator

at Turkey Point and St. Lucie Plants.” The budget item was

divided in two phases. Phase I provided for the development of

simulator technical specifications, and phase II provided for

simulator procurement and installation.42 FPL revised BI 543 in

1984, authorizing $21,980,000 (which was apparently “phase II”)

to “Provide control room specific simulators for the Turkey Point

and St. Lucie nuclear power plants.” This revision referenced a

third phase to the project, which “will include construction of

the buildings and simulator installation. These costs are

estimated at $2,800,000.” This BI 543 was revised in March 1984

to increase the amount budgeted for all three phases to $32

million. This revision envisioned training centers as part of

phase III, which had an estimated cost of $10,020,000. In late

42
BI No. 543 only dealt with phase I.
 - 38 -

1984/early 1985, FPL revised this BI to increase the overall

budgeted amount to $35 million.

ER No. 7172, referencing BI No. 543, was processed in 1984

and approved $10,675,000 to design, fabricate, and install a

control room specific simulator for the St. Lucie power plant.

This ER was revised in late 1988/early 1989 to increase the

amount approved to $13,150,000 and revised again in 1991 to

increase the amount approved to $14,520,000. ER No. 8223,

referencing BI No. 543, was processed in 1985, and authorized

$375,000 to provide detailed design and engineering necessary to

construct the training facility at the St. Lucie nuclear power

plant. FPL revised this ER in 1986 to increase the amount

approved to $5.5 million, and again in 1988 to increase the

amount approved to $7,050,000. ER No. 7173, referencing BI No.

543 and approved in 1984, authorized $10,780,000 to design,

fabricate, and install a control room specific simulator for

Turkey Point. This ER was revised in late 1988/early 1989 to

increase the amount approved to $11,550,000.

A 1987 BI No. 103, approved in 1986, budgeted $2,437,000 to

“provide the capital additions necessary to equip the

Training/Simulator [at the St. Lucie nuclear power plant] with

state of the art tooling, mockups, and equipment.” ER No. 1817,

which references BI No. 103 and was approved in early 1987,

authorized $330,000 to purchase mockup equipment and plant
 - 39 -

specific training aids for the St. Lucie nuclear power plant. ER

No. 1818, which also references BI No. 103 and was approved in

early 1987, authorized $628,000 to purchase equipment for the

simulator at the St. Lucie plant. ER No. 1819, which references

BI No. 103 and was approved in early 1987, approved $521,000 to

purchase a security system and other equipment for the St. Lucie

plant simulator project. ER No. 1820, which references BI No.

103 and was approved in early 1987, authorized $917,000 for the

purchase of equipment and training aids for the St. Lucie nuclear

power plant simulator project. This ER was reprocessed in late

1990, and was reestimated to decrease the amount approved to

$614,989.

A 1989 BI No. 482, approved in late 1988, budgeted $786,000

for the necessary additional equipment for the training/simulator

building. ER No. 5448, referencing BI No. 482 and approved in

1989, authorized $300,000 to purchase “NIS Pack mockup that

duplicates plant equipment to conduct training” for Turkey Point.

This ER was revised in 1990 to increase the amount authorized to

$382,262.

A 1987 BI No. 483, approved in late 1986, budgeted

$1,807,000 to “provide capital funds necessary to equip the

Training/Simulator Building [at Turkey Point] with state of the

art mockups equipment and tooling.” ER No. 2374, referencing BI

No. 483 and approved in 1987, authorized $95,000 to purchase
 - 40 -

Turkey Point specific training aids and mockups. ER No. 2442,

referencing BI No. 483 and approved in 1987, authorized $35,000

to “Purchase a test/training cabinet that will duplicate the

equipment associated with the [Turkey Point] plant’s process and

area radiation monitoring systems.” ER No. 2486, referencing BI

No. 483 and approved in 1987, authorized $682,000 to purchase

shop equipment and training aids for Turkey Point.

A 1988 BI No. 558, approved in late 1987, budgeted

$1,467,000 to provide “THE CAPITAL FUNDS NECESSARY TO EQUIP THE

TRAINING/SIMULATOR BUILDING.”43 ER No. 3381, referencing BI No.

558 and approved in 1988, authorized $275,000 for the purchase of

a “See-Through Power Plant Operational Model” for Turkey Point.

ER No. 5447, referencing BI No. 577 and approved in early

1989, authorized $200,000 for a “Flux Map System Training Model”

for Turkey Point. This ER was revised in June 1989 to increase

the amount authorized to $270,000.

ER No. 8224, referencing BI No. 543 and approved in early

1985, authorized $325,000 to provide detailed design and

engineering necessary to construct the training facility at

Turkey Point. This ER was revised in 1986 to increase the amount

43
This BI did not specify for which site, Turkey Point or
St. Lucie, these funds were budgeted.
 - 41 -

authorized to $4.7 million for the construction of the simulator

training facility at Turkey Point.44

With respect to the construction of the simulator training

buildings, petitioner incurred capitalized costs (tax basis) of

$1,486,050, $1,458,213, and $345,914 for equipment placed in

service in the 1988, 1989, and 1990 taxable years, respectively.

E. Load Management System

A load management system (LMS) is a group of components that

control appliances in customers’ homes to reduce peak demand for

electricity. Peak demand is the time during the day with the

highest demand for electricity. In reducing the demand during

peak times, load management reduces FPL’s need to construct

additional facilities to provide electricity. Load management

reduces peak demand by remotely turning on and off certain

appliances in customers’ homes. Customers voluntarily

participate in the LMS, and FPL gives its customers rebates in

exchange for their participation. FPL claims ITCs for the LMS in

the 1988, 1989, and 1990 taxable years.

The three major components of the LMS are the central

computer, the substation control equipment, and the transponders

located at customers’ homes. Telephone and power lines connect

44
Mr. DePlonty testified that physical construction of the
St. Lucie plant training facility did not start until after April
1986. However, Mr. DePlonty testified that development of the
simulator, a training aid, began before the construction of the
building that housed the simulator.
 - 42 -

these components to each other. The central computer is a

mainframe type of computer, issuing commands through telephone

lines to substation equipment, and is fully redundant, meaning

that FPL purchased two central computers, one of which was used

and one of which served as a backup. When FPL purchased the

central computer at the beginning of the LMS implementation, the

system could handle 600,000 to 700,000 customer locations

(transponders) and the corresponding substation equipment. When

FPL purchased the central computer it also purchased related

software,45 and its software license was perpetual.

The substation control equipment received commands from the

central computer, translated those commands, and sent the

commands through power lines to transponders in customers’ homes.

Substation control equipment includes the control receiving unit,

the outbound modulation unit, the modulation transformer unit,

the inbound processing unit, and the associated equipment.

Transponders are installed at customers’ homes, the transponders

accept commands that are sent from the substation equipment, and

they act on the commands by turning appliances on or off at

customers’ homes. Although the components of the LMS function in

an integrated manner, each transponder, once installed, was

45
According to a document entitled “SOFTWARE PRODUCTS
LICENSE AGREEMENT”, the software was licensed from A.B. Chance
Load Management Systems (A.B. Chance), effective on Oct. 4, 1985.
 - 43 -

operated and placed in service independent of any other

transponder. FPL began placing transponders in service during

the beginning of 1985 and continued to do so through the date of

trial.

On September 17, 1980, the FPSC issued an order proposing

rules. According to the general goals listed in the order, “The

Florida Energy Efficiency and Conservation Act requires

increasing the efficiency of the electric * * * systems of

Florida”. The order also called for a public hearing on the

proposed rules.

During 1980-81, FPL prepared the “Energy Management Plan for

the ‘80s” (the plan) and submitted it to the FPSC.46 The

articulated objective of the plan was to “Reduce use of home

appliances at times of FPL system peak, thereby reducing peak

demand.” The plan called for a load management system. The plan

document states that “FPL has recently obtained * * * [FPSC]

approval to implement a two year test on 1,000 residential

customers beginning in the fall of 1980”.

In January 1983, FPL published a bidirectional communication

system requirements study that outlined “FPL’s future load

46
Armando Garcia, an engineer at FPL, testified that FPL
submitted the energy management plan to the FPSC in response to
the FPSC order and that the FPSC approved the plan. Mr. Garcia
explained that the FPSC had to approve the energy management plan
“Because we do recover the costs and any costs that, money we
collect on our customers has to be approved by the” FPSC.
 - 44 -

management and energy conservation programs designed to meet the

FPSC mandated goals.”47 The study recommended, inter alia, that

FPL procure and install a bidirectional communication system to

implement load control. In addition to the study, FPL published

a technical report that detailed the project expenditures by

year.

In November 1983, FPL prepared a technical specification

that detailed how the LMS was supposed to work, its properties,

and its requirements.48 FPL used the technical specification to

secure bids from vendors to build the LMS.

On October 4, 1985, FPL entered into an agreement (the LMS

contract) with A.B. Chance Load Management Systems (A.B.

Chance).49 An FPL purchase order incorporated into the LMS

contract acted as A.B. Chance’s authority to “furnish the Phase I

47
For example, the FPSC’s Sept. 17, 1980, order proposing
rules included goals to “reduce the average annual growth of
kilowatt demand * * *. The specific goals for the 1980-85 period
are to reduce growth rates so that the total KW demand in 1985
does not exceed that of 1984 by more than 2.212%”.
48
The technical specifications included a “tentative
delivery schedule” for the years 1985 through and including 1992.
Mr. Garcia testified:

we knew that we were going to go long term with the
system and that, because of the nature of it, you had
to go with one vendor. This is what the vendor was
told and he was given the scope of the project and the
values that we were talking about in order to submit an
accurate bid.
49
Mr. Garcia testified that FPL’s technical specifications
were incorporated into the LMS contract.
 - 45 -

Load Management System” to FPL for a total price of $11,477,432.

One of the terms included in the LMS contract was a price

guarantee:

Prices for all parts of the Work shall remain firm
throughout Phase I except as otherwise indicated in
Base Bid Schedule Appendix I.

It is FPL’s intent to competitively bid its
requirements for Phases II and III. However, Contractor
agrees that the maximum price it will charge FPL during
Phases II and III will be the lowest price the Contractor
then currently charges its other customers of Contractor’s
load management system equipment of the same model, type,
system size, quantity purchase and similar contractual
terms. * * *[50]

Under the LMS contract, FPL purchased an entire system, including

hardware, software, etc.51 The LMS contract contemplated the

purchase of, inter alia, 10,000 plug-in transponders, 2,000

surface mount transponders, central computers, software licenses,

50
Concerning the LMS contract, Mr. Garcia testified:

There was no commitment to the work on FPL’s part
at that time to purchase any equipment beyond what is
described here as Phase I.

* * * * * * *

* * * [However, it] was made clear to the vendor
throughout the document that our intention was to do
the whole LMS project. * * *
51
The LMS contract refers to “phase I” but apparently that
term is not defined within the body of the voluminous contract.
Given the description of the items to be provided by A.B. Chance
and those which are described in FPL’s budget items, see infra,
we assume that “phase I” for the LMS contract is the same as
“phase I” for budget item purposes.
 - 46 -

etc.52 The LMS contract contained a termination clause for

convenience that provides:

upon 15 days Written Notice to Contractor, FPL may at
its sole discretion and without prejudice to any other
right or remedy, terminate this Contract. * * *

Upon such termination, FPL shall pay such amount as
Contractor and FPL may agree is to be paid by reason of
such termination, but in event of failure to agree upon
the amount to be paid by reason of such termination,
FPL shall pay the Contractor and Contractor agrees to
accept in full payment of all FPL’s obligations to the
Contractor under this Contract, an amount consisting
of:

1. All amounts which are due to the Contractor
as a result of Contractor satisfactorily
reaching payment milestones in accordance
with * * * [the LMS contract] which FPL has
not yet paid Contractor, plus

2. An amount equal to 10% of the progress
payment for any Contract milestone not
started and for which no preparatory or
startup costs have been incurred by Contract
at the time of termination, plus

3. If a portion of a Contract milestone is
terminated, an amount equal to the costs
which Contractor is unable to mitigate * * *
and 10% of the progress payment determined by
multiplying the percentage of such Work which

52
Although the terms of the LMS contract were for “phase
I,” Mr. Garcia testified that “once we made the commitment [to
the LMS], it was a huge investment and we would continue with
that vendor unless there was a catastrophic event.” He further
testified:

the contract was always envisioned as a single contract
and all the purchases have been made under the same
contract. Phase I, Phase II and [Phase] III were
designations given in order to better manage the
contract. You would not get a contract for 10 or 20
years originally. It just doesn’t make sense.
 - 47 -

has not been completed times the progress
payment of such uncompleted milestones being
terminated.

A 1986 BI No. 897 budgeted $15 million to purchase: 12,000

load control transponders; 1,050 metering transponders; and 500

surface mount load survey transponders, communication equipment

for substations, test equipment, and computer hardware and

software. The budget item states that work was to begin in 1985

and was to be completed in 1988. It further states that a load

management communications system is necessary to meet the demand

and energy goals of the FPSC and FPL’s energy management plan.

This budget item permitted FPL to implement phase I of the LMS:

Initially, the Load Management System will be sized for
10,000 load control points and 1,000 TOU [Time-of-Use]
meter points, and 500 load survey points. After Phase
I is thoroughly tested and results are satisfactory,
the system will be expanded to support 388,000 load
control points and 220,000 TOU Rate customers by 1994.

BI No. 897 was revised in 1989 to increase the amount budgeted

for phase I to $20 million. The budget item states:

Phase II of the program is covered under Budget item
868 which calls for the System to be expanded to
support 250,000 load control points by 1993.
Total Program Capital ($000)
Phase I - $ 20,000
Phase II - 90,000
All future
Phases - 95,000
Total $205,000

A 1989 BI No. 868 budgeted $90 million for phase II of the

LMS. The budget item states that work was to begin in 1989 and

was to be completed in 1993. It also explains that phase II will
 - 48 -

increase the LMS from 10,000 to 250,000 load control points and

from 15 to 183 substations.

According to a summary of exhibits submitted at trial

relating to the cost of the LMS equipment purchased from A.B.

Chance in 1988, 1989, and 1990, FPL installed transponders with a

total cost of $18,061,148, substation equipment with a total cost

of $6,044,979, and master station equipment with a total cost of

$7,478,426 for a total cost of $31,584,553.53

With respect to the installation of the LMS, petitioner

incurred capitalized costs (tax basis) of $362,837, $15,156,624,

and $39,351,031 for equipment placed in service in the 1988,

1989, and 1990 taxable years, respectively.

F. St. Lucie Backfit Construction

St. Lucie Unit 1 was operational in 1976, and St. Lucie Unit

2 was operational in 1983. There are two categories of backfit

items: (1) Items that are the part of the plan completed after

commercial operation, and (2) items developed after commercial

operation, resulting from regulatory requirements or performance

problems.

53
Mr. Garcia testified that all the equipment purchased
from A.B. Chance was purchased under the same contract. He also
testified that as of the day of trial, FPL was still purchasing
equipment from A.B. Chance.
 - 49 -

1. Underwater Intrusion System

An underwater intrusion system protects a power plant using

a barrier system.54 Mr. Paduano testified that “The system

consists of a bridge across the intake canal with a suspension of

a barrier, and underwater and surface detection devices.” FPL

claims an ITC regarding the underwater intrusion detection system

for the 1990 taxable year.

On October 25, 1984, the NRC sent a letter to FPL concerning

St. Lucie’s physical security plan. The letter stated in

pertinent part:

Other changes which were in response to NRR’s
letter of June 5, 1984, relative to the Underwater
Intrusion Detection System (UIDS), are in need of
additional clarification. However, this additional
information request does not delay the acceptance of
your proposed UIDS. You should commence implementation
of that system upon receipt of this letter.[55]

In response to an FPL letter and a meeting regarding the

intake canal barrier and intrusion detection system, on November

14, 1985, the NRC sent a letter to FPL concerning St. Lucie Units

1 and 2 physical security plan. The letter stated in part:

We have determined that the proposal presented by
Florida Power and Light Company * * * is technically
insufficient in that the underwater portion does not
satisfy the requirements of 10 CFR 73.55(c)(4) * * *

54
Harry Paduano, a former manager with FPL, testified that
the underwater intrusion system was required by the NRC.
55
Mr. Paduano testified that this letter in effect required
FPL to modify the underwater intrusion system.
 - 50 -

* * * * * * *

You should take whatever steps are necessary to have
this matter resolved and the system installed by the
date committed to in your security plan.

On December 21, 1989, FPL sent a letter to the NRC

concerning St. Lucie’s intrusion detection system. The letter

stated in part:

The NRC found in its December 7, 1989 letter, that the
system currently installed at St. Lucie Plant does not
meet regulatory requirements or guidance for detection
capability. * * *

* * * * * * *

FPL’s plan [sic] to meet with the NRC in February 1990
to update the Staff on its approach to resolution of
this issue.

On May 1, 1990, the NRC sent a letter to FPL concerning its

conceptual design of the intrusion detection system’s intake

canal. In that letter, the NRC “determined that your conceptual

design is consistent with” regulatory requirements. However, the

letter cautioned that approval of the conceptual design does not

constitute final approval.

ER No. 6475, processed on October 24, 1983, authorized

$2,188,000 to “perform work after the commercial operation of St.

Lucie Unit No. 2 in order to meet regulatory requirements, comply

with technical specifications, achieve full operating capability

and increase plant availability.” The ER specified that “Backfit

Item No. 166, Underwater Intrusion Detection” was to be completed

and in service by March 31, 1984. In 1986, the amount authorized
 - 51 -

was increased to $5.9 million. The ER included a report of

construction action prepared on May 9, 1984, which is associated

with ER No. 6475. The report of construction action stated that

construction work started on May 1, 1984.56 Another report of

construction action prepared on February 27, 1987, stated that

the underwater intrusion detection was completed on February 25,

1987.

ER No. 4866, approved in late 1988/early 1989, authorized

$360,000 for the St. Lucie underwater intrusion detection system.

The ER stated in pertinent part:

[FPL] is committed to the * * * [NRC] for the
development of an underwater intrusion detection system
for the intake canal. This is a security measure.
* * *

This ER is necessary as the presently installed system
does not satisfy the requirements of the [NRC]. This
has caused an extensive effort in research and
development of this specialty system. This research
has identified the need to: Install an additional
sonar head and a surface detection system. These
additional requirements have made it necessary to fund
and perform these modifications.[57]

With respect to the modification and construction of the

underwater intrusion system, petitioner incurred capitalized

costs (tax basis) of $338,665 for equipment placed in service in

the 1990 taxable year.

56
Mr. Paduano testified that the construction work on the
underwater intrusion system began before 1986.
57
Mr. Paduano testified that this ER “added additional
detection capabilities.”
 - 52 -

2. Condensate Polisher Tie Line

A condensate polisher purifies the feedwater that enters the

steam generator to protect the generator from corrosion. The

design for each of the reactors at the St. Lucie plant included a

condensate polisher. FPL claims ITCs for the condensate polisher

tie line in the 1989 and 1990 taxable years.

Apparently, in 1982 there was a plan change or modification

for St. Lucie Unit 1. An engineering study, dated November 13,

1985, recommended the use of cross-tie piping to protect the

generator from corrosion. The recommended system would purify

the feedwater in the second unit by using the polishers at the

first unit. The system uses the cross-tie lines to purify the

feedwater by passing the water discharged from the condensate

pumps at St. Lucie Unit 2 to the condensate polishers at St.

Lucie Unit 1. After passing through the condensate polisher, the

water returns to the condensate system at St. Lucie Unit 2 via

the cross-tie lines, and then the water feeds through the steam

generators.58

ER No. 6195, processed on June 22, 1983, authorized the

expenditure of $15,243,000 as part of the “backfit program” on

St. Lucie Unit 2. The ER states:

58
In a letter dated Jan. 9, 1986, Mr. Paduano recommended
the installation of the cross-tie option for St. Lucie Unit 2.
The record contains numerous letters describing the design
process for going forward with the condensate polisher cross-tie
line for St. Lucie Unit 2.
 - 53 -

It is necessary to perform work after commercial
operation of St. Lucie Unit No. 2 in order to meet
regulatory requirements, comply with technical
specifications, achieve full operating capability and
increase plant availability.

According to the ER, work was to be completed and in service by

May 31, 1985.59 A revision to ER No. 6195 was processed on

February 8, 1984, to increase the amount authorized to

$18,288,000. FPL revised the ER again in 1986 and 1987 to

decrease the amount authorized to $3,830,000. The decrease was

explained as follows:

The previous scope of work included the installation of
a complete full flow condensate polisher at Unit 2. An
examination of the steam generators during the recent
refueling outage resulted in an engineering
determination that the existing condensate polisher at
Unit 1 could serve the needs of both units. The scope
of work is being reduced to a condensate tie line
between the two units.

After the decrease, the ER was again revised to increase the

amount authorized to $4,828,000 to account for extensive

modifications.

With respect to the installation of the condensate polisher

tie line at the St. Lucie nuclear power plant, petitioner

incurred capitalized costs (tax basis) of $3,826,317 and $388,906

for equipment placed in service in the 1989 and 1990 taxable

years, respectively.

59
Mr. Paduano testified that the construction related to
the condensate polisher at St. Lucie Unit 2 commenced before
1986.
 - 54 -

3. Instrument Air Upgrade

At a power plant, an instrument air system operates the

valves located throughout the plant. The instrument air system

provides the force that changes the positions of the valves in

the plants. FPL claims ITCs for the instrument air upgrade for

the 1988, 1989, and 1990 taxable years.

Apparently, the instrument air system at St. Lucie Unit 1

experienced problems, and FPL initiated a study to determine the

cause of the problems.60 The study culminated in a

recommendation on June 22, 1983, to remove existing equipment and

replace it with new equipment. A letter dated October 22, 1984,

states that FPL held a meeting in May 1984 to discuss the

problems and potential solutions for the instrument air systems

for both units at St. Lucie. In that letter, FPL expressed its

intent to solicit bids to acquire four new compressors and two

new dryers. According to a letter dated December 28, 1984, FPL

anticipated that it would complete the bid review and provide an

engineering schedule by January 18, 1985.

ER No. 9009, processed on October 23, 1985, authorized

$75,000 to upgrade the instrument air system at St. Lucie Unit 1.

The ER stated:

The present instrument air systems are not capable
of suppling [sic] the total plant needs for instrument

60
Mr. Paduano testified that the instrument air upgrade was
a type 1 backfit item.
 - 55 -

air. Additional air stations are needed to be
installed in order to provide the equipment with the
necessary instrument air. Two new additional air
compressors will be installed, and the air dryer will
be replaced.

The present air compressors are operating
continuously indicating insufficient air capacity. The
system suffers from a lack of adequate pressure for the
main steam isolation valves * * *. The existing dryer
is not properly drying air at the present system flow
rates.

ER No. 9009 estimated that the upgrade would be completed by

November 30, 1986. In late 1985, the amount authorized was

increased to $692,000. In late 1988/early 1989, the ER was

increased to $1,765,000 “due to schedule duration increase and a

growth in scope.” The duration increase was due to “rescheduling

of Engineering and a Plant Operations requirement that some work

be accomplished during a plant outage.” According to a report of

construction action, the construction began on October 26, 1985.

According to another report of construction action, construction

stopped to await a construction package needed to complete the

work, and the work was to resume during the summer of 1987.

ER No. 9303, processed on February 26, 1986, authorized

$692,000 to upgrade the instrument air system on St. Lucie Unit

2. ER No. 9303 essentially listed the same need for the upgrade

as described in ER No. 9009. In late 1988/early 1989, FPL

increased the amount authorized to $1,464,000 because of growth

in the scope of the project. According to a report of

construction action, construction started on the instrument air
 - 56 -

system upgrade on May 12, 1986. According to another report of

construction action, the instrument air system upgrade was put in

service on April 27, 1989.

With respect to the installation of the instrument air

upgrade, petitioner incurred capitalized costs (tax basis) of

$1,541,741, $1,717,941, and $316,912 for equipment placed in

service in the 1988, 1989, and 1990 taxable years, respectively.

G. St. John’s River Power Park (SJRPP)

The Jacksonville Electric Authority (JEA) and FPL entered

into an agreement, dated April 2, 1982, to jointly own and

operate the St. John’s River Power Park (SJRPP). FPL owns a 20-

percent interest, and the JEA owns an 80-percent interest of the

SJRPP as tenants in common. FPL claims ITCs for the SJRPP

equipment in the 1988, 1989, and 1990 taxable years.

The SJRPP burns coal to generate steam to turn the turbines

that generate electricity. The major components of the SJRPP

include: Hyperbolic cooling towers, bore houses, turbine houses,

steam generators, switcher, precipitators, scrubbers, chimney,

and coal facilities. SJRPP Units 1 and 2 each had their own

boiler, turbine, and control panel. The SJRPP includes a water-

borne coal terminal, which is connected to the main part of the
 - 57 -

facility by conveyor systems located on a piece of land that is

approximately 3.5 miles long by 100 feet wide.

Buildings at the SJRPP serve a support function to the

electrical power generation components. The buildings are not

significant compared to the other parts of the SJRPP facilities

in terms of size and cost.

In operation, Units 1 and 2 both use coal from the SJRPP’s

coal yard and coal-unloading facilities (train and ship). The

SJRPP’s conveyor system serves both Units 1 and 2. Employees of

the SJRPP work on both Units 1 and 2. Both these units use the

SJRPP’s inventory, storage, and tool rooms. The SJRPP includes

other facilities common to both Units 1 and 2, such as the switch

yard, waste water treatment, limestone handling, shipment

handling, and rotary coal dumper. Unit 1 is capable of

supporting the critical systems of Unit 2 and vice versa. These

critical systems are “cross connected” to support one another,

and include the instrument air/service units, condensate systems,

cooling water systems, and auxiliary steam systems.

The SJRPP Unit 1 and the common facilities were placed in

service in 1987, and Unit 2 was placed in service in 1988. After

Unit 1, the common facilities, and Unit 2 were placed in service,

certain construction completion work remained, including “wrap

up” work and “enhancements and deficiencies” work. “Wrap up”

work included predominantly contract closeout work related to
 - 58 -

construction contracts with unrelated parties. “Wrap up” work

was within the original design of the SJRPP.

The SJRPP agreement defined the physical facilities to

include: (1) Two coal-fired electric generating units, along

with all of their necessary equipment; (2) a coal handling

system, including coal storage facilities;61 and (3) a

switchyard.62 The same building contains the generators for

Units 1 and 2. Both units use the same coal yard. The control

room houses control panels for both Units 1 and 2.

61
The SJRPP agreement also stated: “Currently being
studied is the conceptual design for and feasibility of a
facility to provide for the waterborne delivery and transfer of
fuel.”
62
John P. Reid, business manager for the SJRPP, testified
that it was always intended that the SJRPP would include two coal
fire units.
 - 59 -

The SJRPP agreement states in pertinent part:

5.9 Commitments on Behalf of Co-Owner.
5.9.1 Authority of Agents to Commit. JEA shall
have the authority to act as agent on behalf of
FPL (i) to the extent actions are authorized
* * *[63]

According to a final cost report, as of September 30, 1993,

the final cost totaled $860,703,589.96 for Unit 1,

$510,248,946.56 for Unit 2, and $60,227,555.61 for the coal

terminal.64

Numerous third parties contracted to provide materials,

services, and other aspects of the construction of the SJRPP.

Excavation for the construction of the SJRPP commenced in

December 1982, and the first concrete was poured in 1983. The

parties submitted into evidence a summary of third-party

63
Mr. Reid explained his understanding of this provision
as:

[the] JEA is the leading manager of the construction
operation and maintenance and long term ownership of
the facility and because of their contracting
requirements was the lead manager of the facility of
the construction and operation of the facility. This
section under the JOA states that [the] JEA, from * * *
[FPL’s] perspective, [the] JEA will have the authority
to act as agent on behalf of * * * [FPL] in all those
* * * issues.

Additionally, Mr. Reid testified that the JEA and FPL managed the
SJRPP project by committee, with two representatives from each
owner serving as representatives.
64
Mr. Reid testified that the cost of Unit 1 far exceeded
the cost of Unit 2 because the common facilities had to be
erected in time to support the first unit built.
 - 60 -

construction contracts related to the SJRPP. The summary lists

the major contracts for the SJRPP Units 1 and 2, the base award

values of the contracts, the effective dates, and the subject

matter. The parties stipulated that, except for one contract,

each contract identified in the summary contained an introductory

paragraph, of which the following is representative:

This Agreement, Executed this day of in the
A.D. by and between JACKSONVILLE ELECTRIC
AUTHORITY, Jacksonville, Florida, hereinafter OWNER,
and , hereinafter called CONTRACTOR.[65]

The parties stipulated that each contract identified in the

summary contained a clause defining “Owner”, of which the

following is representative:

Owner “means the [Jacksonville Electric] Authority
and any person, firm, partnership, joint venture,
company, corporation or other entity obtaining an
ownership interest or ownership participation in the
Project. The Authority shall represent all entities
comprising Owner with regard to all relations between
the Owner and Contractor under this Contract.”

The parties stipulated that each contract identified in the

summary contained a termination clause, of which the following is

representative:

65
The excepted contract contained the following language:

This Agreement, Executed the 11th day of September in
the A.D. 1985 by and between Jacksonville Electric
Authority on its behalf and agent for Florida Power and
Light, hereinafter Owner and Johnson Control, Inc.,
hereinafter Contractor.
 - 61 -

44.0 Termination for Convenience

44.1 At any time after the acceptance of this
Contract, Owner shall have the absolute
right to terminate the entire Contract.
In the event of termination, Contractor
shall be paid for all disbursements and
expenses which Contractor has incurred
or becomes obligated for prior to the
date of Contractor’s receipt of the
notice of termination plus costs
incurred in compliance with Section 44.2
below, less the reasonable resale value
of Equipment which shall have been
ordered, obtained or fabricated in
connection with this Contract plus a sum
as profit bearing the same ratio to the
profit that Contractor would have
received upon completing this Contract
as the value of the Work completed as of
the date of receipt of the notice of
termination bears to the Contract Price.

44.2 Upon receipt of such notice of termination,
Contractor shall:

44.2.1 Stop the performance of the Work
hereunder except as may be
necessary to carry out such
termination.

44.2.2 Take any other action toward
termination of the Work which
Owner may reasonablely [sic]
direct, including all reasonable
efforts to provide for a prompt
and efficient transition as
directed by Owner.

44.3 All payments made by Owner against the
Contract Price prior to termination shall be
credited to the amount, if any, due
Contractor as provided in Section 44.1.

44.4 Except for amounts due pursuant to
Section 44.1, upon termination as
provided in Section 44.1 Owner will have
no liability to Contractor for any cause
 - 62 -

whatsoever arising out of or in
connection with such termination.

44.5 If the sum of all previous payments and
credits made by Owner exceeds the sum
payable under Section 44.1, such excess
shall be refunded by Contractor to Owner
immediately upon determination of such
excess by the Parties.[66]

According to an actual cost report, as of December 31, 1985,

the total amount expended on the SJRPP was $703,407,644.67

According to that report, as of December 31, 1985, FPL’s

obligation was $140,681,529. Apparently a retention account was

created,68 which totaled $31,259,567 as of December 31, 1985.

66
Mr. Reid testified that, as of Dec. 31, 1985, it was 100
percent likely that FPL and the JEA would continue with the
existing contractors, and that there was a zero percent
likelihood that the JEA or FPL would terminate these contracts.
Furthermore, Mr. Reid testified that neither the JEA nor FPL
exercised the termination clause.
67
Mr. Reid testified that, as of Dec. 31, 1985, the SJRPP
was between 60- and 65-percent complete. According to Mr. Reid’s
testimony and the stipulated summary of the SJRPP contracts, as
of Dec. 31, 1985, FPL and the JEA were “committed” to spend
$810,902,712. Mr. Reid testified that this sum “represents cash
out the door.”
68
As Mr. Reid testified:

Retention is monies withheld from the contractors
invoice pending overall completion, successful
completion of the contract of work and/or performance
testing acceptance, monies withheld from the
contractors invoice on a monthly basis.

However, Mr. Reid also testified that the retained amounts were
owed to the contractors.
 - 63 -

Additionally, as of December 31, 1985, there was an unpaid

liability of $5,569,907.69

According to an actual cost report dated January 31, 1986,

the total expenditures to date were $726,985,585. During January

1986, $23,964,311 was expended on the SJRPP. This amount paid in

January 1986, covered contract work performed during November and

December of 1985.70 According to the actual cost report, as of

January 31, 1986, FPL’s obligation was $145,477,686.

A 1986 BI No. 148 Rev. 4 budgeted $239,087,000 “To

participate with * * * [the JEA] in the joint construction of the

first of two coal-fired steam generating units.” The BI

explained that this amount was predicated upon FPL’s owning 20

percent of the unit’s capital cost. This BI stated that work

started in 1979 and would be completed in April 1987. FPL

approved this BI in late 1985 with only the construction of phase

III yet to be completed. BI No. 148 Rev. 5, approved on October

13, 1986, decreased the amount budgeted to $231 million.

According to the revision, the estimated completion date of

construction was April 15, 1987. Approved on August 20, 1987, BI

69
Mr. Reid testified that the unpaid liability was for
purchase orders that were amounts outside or above and beyond
contractor expenditures.
70
Mr. Reid testified that FPL and the JEA were liable to
the contractors in January 1986 for work performed in November
and December of 1985. This amount, however, did not include the
amounts retained from contractors.
 - 64 -

No. 148 Rev. 6 decreased the amount budgeted to $216 million. BI

No. 148 Rev. 7, approved in late 1988, again decreased the amount

budgeted to the SJRPP project to $204 million. Finally, BI No.

148 Rev. 8 increased the amount budgeted to $207 million in late

1989.

A 1986 BI No. 149 Rev. 4, approved in late 1985, authorized

$166,453,000 to participate in the construction of Unit 2. BI

No. 149 Rev. 5 decreased the amount budgeted to this project to

$148 million. BI No. 149 Rev. 6 decreased the amount budgeted to

$124 million. BI No. 149 Rev. 7 again reduced the amount

budgeted to $121 million.

ER No. 5736, approved in late 1982/early 1983, authorized

the expenditure of $228,116,000 for the SJRPP Unit 1 “To

participate with * * * [the JEA] in the joint construction of the

first of two coal-fired steam generating units.” The estimated

date of completion of construction, startup, and initial

operation of the plant was April 1, 1987. The amount authorized

was decreased to $214,535,000 in late 1986/early 1987. In late

1987/early 1988, the amount authorized was decreased again to

$202,637,000. The revision stated that the unit was operational

at the time of the revision. On June 30, 1988, ER No. 5736 was

closed “To meet both regulatory and corporate accounting

requirements”. The amount authorized in that revision was

apparently again decreased to $179,979,000. In late 1988/early
 - 65 -

1989, ER No. 5736 was reestimated to $181,990,000. In early

1991, FPL increased the ER to $196,666,000. This revision was

increased “to incorporate [the] JEA owners and FPL owners costs

from ER’s 5737 and 4290 respectively, and also costs accumulated

to this ER prior to opening ER 4110 (SJRPP Unit 1 Construction

Wrap-Up).”

ER No. 4110, which authorized the expenditure of $22.6

million for the SJRPP Unit 1 wrap up work,71 was initiated “to

specifically cover the project costs (excluding the JEA and FPL

owner’s costs) beyond June 30, 1988.”72 In late 1988/early 1989

the amount authorized under ER No. 4110 was decreased to

$8,736,000. This ER was again revised in 1989 to decrease the

amount authorized to $8,016,400. A few months later, at the end

of 1989, the ER was revised and the amount authorized was

decreased to $7,354,900. Finally, in 1991, FPL revised the ER to

decrease the amount authorized to $6,575,000. The parties

71
Mr. Reid defined “wrap up” work as:

the work that was completed after both units went
commercial. It’s typical of a job this size that
you’re going to have punch list type items after the
units both went commercial. Included into that is
examples whereas, as I stated, was contract close out,
retention releases, * * * insurance settlements and
enhancements.
72
Mr. Reid testified that the “wrap up” work authorized in
ER No. 4110 was within the original design of the SJRPP. He
explained that “The wrap up was predominantly the construction
and close out of those large dollar contracts and the associated
expense with those.”
 - 66 -

stipulated that a series of ERs were used by FPL to authorize

amounts to be spent on the SJRPP.73

With respect to the installation of equipment at the SJRPP,

petitioner incurred capitalized costs (tax basis) of $1,702,649,

$2,376,238, and ($360,804) for equipment placed in service in the

1988, 1989, and 1990 taxable years, respectively.

H. The Southern Company Contracts

On October 18, 1979, FPL entered into an interchange

contract with an affiliated group of corporations providing

electric power in several southeastern States, including Georgia

(collectively referred to as the Southern companies). The

interchange contract enabled FPL to acquire coal-fired power from

the Southern companies. An “interconnection” between power

companies links the two companies’ systems to enable them to

purchase, sell, and exchange power. Before 1979, FPL did not

have any interconnections with the Southern companies.

73
For simplicity, the following list identifies these ERs
and the respective amounts authorized: (1) ER No. 6473, $1,900;
(2) ER No. 6477, $7,300; (3) ER No. 6483, $105,400; (4) ER No.
6487, $96,500; (5) ER No. 6609, $22,400; (6) ER No. 6638,
$35,000; (7) ER No. 6631, $8,900; (8) ER No. 6640, $14,600; (9)
ER No. 6627, $3,100; (10) ER No. 6629, $1,000; (11) ER No. 6645,
$4,400; (12) ER No. 6623, $2,500; (13) ER No. 6633, $14,300; (14)
ER No. 6637, $8,800; (15) ER No. 6639, $38,400; (16) ER No. 6642,
$16,800; (17) ER No. 6651, $9,800; (18) ER No. 6653, $11,200,
revised to $116,000; (19) ER No. 6611, $21,800; (20) ER No. 6654,
$2,200; (21) ER No. 6722, $9,600; (22) ER No. 6716, $2,500; (23)
ER No. 6728, $6,600; (24) ER No. 6730, $11,700; and (25) ER No.
6644, $9,200.
 - 67 -

The interchange contract specifically required FPL to

construct a 230-kV transmission line from its Duval substation

near Baldwin, Florida, to a point on the Florida-Georgia State

line.74 FPL completed the 230-kV transmission line required by

the interchange contract between November 1979 and January 1980.

In addition, the contract required FPL to provide communications,

telemetering, and automatic generation control equipment,

together with such other facilities as may be required for load

dispatching purposes and for control of power flow and reactive

plan. FPL claims ITCs for the acquisition and construction of

equipment associated with the Southern company supply contract in

the 1988, 1989, and 1990 taxable years.

Subsequent to establishing the interconnection with the

Southern companies under the interchange contract, FPL was

interested in buying more power from the Southern companies.

Effective February 19, 1981, the Southern companies and FPL

entered into a unit power sales agreement (power agreement) under

which the Southern companies sold power to FPL. The power

agreement continued until May 31, 1995, “or such extended period

agreed to by the parties under the provisions” of the contract.

Also, on February 19, 1981, the Southern companies and FPL

entered into amendment No. 1 to the interchange contract.

74
The Southern companies were required to construct a 230-
kV transmission line on their side of the Florida-Georgia State
line to deliver the power.
 - 68 -

Amendment No. 1 required both the Southern companies and FPL to

establish two additional interconnections (500-kV transmission

lines) with specific reference to the point of origin and

destination. Both the Southern companies and FPL were also

required to provide, install, operate, and maintain such

associated terminal and other facilities as may be necessary to

permit effective use of such interconnection. Each of the

transmission lines required under amendment No. 1 was completed

by December 31, 1982.

On July 23, 1981, FPL and the Southern companies entered

into amendment No. 2 to the interchange contract. This amendment

accelerated the effective date listed in amendment No. 1 to the

interchange contract (December 31, 1982) to a date before August

1, 1982.

On February 18, 1982, the Southern companies and FPL entered

into an amended and restated unit power sales agreement (amended

power agreement). Under the amended power agreement, the

Southern companies agreed to sell more power to FPL, and FPL

agreed to acquire more power from the Southern companies. The

amended power agreement recognized that FPL would construct

certain internal transmission lines to allow FPL to increase its

purchases of unit power capacity during the contract period,

which began on January 1, 1985. The contemplated facilities

were: (i) A 500-kV transmission line from its Duval substation
 - 69 -

to its Rice substation continuing to its Poinsett substation;

(ii) a separate 500-kV transmission line from its Duval

substation to its Poinsett substation; and (iii) a 500-kV

transmission line from its Poinsett substation to its Martin

plant. FPL covenanted to “use [its] best efforts consistent with

Prudent Utility Practices to complete such facilities by the time

such facilities are needed to purchase the increased unit power

capacity on January 1, 1985.” FPL completed each of the

transmission lines required under the amended power agreement by

January 1, 1985. As of September 1985, FPL had developed a

transmission expansion program for the years 1985 through 1990.

A 1983 BI No. 273 budgeted $9,670,000 to construct

approximately 13 miles of 240-kV line from the Corbett substation

to the Ranch substation; extend the Orange River-Ranch 240-kV

line into the Corbett substation; “reconductor” the 240-kV line

from the Cedar substation to the Ranch substation; install two

240-kV terminals for the Corbett lines; and upgrade the Cedar
 - 70 -

terminal in the Ranch substation.75 FPL revised this budget item

in 1985 to decrease this project’s budget to $7 million.

A 1983 BI No. 274 budgeted $28.4 million as a conceptual

estimate to construct a new 500-240-kV transmission substation,

the Corbett substation, consisting of four 500 MVA

autotransformers, one 500-kV line terminal and four 240-kV line

terminals. According to the budget item, the work was to begin

in November 1985 and was to be completed in May 1987.

A 1985 BI No. 272 budgeted $24.2 million as a conceptual

estimate to construct approximately 33 miles of 500-kV

transmission line between the Corbett substation and the Martin

plant.76 It also states FPL’s plan to construct a 500-kV

terminal at the Martin plant switchyard.77 The budget item

scheduled work to commence in May 1986 and to be completed in May

1987. ER No. 1248, which refers to BI No. 272 and was processed

75
Thomas Sanders, an engineer employed by FPL, testified:

This is the construction of 13 miles of new 230 KV
line. There are two miles of 230 KV line. Between the
two constructions, they basically integrate the 500 KV
Corbett substation with the existing 230 KV system
that’s in the area. There is also a reconductoring of
the 230 KV line from Cedar to Ranch and the two 240 KV
terminals for the Corbett lines and the upgrade of the
Cedar and the ranch terminal.
76
BI No. 272 was originally authorized in 1983 for $23
million.
77
Mr. Sanders testified that, according to this budget
item, this work was needed “to reliably transfer contracted
foreign power purchases from the Southern [Companies].”
 - 71 -

in 1986, authorized the expenditure of $15,294,000 to “Construct

33 miles of 500 KV transmission line from proposed Corbett

Substation to Martin Plant.”78

ER No. 1224, approved in 1986, authorized $16,599,430 to

construct the Corbett substation, a “500/230 kV air insulated

substation”. ER No. 1249, approved in 1986, authorized the

expenditure of $4,412,159 to construct approximately 11 miles of

double circuit 230-kV transmission line.79 ER No. 2383, approved

in 1987, authorized the expenditure of $896,375 to construct

approximately 2.5 miles of double circuit 230-kV transmission

line looping the Orange River-Ranch 230-kV line into the Corbett

substation. ER No. 1984, approved in 1987, authorized the

expenditure of $113,550 to, inter alia, “Convert the Ranch No. 2,

230kV line to Corbett 230kV line.” ER No. 1479, approved in

1986, authorized the expenditure of $94,840 for the Orange River

subrelaying equipment for the Corbett 230-kV line. ER No. 1778,

approved in early 1987, authorized the expenditure of $593,620 to

upgrade a portion of the “230 kV yard at Ranch Substation * * *

to accommodate the Corbett No. 1 and No. 2, 230 kV lines.”

78
Mr. Sanders testified that this expenditure requisition
was approved in 1986, and construction began after such approval.
He also testified that FPL started receiving power under the
Southern company contracts before the construction of the
property.
79
Mr. Sanders testified that the Southern company contracts
did not specifically identify the property listed in ER No. 1249.
 - 72 -

A 1987 BI No. 304, entitled “Transmission Plant--

Systemwide--Miscellaneous--1987”, approved in 1986, budgeted $9.8

million for transmission lines, substations, relay projects, and

miscellaneous projects. ER No. 3276, approved in late 1987/early

1988, authorized the expenditure of $738,140 to replace five 230-

kV transmission breakers at the St. Lucie plant. On the basis of

a study by the system planning department, the ER states that the

then-existing breakers would become overstressed because of the

500-kV transmission expansion. A 1989 BI No. 267, entitled

“Transmission Plant--Systemwide--Miscellaneous--1989”, approved

in 1988, budgeted $23,456,000 to, inter alia, upgrade and replace

various transmission lines. ER No. 5334, approved in late

1988/early 1989, authorized the expenditure of $1,192,967 to

install one 500-kV bus tie breaker at the Poinsett substation.

ER No. 1776, approved in 1987, authorized the expenditure of

$3,401,908 to install a 500-kV 2 breaker terminal.80 A 1988 BI

No. 264, approved on October 15, 1987, entitled “Transmission

Plant Systemwide Miscellaneous--1988”, budgeted $12,045,000 to,

inter alia, install high voltage switched capacitor banks at

three locations. ER No. 3216, approved in late 1987/early 1988,

authorized the expenditure of $1,257,310 to add two 230-kV MVAR

80
Mr. Sanders testified that this expenditure was “an
integral part of the 500 KV transmission system that we built.”
 - 73 -

capacitor banks to the Poinsett substation. A section of the ER

labeled “purpose and necessity” states, in part:

an increased load demand coincident with the nuclear
units at Turkey Point out of service and insufficient
reactive support will reduce the transfer capability of
the FPL ties with Southern to scheduled firm
interchanges in the 1988 to 1990 time frame. * * *

* * * * * * *

Installation of these capacitor banks and
associated equipment * * * will provide an increase in
transfer capability of the ties with Southern * * *.

ER No. 3623, approved in early 1988, authorized the expenditure

of $992,000 to add a second 230-kV capacitor bank to the Levee

substation.81 ER No. 3219, approved in 1988, authorized the

expenditure of $1,182,715 to add two 88 MVAR 230-kV capacitor

banks to the Duval substation.

A 1986 BI No. 129, approved in 1985, budgeted $13.1 million

to install high initial response exciters.82 ER No. 9327,

approved in 1986, authorized the expenditure of $1,225,000 to

install a high initial response excitation system at Turkey Point

Unit 2. ER No. 9334, approved in 1986, authorized the

expenditure of $740,000 to install a high initial response

81
The purpose and necessity stated in this ER is very
similar to that stated in ER No. 3216.
82
Mr. Sanders testified that the installation or
construction of the high initial response exciters was required
by the interchange contract to effectively utilize the interface.
 - 74 -

excitation system at Martin Unit No. 1. ER No. 9337, approved in

1986, authorized the expenditure of $1,215,000 to install a high

initial response excitation system at Port Everglades Unit No. 4.

ER No. 9329, approved in 1986, authorized the expenditure of

$970,000 to install a high initial response excitation system at

Turkey Point Unit 4. ER No. 9326, approved in 1986, authorized

the expenditure of $1,185,000 to install a high initial response

excitation system at Turkey Point Unit 1.

With respect to the equipment relating to the Southern

company supply contract and the interchange contract, petitioner

incurred capitalized costs (tax basis) of $39,605,571,

$2,648,789, and $1,169,866 for equipment placed in service in the

1988, 1989, and 1990 taxable years, respectively.

I. Integrated Transmission Line Systems

FPL claims ITCs for components added to the Midway-Jensen-

Crane transmission line system in the 1989 and 1990 taxable

years. FPL also claims ITCs for components added to the

Andytown-Lauderdale transmission line system in the 1988, 1989,

and 1990 taxable years.

In 1983, FPL filed an application for corridor certification

under the Florida Transmission Line Siting Act proposing the

Midway-Jensen-Crane 230-kV transmission line. The transmission

line supported the entire load in this particular area of
 - 75 -

Florida.83 FPL had a reliability problem because a single

transmission line fed several substations in the area. As a

result, if the transmission line lost service at one end, all of

the substations would experience an outage. FPL planned to break

that line into two segments, including the new Midway-Jensen-

Crane line. To reliably serve the load in that area, the plan

also called for additional distribution substations to the west.

A 1982 BI No. 244, approved in late 1981, budgeted $1.5

million to: (1) Acquire 16 miles of 15-foot-wide right-of-way

from Jensen substation to Midway substation; (2) acquire a 10-

acre substation site for a distribution/switching station from

Turnpike substation; and (3) acquire 7.5 miles of 15-foot-wide

right-of-way from the Turnpike substation to the Crane

substation. According to the BI, the work was to be started in

January 1982 and was to be completed in December 1985. FPL

revised BI No. 244 in late 1982 to increase the amount authorized

by $200,000 to acquire an additional 1.5 acres at the Jensen

substation for its expansion. In early 1982, ER No. 5058, which

references BI No. 244, authorized the expenditure of $200,000 to

purchase approximately 10 acres of land as a site for the

purposed Turnpike substation.

83
Mr. Sanders testified that the Midway-Turnpike-Jensen
transmission line system operated as an integrated unit, and that
FPL viewed the system as one integrated piece of equipment.
 - 76 -

A 1986 BI No. 330, approved in 1985, budgeted $1.2 million

to construct a 230-23-kV one-transformer two-feeder distribution

substation.84 The BI states:

The City of Port St. Lucie has experienced an estimated
67% increase in population from 1980 to 1983. * * *
Economic studies have indicated that the addition of
Turnpike Substation with its two feeders connected to
the proposed Midway-Sandpiper 230 kV line is the most
cost effective method of addressing this load growth.

ER No. 8476, which references BI No. 330 and was approved in

early 1985, authorized the expenditure of $1,856,836 to construct

the Turnpike substation.

A 1988 BI No. 206, approved in 1987, budgeted $2.3 million

as a conceptual estimate to construct approximately 7.7 miles of

single pole concrete 230-kV line from the Turnpike substation to

the proposed Crane substation. The stated reason for budgeting

this amount was:

The area adjacent to Palm City and Martin Downs is
presently being subjected to expansive residential,
commercial, and industrial development. * * *

* * * * * * *

* * * It is proposed to construct Crane Substation
and the associated Crane-Turnpike 230 kV line to
address the expected load growth and service
reliability to the area.

This line extension will be utilized in the
development of the Turnpike-Crane-Bridge-Plumosus
future circuit.

84
Mr. Sanders testified that BI No. 330 was to build the
Turnpike substation.
 - 77 -

ER No. 5366, which referenced BI No. 206 and was processed

in late 1988/early 1989, authorized the expenditure of $2,226,922

to construct approximately 7.7 miles of 230-kV single circuit

transmission line from the existing Turnpike substation to the

proposed Crane substation. The ER explained that the “ER will

provide service for the expected load growth and improve service

reliability to the area.”

A 1988 BI No. 307, approved in 1987, budgeted $1,530,000 to

construct the Crane substation, which consists of a 230-23-kV

line, one transformer, and a two feeder distribution substation.

FPL approved this BI because “The area adjacent to Palm City and

Martin Downs is presently being subjected to expansive

residential, commercial, and industrial development.”

ER No. 4512, approved in 1988, authorized the expenditure of

$111,245 to install a third regulated feeder position to the

Turnpike substation. The ER anticipated that construction would

begin on March 1, 1989. ER No. 5056, approved in late 1988/early

1989, authorized the expenditure of $240,928 to add a third 230-

kV line terminal to the Turnpike substation. The ER stated that

“The present 138kV network * * * will become inadequate to serve

load in 1989.”

A 1986 BI No. 246, approved in 1985, budgeted $5,860,000 for

a conceptual estimate to construct approximately 16 miles of

single pole concrete 230-kV line from the Andytown substation to
 - 78 -

the Trace substation. The BI stated that “Extensive development

is presently occurring in the Southwest Broward County area”.

Apparently, FPL anticipated that one development project in this

area would have an ultimate peak demand of 270 MVA. New

substations were anticipated to be built, and FPL proposed to

construct a fourth Andytown-Lauderdale plant 230-kV line to serve

the new substations.85

ER No. 1333, which referenced BI No. 246 and was approved in

late 1986, authorized the expenditure of $2,502,710 to construct

approximately 9.5 miles of single pole concrete 230-kV

transmission line from the Andytown substation to the Trace

substation. ER No. 1645, which referenced BI No. 246 and was

processed in late 1986/early 1987, authorized the expenditure of

$962,036 to install equipment at the Andytown substation. ER No.

1676, which references BI No. 246, authorized the expenditure of

$152,090 to install equipment at the Andytown substation.

A 1986 BI No. 253, approved in late 1985, budgeted $1.1

million to construct approximately 3.5 miles of single circuit,

single pole concrete 230-kV line to serve the Trace substation.

The BI states that the project was initially authorized in 1984,

and that the project was completed in May 1985. The reason for

the BI was “to construct Trace Substation by the summer of 1985

85
Mr. Sanders testified that “This line was constructed to
serve the load growth in western Broward County.”
 - 79 -

to serve new customers in Bona Venture Estates and Arvida’s

Weston development”.86

A 1986 BI No. 254, approved in late 1985, budgeted $900,000

to construct approximately 2.5 miles of single circuit, single

pole concrete 230-kV transmission line. The BI stated that it

was initially authorized for $600,000 in 1984 and that, at that

time, the line was under construction. The BI stated that this

expenditure was needed because of growth in the area from new

development and increased demand for electricity.87 ER No. 1332,

which references BI No. 254, authorized the expenditure of

$2,265,570 to construct approximately 7.5 miles of single pole

concrete 230-kV transmission line from the Hiatus substation to

the Melaleuca substation.

With respect to the installation of the Midway-Jensen-Crane

transmission line system, petitioner incurred capitalized costs

(tax basis) of $119,911 and $3,109,573 for equipment placed in

service in the 1989 and 1990 taxable years, respectively. With

respect to the installation of the Andytown-Lauderdale

transmission line, petitioner incurred capitalized costs (tax

basis) of $6,436,912, $545,188, and $16,707 for equipment placed

86
Mr. Sanders testified that this BI was for the Melaleuca-
Trace section of the Andytown-Lauderdale line.
87
Mr. Sanders testified that “This is another section of
the Andytown-Lauderdale number four line, the Hiatus Springtree
section.”
 - 80 -

in service in the 1988, 1989, and 1990 taxable years,

respectively.

J. Distribution and Transmission Substations

A distribution substation transforms transmission voltage of

electricity from high voltage/lower current to low voltage/higher

current; i.e., to “distribution voltage”. The distribution

voltage is distributed through feeder wire (either overhead or

underground), then through either aerial or pad-mounted

transformers, and then to utility customers (residential or

commercial). A transmission substation either consolidates

transmission lines or transforms voltage from one voltage to

another. FPL used similar procedures for designing and

constructing distribution substations to those it used for

transmission substations. Typically, FPL builds a distribution

substation on approximately 5 acres of property, with

approximately 1 acre in the middle of the property developed for

the substation. FPL claims ITCs for the distribution and

transmission substation components in the 1988, 1989, and 1990

taxable years.

The most important components of a distribution substation

are the “power transformers” (transformers) because this

equipment transforms the voltage from transmission voltage to

distribution voltage. Also, the transformers are significantly

more expensive than the other items in the substation. A
 - 81 -

distribution substation contains other necessary and related

electrical and structural components, including pull-off

structures, switches, bus work, feeders, voltage regulators,

equipment contained within a “relay vault” (a concrete block

enclosure for electrical equipment), wire, cable, control panels,

fencing, concrete, and steel. Regulations require that a chain

link fence enclose distribution and transmission substations.

FPL viewed each distribution and transmission substation as a

single facility.88

FPL planned a distribution substation typically 5 years in

advance. The planning process included an analysis of the number

of transformers required. Substations are built according to

more than 100 structural and electrical plans. The plans

graphically illustrate the location of the transformers and

feeder positions. To build a substation, FPL was required to

obtain permits from local, State, and sometimes Federal agencies.

To allocate funds to the project, FPL prepared a budget item

the year before a substation was constructed. After the budget

item received approval, an engineer prepared an expenditure

requisition to authorize the payment for the project against the

budget item. Once the budget item and the expenditure

requisition received approval, FPL prepared detailed drawings for

88
Ken Veronee, an employee of FPL, testified that each
distribution and transmission substation was a self-contained
unit.
 - 82 -

the substation. Finally, construction would begin, typically in

three phases: Site prep work (clearing trees and vegetation on

the property); substation construction; and installation and

testing of equipment. FPL individually named each distribution

and transmission substation, normally on the basis of geography.

A plot plan was essentially FPL’s overall layout of the

substation on the piece of property. The plot plan graphically

illustrated the general orientation of the high voltage bus work,

location and number of transformers, location of the relay vault,

and all low voltage distribution substation equipment. FPL

created the plot plan when it prepared the substation’s first

budget item because the budget was based upon the plot plan.

FPL claims an ITC for equipment installed at numerous

substations, including transformers and feeders. In the interest

of brevity and ease of explanation, a table has been prepared to

illustrate FPL’s claims that is attached as appendix A.

With respect to the distribution and transmission

substations, petitioner incurred capitalized costs (tax basis) of

$3,264,386, $8,091,517, and $4,413,670 for equipment placed in

service in 1988, 1989, and 1990 taxable years, respectively.

K. Regional Planning

FPL had a distribution planning group that planned and

provided for an orderly, cost effective expansion of FPL’s

electrical distribution system over the long term. The
 - 83 -

distribution planning group provided extensive analysis.

Annually, this group collected data related to electrical power

needs from residential customers, small businesses,

commercial/industrial customers, large customers, and

governmental customers. The distribution planning process

involved: (i) Evaluation of load demands on the distribution

system; (ii) analysis of alternatives for providing electrical

service to customers, currently and over the long term; (iii)

evaluating the cost and reliability of alternatives against any

risk associated with the alternative; and (iv) selection of the

best alternative.

“Load” is the demand for electricity from customers. The

distribution planning group made projections of “load growth”

over the short, medium, and long terms.89 To project load

growth, the distribution planning group conducted an extensive

analysis of, inter alia, historical load growth and anticipated

land uses in relevant areas. The distribution planning group’s

expertise in analyzing load growth allowed FPL to determine the

89
Michael H. Hernandez, FPL’s operations support
supervisor, testified:

Distribution planning will go ahead and first
measure how much of our actual loading we have on our
existing equipment. We will review that loading. We
will go ahead and forecast loads into the future and
determine if there are any future weaknesses, either
current or future, and plan for alternatives of how to
go ahead and deal with those projected weaknesses.
* * *
 - 84 -

size and number of distribution substations that FPL needs for

its distribution system.

A development of regional impact (DRI) project is a large

development project that has an impact beyond a particular

municipality and becomes subject to the requirements of the

Florida Administrative Code. Examples of DRI projects include

large housing developments and commercial construction projects

(regional malls and stadiums). Regional planning councils

throughout the State of Florida review DRI projects. FPL claims

ITCs for the acquisition and construction of property related to

the DRI projects in the 1988, 1989, and 1990 taxable years.

Before a developer of a DRI project is permitted to commence

construction, the developer must submit an application for

development approval to the appropriate regional planning

council. The application for development approval requires,

inter alia, a statement or letter from the offsite source of

electricity indicating its ability to provide electric service at

all times during and after the development.90 To fulfill a

90
Mr. Hernandez explained how FPL responded when a
developer requested power:

We review it to see what work is going to be required
in order to serve the project. We establish a file on
the project. We go ahead and determine an area of
study including the project. We look at the existing
facilities we have within the area. We look at the
demand on those existing facilities. We look at what
other additional projects are coming on in service in
(continued...)
 - 85 -

requirement of the application for development approval, a

developer submits a letter of inquiry to the offsite source of

electricity, in this case FPL, as to whether it can meet the

developer’s electricity needs for his proposed development.91

The letter from FPL to the developers generally stated that FPL

was ready and able to provide the needed electrical services to

serve the development project.

For example, the record contains an application for

development approval for the Palm Beach International Airport.

This application was made according to section 380.06(6) of the

Florida Statutes to the Bureau of Land and Water Management,

Division of State Planning, Department of Administration, State

of Florida. The Palm Beach County Department of Airports made

the application to undertake a DRI project. Included with the

90
(...continued)
that area, also what additional vacant land is in that
same area, and then look at alternative ways of serving
it, whether it can be served from existing facilities,
whether it requires new facilities, and what new
facilities it requires. * * *
91
Mr. Hernandez testified as follows:

Q: And what does the special process require of
the developer?

A: As I said, the developer has to make an
application, and prior to making that
application they must first apply to Florida
Power and Light a request for service. They
must enumerate how much energy they are going
to use * * * and they have to show how much
load or demand they are going to have * * *
 - 86 -

application is a letter from the developer to FPL concerning its

load needs for the DRI project.92 On June 1, 1981, FPL wrote a

letter to the Palm Beach County Department of Planning, Zoning &

Building stating that it anticipated “no problem in providing

electric service” for the DRI project, the Palm Beach

International Airport. The record contains a portion of the

Treasure Coast Regional Planning Council’s DRI update which

lists, inter alia, the Palm Beach International Airport

project.93 The document is in table format with columns and rows

detailing the specifics of each project. One of the columns is

titled “Effective Date”, which was February 16, 1982, for the

Palm Beach International Airport project.94

The Palm Beach International Airport project is

representative of the many DRI projects in the record for which

FPL claims ITCs. Petitioner introduced work orders for the

92
Mr. Hernandez was asked and answered as follows:

Q: At the time FPL issues the response letter,
is it possible to know exactly how much cable
and trench will be required?

A: No, it wouldn’t because the developer hasn’t
finalized his plans; and, therefore, we don’t
know the exact routes of these cables.
93
Mr. Hernandez testified: “This document establishes the
status of the project and shows that the project has been given
permission to go ahead.”
94
Mr. Hernandez testified that “The effective date is the
date that the project has permission to move ahead.”
 - 87 -

various DRI projects for which it claims ITCs. Because of the

large number of DRI projects and in the interest of brevity, we

will detail in appendix B the information from the work orders

that petitioner cites on brief to support its claimed ITCs.

With respect to equipment related to the DRI projects,

petitioner incurred capitalized costs (tax basis) of $1,464,901,

$3,609,855, and $4,832,205 for equipment placed in service in the

1988, 1989, and 1990 taxable years, respectively.

OPINION

A. The Statutory Landscape

Before 1986, section 38(a)95 of the Internal Revenue Code of

1954 provided businesses with an investment tax credit (ITC), and

section 46(a) determined the amount of the ITC available to

taxpayers. Section 49(a) eliminated the ITC for all property

placed in service after December 31, 1985.96 However, section 49

95
Unless otherwise indicated, all section references are to
the Internal Revenue Code for the years at issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
96
Sec. 49(a), which was added to the Internal Revenue Code
by the Tax Reform Act of 1986 (TRA), Pub. L. 99-514, sec. 211,
100 Stat. 2166, provides:

SEC. 49. TERMINATION OF REGULAR PERCENTAGE.

(a) General Rule.–-For purposes of determining the
amount of the investment tax credit determined under
section 46, the regular percentage shall not apply to
any property placed in service after December 31, 1985.
 - 88 -

contained transitional rules that excepted “transition property”

from the repeal of the ITC.97 Sec. 49(b). Section 49(e) defined

“transition property” as:

SEC. 49(e). Transition Property.--For purposes of
this section--

(1) Transition property.--The term
“transition property” means any property placed in
service after December 31, 1985, and to which the
amendments made by section 201[98] of the Tax
Reform Act of 1986 do not apply, except that in
making such determination--

(A) section 203(a)(1)(A) of such Act
shall be applied by substituting “1985” for
“1986”,

(B) sections 203(b)(1) and 204(a)(3) of
such Act shall be applied by substituting
“December 31, 1985” for “March 1, 1986”,

(C) in the case of transition property
with a class life of less than 7 years--

97
The transitional rules were intended to provide relief to
taxpayers who may have committed to post-1985 investments in
qualifying property in reliance on the availability of the
credit. See Newhouse Broad. Corp. v. Commissioner, T.C. Memo.
2000-270. The House Ways and Means Committee made the following
observation with respect to the repeal of the ITC:

The committee is aware that commitments have
already been made on the basis of present law capital
cost recovery rules. The committee bill provides for
equitable transition rules in such cases, which are
estimated to cover more than 50 percent of the new
personal property to be placed in service in the first
year the bill is effective.

H. Conf. Rept. 99-426, at 146 (1985), 1986-3 C.B. (Vol. 2) 1,
146.
98
TRA sec. 201, 100 Stat. 2121, amended sec. 168, which
relates to the accelerated cost recovery system.
 - 89 -

(i) section 203(b)(2) of such Act
shall apply, and

(ii) in the case of property with a
class life–-

(I) of less than 5 years, the
applicable date shall be July 1,
1986, and

(II) at least 5 years, but
less than 7 years, the applicable
date shall be January 1, 1987,
* * *

The pertinent portions of TRA section 203, 100 Stat. 2143,

provide:99

SEC. 203. EFFECTIVE DATES; GENERAL TRANSITIONAL RULES.

(a) General Effective Dates.--

(1) Section 201.--

(A) In general.--Except as provided in
this section, section 204, and section
251(d), the amendments made by section 201
shall apply to property placed in service
after December 31, [1985] 1986, in taxable
years ending after such date.

* * * * * * *

(b) General Transitional Rule.--

(1) In general.--The amendments made by
section 201 shall not apply to--

(A) any property which is constructed,
reconstructed, or acquired by the taxpayer

99
Pursuant to sec. 49(e), date changes have been made in
TRA secs. 203 and 204. The stricken portions are the original
dates, unmodified by sec. 49(e). The inserted dates are those
which were modified by sec. 49(e)(1)(A) and (B) and applicable to
this case.
 - 90 -

pursuant to a written contract which was
binding on [December 31, 1985] March 1, 1986,

(B) property which is constructed or
reconstructed by the taxpayer if–-

(i) the lesser of (I) $1,000,000,
or (II) 5 percent of the cost of such
property has been incurred or committed
by [December 31, 1985] March 1, 1986,
and

(ii) the construction or
reconstruction of such property began by
such date, or

(C) an equipped building or plant
facility if construction has commenced as of
[December 31, 1985] March 1, 1986, pursuant
to a written specific plan and more than one-
half of the cost of such equipped building or
facility has been incurred or committed by
such date.

(2) Requirement That Certain Property Be
Placed In Service Before Certain Date.--

(A) In general.--Paragraph (1) and
section 204(a) (other than paragraph (8) or
(12) thereof) shall not apply to any property
unless such property has a class life of at
least 7 years and is placed in service before
the applicable date determined under the
following table:

In the case of property The applicable
with a class life of: date is:

At least 7 but less than 20 years...January 1, 1989

20 years or more....................January 1, 1991

(B) Residential rental and
nonresidential real property.--In the case of
residential rental property and
nonresidential real property, the applicable
date is January 1, 1991.
 - 91 -

(C) Class lives.--For purposes of
subparagraph (A)--

(i) the class life of property to
which section 168(g)(3)(B) of the
Internal Revenue Code of 1986 (as added
by section 201) shall be the class life
in effect on January 1, 1986, except
that computer-based telephone central
office switching equipment described in
section 168(e)(3)(B)(iii) of such Code
shall be treated as having a class life
of 6 years,

(ii) property described in section
204(a) shall be treated as having a
class life of 20 years, and

(iii) property with no class life
shall be treated as having a class life
of 12 years.

(D) Substitution of applicable dates.--
If any provision of this Act substitutes a
date for an applicable date, this paragraph
shall be applied by using such date.

The pertinent portion of TRA section 204, 100 Stat. 2146,

provides:

SEC. 204. ADDITIONAL TRANSITIONAL RULES.

(a) Other Transitional Rules.--

* * * * * * *

(3) Supply or service contracts.--The
amendments made by section 201 shall not apply to
any property which is readily identifiable with
and necessary to carry out a written supply or
service contract, or agreement to lease, which was
binding on * * * [December 31, 1985] March 1,
1986.

We note that “provisions granting special tax exemptions are

to be strictly construed.” Helvering v. Nw. Steel Rolling Mills,
 - 92 -

311 U.S. 46, 49 (1940). This rule of interpretation applies

equally to transitional rules. United States v. Commonwealth

Energy Sys., 235 F.3d 11, 16 (1st Cir. 2000); see Apache Bend

Apartments, Ltd. v. United States, 987 F.2d 1174, 1175 (5th Cir.

1993); United States v. Kjellstrom, 916 F. Supp. 902, 905 (W.D.

Wis. 1996), affd. 100 F.3d 482 (7th Cir. 1996). As the Court of

Appeals for the First Circuit explained:

The transition rules were enacted to provide relief “to
a very, very few specified favored taxpayers,” * * *
and although we must extend them to all qualifying
taxpayers, * * * we need not broaden our interpretation
so that entities that did not detrimentally rely on the
old rule benefit from the transition exemption * * *
[Citations omitted.]

United States v. Commonwealth Energy Sys., supra at 16. The

taxpayer bears the burden of proving that it qualifies for the

transitional rules. Rule 142(a); Payless Cashways, Inc. v.

Commissioner, 114 T.C. 72, 80 (2000).

B. TRA Section 204(a)(3)--Supply or Service Contracts

Petitioner argues that it is entitled to ITCs for property

FPL placed in service during the years at issue because FPL

purchased and/or installed the property pursuant to binding,

written supply contracts within the meaning of TRA section

204(a)(3). According to petitioner, the following contracts

constitute binding, written supply contracts: (1) The tariff;

(2) the Southern company contracts; and (3) the documents

exchanged with respect to the DRIs. Respondent argues that
 - 93 -

petitioner “did not enter into any written supply contracts that

were binding on December 31, 1985.”

Pursuant to TRA section 204(a)(3), property qualifies for

relief from the ITC repeal only when it is “readily identifiable

with and necessary to carry out a written supply or service

contract, * * * which was binding on” December 31, 1985. See

also sec. 49(e)(1). Many courts have grappled with interpreting

this language and have looked to legislative history for

guidance. See United States v. Commonwealth Energy Sys., supra;

Bell Atl. Corp. v. United States, 224 F.3d 220 (3d Cir. 2000),

affg. 82 AFTR 2d 7375, 99-1 USTC par. 50,119 (E.D. Pa. 1998);

Maine Yankee Atomic Power Co. v. Commissioner, T.C. Memo. 2002-

176. As the Court of Appeals for the First Circuit explained:

“Still it is possible to think that there are ambiguities

inherent in the clause ‘readily identifiable with and necessary

to carry out,’ and that the level of specificity required as to

both ‘readily identifiable’ and ‘necessary’ is not self-

defining.” United States v. Commonwealth Energy Sys., supra at

16. The conference report explains:

This transitional rule is applicable only where
the specifications and amount of the property are
readily ascertainable from the terms of the contract,
or from related documents. A supply or service
contract or agreement to lease must satisfy the
requirements of a binding contract * * *.

H. Conf. Rept. 99-841 (Vol. II), at II-60 (1986), 1986-3 C.B.

(Vol. 4) 1, 60.
 - 94 -

We glean from this that the specifications and amount of

property must be readily or “easily” ascertainable from the terms

of the source documents, which consist of the contract and

related documents. United States v. Commonwealth Energy Sys.,

supra at 16; Bell Atl. Corp. v. United States, supra at 224.

Because the specifications and amount of the property must be

readily ascertainable, this rule requires a “specific, although

not exact”, inquiry. United States v. Commonwealth Energy Sys.,

supra.

1. Property Purchased and/or Installed Pursuant to the
Tariff

Petitioner argues that “FPL and its customers, through the

* * * [FPSC], entered into a binding written supply or service

contract in the form of a Tariff in 1984.” Petitioner further

contends that the tariff is a contract under Florida law;

therefore, it is a binding contract for Federal tax purposes.

Accordingly, petitioner asserts that it acquired, installed, and

constructed and/or reconstructed property that was readily

identifiable within the tariff and/or related documents, and that

this property was necessary to carry out FPL’s supply obligations

to its customers under the tariff. Petitioner seeks ITCs for the
 - 95 -

tariff related equipment that was placed in service during 1988,

1989, and 1990.100

a. The Tariff Is Not a Contract for Purposes of
TRA Section 204(a)(3)

In support of its argument, petitioner cites cases that

generally state that a tariff is a contract. For example, in

Life Sciences, Inc. v. Emery Air Freight Corp., 341 So. 2d 272

(Fla. Ct. App. 1977), a shipper brought suit against an air

carrier to recover damages to its cargo. Apparently, a tariff

filed by the freight forwarder contained a 1-year property damage

100
Petitioner argues that the following equipment is readily
identifiable with the tariff and incorporated documents: (1) The
nuclear fuel assemblies; (2) the nuclear plant property (MSIV air
accumulation system, surveillance system for heat exchangers,
reactor vessel probes, raceway protection, spent fuel rack
equipment, and area radiation monitoring system equipment); (3)
environmental property (PCB transformers and wastewater
neutralization treatment system); (4) simulator and training
buildings; and (5) the LMS. The tax bases of the property for
which petitioner seeks ITCs are as follows:

Property 1988 1989 1990

Nuclear fuel assemblies $51,684,173 $70,782,440 $133,263,604
MSIV air accumulation -- 2,846,306 126,666
system
Surveillance system for -- 123,742 324,668
heat exchangers
Reactor vessel probes 826,767 (126,353) (12,983)
Raceway protection -- 969,676 239,161
Spent fuel rack equipment 6,713,729 532,892 6,646,960
Area radiation monitoring -- -- 657,253
system equipment
PCB transformers 886,616 748,411 36,053
Wastewater neutralization 241,469 -- 233,742
treatment system
Simulator and training 1,486,050 1,458,213 354,914
buildings
LMS 362,837 15,156,624 39,351,031
 - 96 -

claims limitation based upon a Florida statute. The

freight forwarder argued that the limitation period stated in the

tariff was invalid as such power could only be granted by Federal

law. In holding against the freight forwarder, the court stated

that “The tariff filed by * * * [a freight forwarder] constituted

part of the contract of carriage between it and its customer”.

Id. at 273; see also Bd. of Water, Light and Sinking Fund Commrs.

v. FERC, 294 F.3d 1317, 1319 n.2 (11th Cir. 2002); Atlanta Gas

Light Co. v. FERC, 140 F.3d 1392, 1395 n.1 (11th Cir. 1998) (“A

tariff is the ‘contract which governs a pipeline’s service to its

customers.’”); ANR Pipeline Co. v. FERC, 931 F.2d 88, 90 n.1

(D.C. Cir. 1991); Bell S. Telecomm., Inc. v. Jacobs, 834 So. 2d

855, 859 (Fla. 2002); Bella Boutique Corp. v. Venezolana

Internacional de Aviacion, S.A., 459 So. 2d 440, 441 (Fla. Ct.

App. 1984) (“A validly filed tariff constitutes the contract of

carriage between the parties and conclusively and exclusively

governs the rights and liabilities between the parties.”).

In Bell Atl. Corp. v. United States, 82 AFTR 2d 7375, 99-1

USTC par. 50,119 (E.D. Pa. 1998), the District Court discussed

this issue at length. That court examined whether TRA section

204(a)(3) entitled the taxpayer to an ITC based upon, inter alia,

a tariff. As that court stated: “A contract is ‘a promise or

set of promises for the breach of which the law gives a remedy,

or the performance of which the law in some way recognizes as a
 - 97 -

duty.’” Id. at 7379, 99-1 USTC par. at 87,037 (quoting 1

Restatement, Contracts 2d, sec. 1 (1981); Black’s Law Dictionary

322 (6th ed. 1990)). The District Court then explained:

A tariff is “a public document setting forth
services of a common carrier being offered, rates and
charges with respect to services and governing rules,
regulations and practices relating to those services.”
Black’s Law Dict. 6th ed. (1990) at 1456-57. * * *

Tariffs set forth a description of the services
that a particular regulated public utility provides,
including the prices that customers may be charged for
these services. Tariffs are reviewed and may be
challenged by the regulating authority and consumers.
Once effective, tariffs bind the customer and the
utility to the tariffs [sic] terms. * * *

Id. at 7381, 99-1 USTC par. 50,119, at 87,039. The court looked

at the broad terms of the tariffs and concluded that the tariffs

were not TRA section 204(a)(3) service or supply contracts. The

court reasoned as follows:

First, the court does not find that the tariffs
are contracts under the normal definition of that term.
However, even accepting arguendo that the tariffs are
contracts, the court finds that these tariffs are not
the type of contracts Congress contemplated under the
ITC. The tariffs are descriptions of services offered
and prices to be charged. They are terminable at will
by the customers and * * * [the taxpayer] can modify
them by filing a new tariff. The regulating
authorities can revoke the certifications and levy
fines. The tariffs are merely the rules with which
* * * [the taxpayer] must conform if it chooses to
conduct business in the particular jurisdiction. * * *
[The taxpayer] may decide that it does not agree with
the terms and may decide not [to] apply to provide its
service in a particular jurisdiction. It would not be
bound to do so. None of the tariffs require the
purchase of property. None of the tariffs or related
documents alone or together identify the property to
the “contracts” or necessitate the purchase of the
 - 98 -

property. The court finds that the property for which
* * * [the taxpayer] claims the ITC was not “readily
identifiable with and necessary to carry out” these
“contracts.”

Id. at 7382, 99-1 USTC par. 50,119, at 87,040.

We find the District Court’s reasoning in Bell Atl. Corp.

persuasive. Indeed, the tariff that petitioner argues is a TRA

section 204(a)(3) contract is strikingly similar in its broad

description of rights and duties to the tariff described by the

District Court in Bell Atl. Corp.101 The tariff at issue sets

forth the rates to be charged and the general service commitments

to which FPL had to adhere if it wanted to provide electrical

service to customers under the jurisdiction of the FPSC.

Customers could discontinue service at will and without penalty.

The price for electrical service was not permanently fixed; from

time to time, FPL could (and did) petition to change the price

term in the tariff. The term establishing the fee that customers

must pay for electrical service was not fixed. Thus, we agree

“that the tariffs are [not] contracts under the normal definition

of that term.” Id. Rather, the tariff is more akin to a set of

operating rules imposed on petitioner by the State that

101
In Bell Atl. Corp. v. United States, 224 F.3d 220 (3d
Cir. 2000), the Court of Appeals for the Third Circuit affirmed
the District Court’s holding, which denied the taxpayer’s claimed
ITC. In affirming the District Court, the Court of Appeals did
“not find it necessary to decide whether Bell Atlantic's tariffs,
franchises, and contracts with other telephone companies are
‘written service contracts’ within the meaning of the Act.” Id.
at 223.
 - 99 -

petitioner must follow if it wishes to provide services to

customers. The tariff does not obligate customers to continue

the purchase of electrical services, and the price for future

services can be adjusted by the State.

Petitioner also argues that respondent has taken the

position in published guidance that a tariff is a contract.

Petitioner cites Rev. Rul. 68-109, 1968-1 C.B. 10, which

addressed “whether switchboards installed in furnishing

communications services to tax-exempt organizations or government

units qualify as ‘section 38 property.’” Id. In the revenue

ruling, the investment tax credit would not have been available

had the property been owned by or leased to the tax-exempt

organizations or government units. The taxpayer installed

equipment pursuant to contracts between it and its customers that

were tax-exempt organizations or government units. Under the

terms of the contracts, the taxpayer retained all ownership and

control of the equipment, and the customers paid the installation

charges and provided an operator for the equipment. On the basis

of these factors, the ruling concludes: “Hence, the agreement

entered into between the taxpayer and the customer is not a sale

or lease but a service contract.” Id. After holding that the

agreement was a service contract, the revenue ruling stated:

Furthermore, the services furnished by the taxpayer [a
regulated utility] and the manner in which they must be
furnished are described in tariffs on file with the
Federal Communications Commission * * *. These tariffs
 - 100 -

constitute a public offering by the utility which, when
accepted by the subscribers, creates a contract
embodying the terms and conditions of that tariff.
* * *

Id.; see also Rev. Rul. 72-49, 1972-1 C.B. 125.

In Rev. Rul. 68-109, supra, there was a service contract

independent of the tariff. The conclusion of the revenue ruling,

that there was a service contract, is based upon the agreement

entered into between the utility and its customers. After

determining that such service contract existed, the revenue

ruling found that “Furthermore” the provisions of the tariff also

bound the parties.

The instant case is distinguishable because there was no

binding contract independent of the tariff. The service

agreement between the utility and its customers was the

determining factor in the ruling. It was in this context that

the ruling stated that the tariff was a contract. The revenue

ruling does not address TRA section 204(a)(3), nor does it state

that the tariff is a binding supply or service contract. Here,

we must determine whether the tariff constitutes a binding supply

or service contract for purposes of TRA section 204(a)(3). We do

not think this revenue ruling supports a finding that the tariff

is a binding supply or service contract for purposes of TRA

section 204(a)(3).
 - 101 -

b. The Tariff Does Not Readily Identify the
Property in Issue

Even assuming for the sake of argument that the tariff is

the type of contract which Congress contemplated when it drafted

TRA section 204(a)(3), we do not believe the property for which

petitioner seeks an ITC was “readily identifiable” in that

tariff. The link between the tariff and the property for which

petitioner seeks ITCs is “too attenuated” to be considered

“readily identifiable” under TRA section 204(a)(3). See United

States v. Commonwealth Energy Sys., 235 F.3d at 17; Bell Atl.

Corp. v. United States, 224 F.3d at 224. Indeed, “Congress added

the word ‘readily’ to imply a more immediate link between the

terms of the contract and the property at issue.” United States

v. Commonwealth Energy Sys., 235 F.3d at 17; see Bell Atl. Corp.

v. United States, 224 F.3d at 224; S. Multi-Media Commcns., Inc.

v. Commissioner, 113 T.C. 412 (1999); United States v. Zeigler

Coal Holding Co., 934 F. Supp. 292, 294-295 (S.D. Ill. 1996).

“Congress did not want to extend ITC to all property that was

identifiable and necessary to carry out a service contract.”

Bell Atl. Corp. v. United States, 224 F.3d at 24.

As in Bell Atl. Corp., the tariff at issue does not specify

any of the property for which petitioner seeks an ITC. Under

petitioner’s construction of TRA section 204(a)(3), any property

used in the generation of electricity or in supplying customers

with electrical service would be considered readily identifiable.
 - 102 -

The tariff is not concerned with the “hows” or the “whats” of

generating electricity; it merely sets forth the expected

services FPL will provide to its customers. We do not think this

is what Congress intended when it drafted the transitional relief

to the repeal of the ITC.

c. Documents Incorporated by Reference Into the
Supply or Service Contract

Petitioner also argues that the documents incorporated into

the tariff readily identify the specifications and amount of

property for which it claimed ITCs. Petitioner contends that it

is irrelevant that the tariff does not reference the other

documents because “‘referencing’ is not the test for a ‘related

document’.”

The supply or service contract rule requires that property

is readily identifiable from the terms of the contract or related

documents. TRA sec. 204(a)(3); H. Conf. Rept. 99-841 (Vol. II),

supra at II-60, 1986-3 C.B. (Vol. 4) at 60. When a contract

specifically incorporates another document by reference, the

referenced document constitutes a “related document”. See Maine

Yankee Atomic Power Co. v. Commissioner, T.C. Memo. 2002-176.

Language within a contract that generally refers to industry

standards and the applicable law, without specifically referring
 - 103 -

to a document, fails to incorporate by reference those documents

created according to the industry standards and applicable laws.

See id.

For the documents to qualify as “related documents”, the

supply contract must adequately incorporate the documents by

reference. In Maine Yankee Atomic Power Co., the taxpayer

claimed an ITC under TRA section 204(a)(3) with respect to

nuclear fuel assemblies. The parties stipulated that the power

contracts and amendments as of December 31, 1985, qualified as

binding written supply or service contracts under TRA section

204(a). Id. However, the parties disputed whether the nuclear

fuel assemblies were readily identifiable with the power

contracts. Id. While the taxpayer conceded that the power

contract failed to list the specifications of the fuel

assemblies, it argued that the operating license, and amendments

and appendices of the power contract constituted “related

documents”. Id. The taxpayer argued that the following language

incorporated the “related documents” by reference:

“Maine Yankee * * * will operate and maintain the
Unit * * * in accordance with good utility practice
under the circumstances and all applicable law,
including the applicable provisions of the Atomic
Energy Act of 1954, as amended, and of any licenses
issued thereunder to Maine Yankee.” [Emphasis added in
original.]

Id.
 - 104 -

This Court found that the operating licenses and their

amendments were not “related documents” because the power

contract contained only a general reference and failed to

specifically refer to these documents. Id. “This general

standard of operation and maintenance, without more, does not

incorporate the operating license, or amendments or appendices

thereto, into the power contracts.” Id.

In this case, petitioner argues:

The Tariff incorporated by reference applicable orders,
rules and regulations of various governmental bodies,
including, for example, the Nuclear Regulatory
Commission (“NRC”), the Environmental Protection Agency
(“EPA”), the Florida Department of Environmental
Protection (“FDEP”), the FPSC and others. FPL was
required under the Tariff to comply with these orders,
rules and regulations.

According to Mr. Wilson’s testimony and the citations contained

in petitioner’s proposed findings of fact, the relevant language

in the tariff states:

RULES AND REGULATIONS

Service under this schedule is subject to orders
of governmental bodies having jurisdiction and to the
currently effective ‘General Rules and Regulations for
Electric Service’ on file with the Florida Public
Service Commission. In case of conflict between any
provision of this schedule and said ‘General Rules and
Regulations for Electric Service’ the provision of this
schedule shall apply.

Mr. Wilson testified:

The Commission had rules and regulations itself
that concerned the quality of service, how companies
were to treat deposits for service for customers, the
complaint procedure, things like that. And this was
 - 105 -

intended to incorporate, to refer to that, so that
anyone looking at this tariff sheet would see that
there were other conditions that apply.

Neither TRA section 204(a)(3) nor the conference report

articulates a standard for identifying “related documents.”

Maine Yankee Atomic Power Co. indicated that a supply or service

contract must incorporate an item by reference for it to

constitute a “related document.” In light of Helvering v. Nw.

Steel Rolling Mills, 311 U.S. at 49, we agree with the

interpretation of the supply or service contract rule in Maine

Yankee Atomic Power Co. because it strictly construed the ITC

transitional rule, a provision which grants a special tax

exemption. Petitioner’s position would expand the supply or

service contract rule beyond its proper scope because property

could be identified from documents that have not been referred to

in the supply or service contract. Therefore, we find that the

language in the tariff must incorporate by reference the alleged

“related documents”.

The general language of the power contract in Maine Yankee

Atomic Power Co. is analogous to the language petitioner relies

upon in the tariff. The taxpayer in Maine Yankee Atomic Power

Co. asserted that the power contract incorporated “related

documents” by providing that its power plant will operate “in

accordance with good utility practice under the circumstances and

all applicable law, including the applicable provisions of the
 - 106 -

Atomic Energy Act of 1954, as amended, and of any licenses issued

thereunder to Maine Yankee.” Maine Yankee Atomic Power Co. v.

Commissioner, T.C. Memo. 2002-176.

Both the Maine Yankee Atomic Power Co. power contract and

petitioner’s tariff contain general references to the authorities

that govern service quality and standards. Each fails to refer

to any specific document. The general statements referring to

service standards and regulatory orders lack the details

necessary to identify which documents constitute related

documents. See Maine Yankee Atomic Power Co. v. Commissioner,

supra (“This general standard of operation and maintenance,

without more, does not incorporate the operating license, or

amendments or appendices thereto, into the power contracts.”).

Because petitioner’s tariff contains only a general statement

identifying “orders of governmental bodies having jurisdiction

and to the currently effective ‘General Rules and Regulations for

Electric Service’ on file with the Florida Public Service

Commission”, we hold that the tariff fails to incorporate by

reference the alleged “related documents”.

d. Property Readily Identifiable From the Related
Documents

Assuming arguendo that the tariff qualifies as a contract

and the documents cited by petitioner qualify as “related

documents”, the property in issue must be readily identifiable

from the terms of these “related documents”. TRA sec. 204(a)(3).
 - 107 -

The conference report states that TRA section 204(a)(3) applies

only when the specifications and amount of the property are

readily ascertainable from the terms of the contract and related

documents. H. Conf. Rept. 99-841 (Vol. II), supra at II-60,

1986-3 C.B. (Vol. 4) at 60.

i. Statutes and Regulatory Materials

Petitioner argues that statutes and regulatory guidelines

are “related documents” that readily identify the property it

installed pursuant to the tariff. Specifically, petitioner

contends that the following statutes and regulatory materials are

“related documents”: (1) The U.S. Nuclear Regulatory Commission,

Office of Nuclear Reactor Regulation, Clarification of TMI Action

Plan Requirements, NUREG-0737 (NUREG 0737); (2) a letter from the

U.S. Nuclear Regulatory Commission, to all licensees of operating

reactors, applicants for operating licenses, and holders of

construction permits, Supplement 1 to NUREG-0737 (December 17,

1982) (Generic Letter 82-33); (3) the U.S. Nuclear Regulatory

Commission, Office of Nuclear Regulatory Research, Regulatory

Guide 1.97, Rev. 3 (1983) (Regulatory Guide 1.97, Rev. 3); (4) 10

C.F.R. sec. 50, App. R (1992) (appendix R); (5) the Nuclear Waste

Policy Act of 1982, Pub. L. 97-425, 96 Stat. 2201 (Nuclear Waste

Policy Act of 1982); (6) the Toxic Substance Control Act, Pub. L.

94-469, sec. 6(e), 15 U.S.C. sec. 2605 (1976) (TSCA sec. 6(e));

and (7) the Environmental Protection Agency, Polychlorinate
 - 108 -

Biphenyls (PCBs) Manufacturing, Processing, Distribution in

Commerce and Use Prohibitions; Use in Electrical Equipment, 47

Fed. Reg. 37,342 (Aug. 25, 1982) (codified at 40 C.F.R. pt. 761).

We find that these statutes and regulatory materials fail to

provide the specifications and amount of property for which

petitioner seeks ITCs. TRA section 204(a)(3) requires that the

terms of the supply contract and related documents readily

identify the specifications and amount of the property. These

regulatory materials provide guidelines that are generally

applicable; however, they do not specifically refer to

petitioner’s property.

Petitioner’s reliance on regulatory guidance to readily

identify its property is similar to that of the taxpayer in Bell

Atl. Corp. v. United States, 224 F.3d at 221, which relied on

service quality standards in its utility franchises, tariffs, and

contracts with other telephone companies to identify property for

purposes of TRA section 204(a)(3). In Bell Atl. Corp., the court

found that the terms of the utility franchise, tariffs, and

contracts with other telephone companies did not readily identify

the taxpayer’s property because “these alleged ‘contracts’ speak

only of service quality standards, never mentioning property of

any sort.” Id. at 224.
 - 109 -

The franchises, tariffs, and contracts in Bell Atl. Corp.

failed to specifically refer to the taxpayer’s property. The

statutes and regulatory guidance petitioner relies on also fail

to specifically identify any of FPL’s property. These regulatory

materials establish quality and service standards and lack

references or descriptions that specifically relate to

petitioner’s property. We find that the documents lack the

specifications and amounts necessary to readily identify

petitioner’s property for purposes of TRA section 204(a)(3).

ii. Correspondence

In addition to the statutes and regulatory guidance,

petitioner asserts that numerous items of correspondence are

“related documents” that readily identify the property in issue.

Particularly, petitioner relies on: (1) Letter No. L-85-385,

dated October 11, 1985, from FPL to the Office of Nuclear Reactor

Regulation; (2) a letter dated July 18, 1986, from FPL to the

Office of Nuclear Reactor Regulation; and (3) Letter No. L-86-296

dated December 5, 1986, from the Nuclear Regulatory Commission

(NRC) to Mr. C.O. Woody, group vice president of FPL’s nuclear

energy department.

FPL submitted to the NRC Letter No. L-85-385, which

contained attachments relating to the requirements of appendix R.

Attachment 1 states that FPL must install the following equipment

at Turkey Point Unit 4:
 - 110 -

• 18,095 feet of conduit installation

• 1,640 seismic hangers and supports

• 100 feet cable tray

• 88,810 feet of cable (reroute)

• 11,410 cable terminations and determinations

• 4,500 feet of raceway (conduit) protection

• 650 Supports to protect

• 75 Pull and terminal boxes to protect

• 300 Pieces of equipment to install (valves,
valve actuators, switches, local control
stations, instruments, etc.)

Attachment 2 contains a raceway-by-raceway list of the additional

work needed at Turkey Point Units 3 and 4. Unlike attachment 1,

attachment 2 does not contain the same specific itemized and

quantified descriptions of the raceway property. We find that

Letter No. L-85-385 readily identifies FPL’s raceway protection

property at Turkey Point Unit 4 because attachment 1 lists the

components of the raceway protection system that FPL needed to

install.102 However, we find that this letter fails to readily

identify the specifications and amount of the Turkey Point Unit 3

raceway protection property.

102
We address this issue to complete our analysis of the
supply or service contract transitional rule. However, the
property does not qualify for an ITC because we have held that
the tariff is not a supply or service contract for purposes of
TRA sec. 204(a)(3), and we have held that the tariff does not
incorporate the “related documents”.
 - 111 -

Two of the items of correspondence that petitioner cites as

“related documents” are dated after December 31, 1985. FPL’s

letter to the NRC is dated July 18, 1986, and the NRC’s letter to

FPL’s nuclear energy department is dated December 5, 1986. To

qualify as transition property under the supply or service

contract rule, the specifications and amount of property must be

readily identifiable by December 31, 1985. Sec. 49(e)(1); TRA

sec. 204(a)(3). Even had these documents readily identified the

specifications and the amount of reactor vessel probes, we find

that the property was not “readily identifiable” as of December

31, 1985.

iii. Permits and Regulatory Orders

Petitioner also contends that several permits and regulatory

orders readily identify its property: (1) The Final Hazardous

Waste Temporary Operating Permit (TOP) for the Martin plant,

effective November 30, 1982; (2) the TOP for the Port Everglades

plant, effective November 30, 1982; (3) Confirmatory Order EA-84-

55, dated July 11, 1984; and (4) an NRC Order Confirming Licensee

Commitments on Emergency Response Capability, dated February 23,

1984 (order confirming licensee commitments).

We disagree with petitioner. As an illustration, we look at

the TOP for the Port Everglades plant. Petitioner argues that

specific conditions 12 and 17 identified the equipment that FPL
 - 112 -

planned to install for its wastewater neutralization treatment

system. Specific condition 12 provides:

The permittee shall inspect and/or certify the surface
impoundment, dikes, liners and other associated
structural and monitoring equipment as required by §
264.226 and in accordance with the approved schedule
submitted to satisfy Specific Condition 16c.

Specific condition 17 provides:

a. Within 30 days issuance of this permit, the
permittee shall submit to the department for
approval a schedule for closure of the existing
surface impoundment(s) with a binding committment
[sic] to construct and have operational an
elementary neutralization unit or total enclosed
treatment facility. This binding committment
[sic] shall include the authorization to commit
funds by FP&L for the engineering, design, and
construction of said units. The elementary
neutralization unit or total enclosed system shall
be constructed and operational within ninety (90)
weeks from issuance of this permit. Said
elementary neutralization unit or totally enclosed
system must meet the definition specified in 40
CFR Part 260.10 and be approved by the department
prior to construction. If FP&L is unable to
provide the binding committment [sic] for
construction of said units: then

b. Within 210 days from the issuance of the permit,
the permittee shall submit a groundwater
monitoring plan to comply with the applicable
provisions of 40 CFR Part 264 Subpart F for
department approval. Specific elements of this
plan shall include the information required on DER
Form 17-1.207(3) Part XIII, specifically items A2,
A3, A5, and A6. This information shall be
certified by an engineer registered in the State
of Florida.

Within 30 days from approval of the groundwater
plan, the permittee shall install the necessary
monitoring wells included as part of item A.6.b of
the approved monitoring system required in 40 CFR
Part 264.98. Within 15 days after completion of
 - 113 -

the installation, certification of the well
construction by the engineer of record, shall be
submitted to the department for approval.

Within 15 days of department approval of the well
construction and certification, the permittee
shall commence sampling of the groundwater
monitoring wells by procedures approved based on
information submitted in A.6.d of the groundwater
monitoring plan. Sampling and analysis shall be
conducted for the parameters approved in Section
A.6.a of the referenced plan and results of these
analyses shall be submitted to the department
within 30 days of the sampling.

Sampling and analyses of the wells shall be
subsequently conducted every 90 days from the date
of the initial sampling with analytical results
submitted to the department within 30 days after
each sampling.

We do not think that the TOP for the Port Everglades plant

readily identifies petitioner’s wastewater neutralization system.

Although the TOP provides a specific timetable for completing

the treatment system, it lacks specific details describing the

property required for the treatment system. The TOP provides

cross-references to other documents that may contain the

specifications for the treatment system; however, the permit

itself does not attach any of the cross-referenced documents.

Without providing the specifications and amount of property at

issue, the TOP fails to readily identify the wastewater

neutralization system. As the relevant language in the TOP for

the Martin plant is virtually identical to the TOP for the Port

Everglades plant, we find that this document also fails to

identify FPL’s property.
 - 114 -

We conclude that the regulatory orders petitioner cites also

fail to identify the specifications and amount of property for

which petitioner claims ITCs. An attachment to the Confirmatory

Order EA-84-55 states that FPL will “Develop detailed simulator

specifications”. We do not think that this document contains the

necessary details regarding the simulator and training building

property when it directs FPL to develop such specifications.

Similarly, the order confirming licensee commitments

includes an attachment that outlines FPL’s commitment to

Regulatory Guide 1.97. For example, FPL’s commitment entitled

“Regulatory Guide 1.97 - Application to Emergency Response

Facilities” states that FPL will: “Implement (installation or

upgrade) requirements”. This order and its attachment provide a

general list of requirements that FPL must comply with but lacks

details and specifics relating to FPL’s area radiation monitoring

system.

Because these permits and orders fail to provide the

specifications for the property that FPL planned to install, we

find that these documents do not readily identify the property

for which petitioner claims ITCs.

iv. Memoranda, Studies, and Other Documents

Petitioner also argues that memoranda, studies, and other

documents are “related documents” that readily identify the

property for which it seeks an ITC. Particularly, petitioner
 - 115 -

cites: (1) The licensee event report, dated July 29, 1985; (2)

the substantial safety hazards evaluation, issued July 1985; (3)

action item No. 19850484, dated April 30, 1985; (4) spent fuel

disposition management action plan, dated February 4, 1986; (5)

energy management plan for the ‘80s (energy management plan),

dated November 1, 1980; (6) the bidirectional communication

system (BCS) requirements studies, Vols. I and II, dated January

1983; and (7) FPL’s request for engineering assistance, dated

November 5, 1985. With the exception of the request for

engineering assistance, we disagree with petitioner and find that

these documents fail to readily identify the specifications and

amount of property for which petitioner claims ITCs.

For example, Mr. Bible testified that the second corrective

action listed in the licensee event report described the

specifications and amount of the MSIV air accumulation system

property for which petitioner claims an ITC. Specifically, the

second corrective action provides that “The design of the MSIVs

will be upgraded to assure that each MSIV will meet the Final

Safety Analysis Report closure criteria without steam flow

assistance.”

In addition to the licensee event report, petitioner relies

on the substantial safety hazards evaluation to readily identify

the MSIV air accumulation system. The evaluation states:

It is recommended that design modifications be
implemented on an expedited basis that will assure MSIV
 - 116 -

closure in 5 seconds without steam flow assistance.
(Note: This design activity would also resolve the ISI
deficiency identified in Inspection Report 85-05 in
that fail safe testing can be accomplished.)

We find that the licensee event report and the substantial

safety hazards evaluation do not satisfy the readily identifiable

requirement of TRA section 204(a)(3). Both the licensee event

report and the substantial safety hazards evaluation provide

vague summaries of the proposed upgrades; these descriptions of

the property fail to indicate the type of material used, the

specific components that it planned to upgrade, and the amount of

property needed to upgrade the MSIV system.

Similarly, we believe that the other memoranda, studies, and

documents that petitioner relies upon to readily identify its

property lack specific details, as required by TRA section

204(a)(3) and the conference report. Action item No. 19850484 is

a two-page document that contains no information relating to the

specifications or amount for the surveillance system property.

Although TRA section 204(a)(3) requires that transition property

be readily identifiable as of December 31, 1985, the spent fuel

disposition management action plan was not created until February

4, 1986. While the energy management plan establishes specific

goals for reducing the energy load, the document does not provide

any specifications relating to the LMS property or identify how

FPL will accomplish the goal of reducing the energy load. The

BCS requirements studies generally describe the property, the
 - 117 -

estimated number of customers the system will serve, and the

basic outline of the three phases of the LMS plan; however, these

documents do not detail the property needed for the LMS, nor do

they provide the amount of property needed for the system.

With respect to the request for engineering assistance,

petitioner argues that this document “defined ‘the scope of the

work that they wanted engineering to perform.’” Specifically,

the request for engineering assistance states:

Desired Project Considerations:
A. Provide PC/M to:

1. Replace ICW thermometers TI 1415 thru TI 1420
inclusive in existing thermowells with ‘K’
type thermocouples.
2. Replace CCW thermometers TI 633 A, B, & C and
TI 663 A, B, & C in existing thermowells with
‘K’ type thermocouples.
3. Install permanent wiring from thermocouples
installed in #1 & 2 to rotary selector
switch.
4. Please provide connections to read the output
of the selector switch (Item #3) via: (a)
plug, (b) two foot extension cord with ‘K’
plug end, and (c) terminal posts.
5. Locate Items 3 & 4 in weather proof box with
door and locate box on east wall of CCW heat
exchanger room near the ICW flow meters, so
that both temperature and flow can be read at
one location
6. Provide and locate portable readout similar
to those listed in B.2 below within the
weather proof box.[103]

B. Considerations:

103
Desired project consideration A.6. is a handwritten
entry, whereas all of the other desired project considerations
are typewritten.
 - 118 -

1. Temperatures to be measured will be in 80-
120"F vicinity and thermocouples should be
selected to give maximum accuracy/linearity
in this area.
2. Readout will be via portable instruments
already on hand, such as Bailey Models TZFHR,
TZF4, WAHL Model LXD T/C Alnor Digicon Model
6840 or Leeds & Northrup Millivolt
Potentiometer.

We find that the request for engineering assistance provides

a detailed description of the heat exchange system for which

petitioner seeks an ITC. The request for engineering assistance

identifies components of the system by name. As the court stated

in United States v. Commonwealth Energy Sys., 235 F.3d at 16:

“the requirement that the specifications and amount of the

property be readily ascertainable indicates that the inquiry need

be specific, although not exact.” Because these descriptions

specifically identify the property at issue, the “readily

identifiable” requirement of TRA section 204(a)(3) has been

satisfied by the request for engineering assistance for the heat

exchange system.

The licensee event report, the substantial safety hazards

evaluation, action item No. 19850484, the spent fuel disposition

management action plan, the energy management plan, and the BCS

requirements studies fail to readily identify the specifications

and amount of property for which petitioner claims ITCs.

v. Contracts

Petitioner argues that several contracts readily identify
 - 119 -

the property for which it claims ITCs.104 Particularly,

petitioner cites: (1) The nuclear fuel fabrication and related

services contract between Westinghouse and FPL (Westinghouse

contract), entered into as of November 5, 1979, and amended in

February 1990 and June 1992; (2) the nuclear fuel fabrication and

related services contract between FPL and Exxon Nuclear Co.

(Exxon contract), dated January 30, 1982; (3) the A.B. Chance LMS

Contract (A.B. Chance contract); and (4) the LMS specifications,

dated November 1983.

Petitioner contends that article 5.1 of the Westinghouse

contract provides the quantity of enriched uranium necessary for

the fuel assemblies. Article 5.1 states that FPL shall:

a. Supply one hundred percent * * * together with an
Excess of eight tenths of one percent * * * of the
enriched uranium hexafluoride required to meet the
final design uranium loading for each Region to be
fabricated in the quantity, and enrichment and at
the times specified by Westinghouse consistent
with Article 31, SCHEDULES. The enriched uranium
hexafluoride shall be of the quality supplied by
DOE as of February 1, 1979.

Petitioner asserts that the amount of nuclear fuel

assemblies that it acquired was “determinable from” the

fabrication contracts and the 18-month refueling cycle for the

nuclear reactors. Article 5.1 of the Westinghouse contract

identified the percentage of the enriched uranium hexafluoride

104
Petitioner does not argue that these contracts are
themselves supply or service contracts.
 - 120 -

(UF6) that FPL needed to provide; however, because it did not

state the number of nuclear fuel assemblies that FPL planned to

construct, the percentage of UF6 lacks specificity. The “readily

identifiable” requirement demands a more explicit statement of

the amount of property required for the nuclear fuel assemblies

than contained in this contract. The nuclear fuel assemblies are

“too attenuated” to be readily identifiable with the Westinghouse

contract term that identifies the percentage of UF6 that

petitioner must supply. See Bell Atl. Corp. v. United States,

224 F.3d at 224.

Petitioner argues that the Exxon contract readily identifies

the fuel assemblies specifications. Specifically, petitioner

relies on article 7.1, which states:

FPL shall make SNM [special nuclear material] available
to Seller f.o.b. carrier at either an Enrichment
Facility or the Fabrication Facility pursuant to
Article 7.3 and natural uranium available to Seller
f.o.b. carrier at a converter’s facility, consistent
with the provisions of Article 5.6.1 hereof. Such SNM
and natural uranium shall be equal to one hundred
percent * * * of the loading requirements of the final
design as agreed by the Parties together with the
Excess for each Region to be fabricated hereunder. The
SNM shall be in the form of uranium hexafluoride unless
otherwise agreed to by the Parties. FPL will be
responsible for withdrawal and packaging charges. FPL
shall make such SNM and natural uranium available to
Seller on a schedule consistent with the provisions of
Appendix C. Should agreement not be reached on the
quantity and/or enrichment of the SNM, or on the final
design, the provisions of Article 15.7 shall apply.

At trial, Mr. Villard also testified that appendix A, Reference

Fuel Assembly Design St. Lucie Nuclear Unit #1, to the Exxon
 - 121 -

contract identified the specifications and amount of nuclear fuel

contracts. Appendix A contains diagrams and design parameters.

We conclude that the specifications for the nuclear fuel

assemblies contained in appendix A to the Exxon contract satisfy

the “readily identifiable” requirement. The appendix contains

the number of fuel assemblies in the core, diagrams depicting a

fuel assembly and fuel rod array, the number of fuel rods per

assembly, the distance between assemblies, etc. Mr. Villard

testified that “All fuel fabrication contracts have detailed

specifications on not only the quantity, but also on the

material, the size, manufacturing tolerances that needs to be

supplied under that fuel fabrication contract.” TRA section

204(a)(3) and the conference report state that “related

documents” must be specific, although not exact; on the basis of

Mr. Villard’s testimony and the contents of appendix A, we find

that the spent fuel assembly property relating to the Exxon

contract is readily identifiable.

Petitioner also asserts that the A.B. Chance contract

readily identifies the specifications and amount of the LMS

property. The “Base Bid Schedule,” dated September 9, 1985, an

attachment to the A.B. Chance contract, lists the following

components of the LMS: (1) Master station and USW hardware, (2)

master station and USW software, (3) field equipment (excluding

transponders), (4) engineering and services, (5) interim master
 - 122 -

station (IMS), (6) spare parts, (7) the LMS master

communication/data link equipment, (8) MMI equipment, (9) field

equipment, (10) installation/test equipment for phase II

transponders, (11) installation of watthour meter input devices,

(12) residential load control transponders, (13) residential

meter transponders, (14) commercial industrial meter

transponders, (15) load survey transponder, and (16) distribution

automation transponders. The schedule also itemizes many

subcomponents of the LMS components.

The A.B. Chance contract contains cross-references to the

LMS specifications document. FPL created the LMS specifications,

which contains more than 600 pages. Petitioner specifically

cites appendix D, Tentative Delivery Schedule, and appendix E,

Initial Phase Implementation. Appendix D summarizes the number

of metering transponders that FPL planned to install in each year

from 1985 to 1992 and identifies the transponder voltage, the

number of residential meter transponders nondemand, commercial

meter transponders demand, and commercial meter transponders

nondemand.

We find that the description of the LMS property is

sufficiently detailed so that it is “readily identifiable” with

the terms of the A.B. Chance contract and the LMS specifications.

The bid schedule in the A.B. Chance contract outlines the

component parts for the LMS. Appendix D identifies the number of
 - 123 -

transponders, the voltage of the transponders, the type of

property that the transponders served, and the year that FPL

planned to install the transponders. While the terms of the

related documents are not required to identify the exact property

in issue, the terms must contain specific details. See United

States v. Commonwealth Energy Sys., 235 F.3d at 16. Petitioner’s

“related documents” itemize many components and subcomponents of

the LMS property and indicate the number of transponders needed

for the system.

Although the Westinghouse contract fails to readily identify

the nuclear fuel assemblies, appendix A of the Exxon contract

contains specific details that identify the assemblies at St.

Lucie Unit 1. Also, the LMS property is readily identifiable

from the terms of the A.B. Chance contract and the LMS

specifications. Therefore, the Exxon contract and the A.B.

Chance contract and the LMS specifications readily identify the

St. Lucie Unit 1 nuclear fuel assemblies and the LMS property,

respectively.105

Because the tariff is not a contract for purposes of TRA

section 204(a)(3), the tariff does not readily identify any

105
We address this issue to complete our analysis of the
supply or service contract transitional rule. However, the
property does not qualify for an ITC because we have held that
the tariff is not a supply or service contract for purposes of
TRA section 204(a)(3), and we have held that the tariff does not
incorporate the “related documents”.
 - 124 -

property in issue, no related documents were incorporated by a

supply or service contract, and the property generally was not

readily identifiable from the related documents, we hold that the

fuel assemblies, the nuclear plant property (the MSIV air

accumulation system, surveillance system for the heat exchangers,

reactor vessel probes, raceway protection, spent fuel equipment,

and the area radiation monitoring system equipment), the

environmental property (wastewater neutralization treatment

system and replacement of PCB transformers), the simulator and

training buildings, and the LMS do not qualify as transition

property under TRA section 204(a)(3).

e. Class Life of Nuclear Fuel Assemblies Pursuant to
TRA Section 203(b)(2)

Finally, with respect to the ITC claimed for nuclear fuel

assemblies placed in service in 1988, 1989, and 1990, we conclude

that petitioner is not entitled to those credits even if the fuel

assemblies would otherwise qualify as transition property under

TRA section 204(a)(3).

Congress imposed restrictions on the availability of the ITC

for transition property. One of these restrictions is contained

in TRA section 203(b)(2), which provides:
 - 125 -

(b) General Transitional Rule.--

* * * * * * *

(2) Requirement that certain property be placed in
service before certain date.--

(A) In General.--Paragraph (1) and section
204(a) * * * [which includes the supply and service
contracts exception] shall not apply to any property
unless such property has a class life of 7 years and is
placed in service before the applicable date determined
under the following table:

In the case of property with a class life of: The
applicable date is:

At least 7 but less than 20 years January 1, 1989

20 years or more January 1, 1991

* * * * * * *

(C) Class Lives.--

* * * * * * *

(ii) property described in section 204(a)
shall be treated as having a class life of 20
years. * * *

At first blush, there appears to be an inconsistency between the

requirement in subsection (b)(2)(A), which requires that TRA

section 204(a) property have a class life of at least 7 years,

and subsection (b)(2)(C)(ii), which provides that TRA section

204(a) property shall be treated as having a class life of 20

years.

The parties agree that the nuclear fuel assemblies have a

class life of 5 years under Rev. Rul. 87-56, 1987-2 C.B. 674, and

that petitioner treated these assemblies as having a class life
 - 126 -

of 5 years for purposes of computing depreciation allowances.

Respondent argues that TRA section 203(b)(2)(A) precludes any

credits for 1988, 1989, or 1990 because the class life of the

nuclear fuel assemblies is less than 7 years. Respondent argues

that TRA section 203(b)(2)(A) mandates that TRA section 204(a)

property must have a class life of at least 7 years before TRA

section 203(b)(2)(C)(ii) is applied to that property. Petitioner

argues that TRA section 203(b)(2)(C)(ii) contains a special

provision that transforms the class life of the fuel assemblies

to 20 years, thus negating the requirement in TRA section

203(b)(2)(A) that TRA section 204(a) property must have a class

life of at least 7 years.106

This same issue of statutory construction with respect to

TRA section 203(b)(2) was addressed by the Court of Appeals for

the Ninth Circuit in Airborne Freight Corp. v. United States, 153

F.3d 967, 971-972 (9th Cir. 1998), revg. on this issue 78 AFTR 2d

6272, 96-2 USTC par. 50,552. The Court of Appeals explained:

This section is not a model of clarity, but we
read the opening restriction of subsection (A),
standing alone, as requiring that the world
headquarters exception [which is another exception
contained in TRA section 204(a)] not be available to
property with a class life of less than 7 years. The
plain words dictate that reading. The difficulty
arises from subsection (C)(ii), which assigns to
property described in § 204(a) a class life of 20

106
Before the trial, respondent moved for partial summary
judgment on this issue. We reserved ruling on this motion and
decide the issue as part of this opinion.
 - 127 -

years. The district court read subsection (C)(ii) as
establishing a 20-year class life for all § 204(a)
property, thus entirely negating the 7-year-minimum
requirement of subsection (A) of § 203(b)(2). We
conclude that a more appropriate reading of subsection
(C)(ii) is to consider it as "treating" § 204(a)
property (which must have a class life of 7 years or
more) as having a 20-year life for the purpose of the
applicable date by which it must be placed in
service-January 1, 1991. We recognize that this
interpretation may negate the provision of subsection
(A) with regard to such property with a life of at
least 7 but less than 20 years. The district court's
interpretation does even more violence to subsection
(A), however, because it negates not only the same
provision, but virtually all of subsection (A).

Our interpretation of § 203 is made more
compelling by the fact that § 203 does not stand alone.
It is supplemented by § 49(e)(1)(C), which provides in
pertinent part:

(C) [I]n the case of transition property with a
class life of less than 7 years-

(i) section 203(b)(2) of this Act shall apply, and

(ii) in the case of property with a class life-

(I) of less than 5 years, the applicable
date shall be July 1, 1986, and

(II) at least 5 years, but less than 7
years, the applicable date shall be January
1, 1987. * * *

26 U.S.C. § 49(e)(1)(C). Here again, the draftsmanship
leaves much to be desired, but the most reasonable
reading of this subsection is that it renders
additional property eligible for the investment credit,
and for practical purposes adds it to the table of
class lives and service dates contained in §
203(b)(2).5 See H.R. Conf. Rep. No. 99-841, 99th
Cong.2d Sess., at II-54. If the district court's
reading of subsection 203(b)(2)(C) were accepted,
however, it would give all § 204(a) property a life of
20 years and entirely negate the above provisions of §
49(e)(1)(C).6 We adhere to our conclusion, therefore,
 - 128 -

that the only effect of subsection (C)(ii) of §
203(b)(2) is to make applicable to eligible property
with a class life of more than 7 years the required
service date applicable to property with a class life
of 20 years or more--January 1, 1991.
5
Airborne's eligibility for credits under § 49(e)
is not in issue, because this appeal concerns only
property placed in service in 1989 and 1990, well after
the dates required by § 49(e) for property having a
class life of less than 7 years.
6
Airborne contends that § 49(e)(1)(C) would still
have a function because it could apply to the different
type of transition property described in § 203(b)(1).
But § 203(b)(1), like § 204(a), is rendered
inapplicable by § 203(b)(2)(A) to property with a class
life of less than 7 years. There is no reason why §
49(e)(1)(C) should be effective in one context but not
in another, when both are governed by the same clause
of § 203(b)(2)(A).

See also United States v. Kjellstrom, 916 F. Supp. 902 (W.D. Wis.

1996).

We apply the analysis of the Court of Appeals, and hold that

TRA section 203(b)(2)(A) precludes any ITC for the nuclear fuel

assemblies that petitioner placed in service in 1988, 1989, and

1990.107

2. Are the Southern Company Contracts TRA
Section 204(a)(3) Supply or Service Contracts?

Petitioner seeks ITCs for equipment related to the Southern

company contracts. Petitioner contends that the Southern company

contracts constitute TRA section 204(a)(3) supply contracts and

107
Petitioner cannot claim an ITC for 1988, 1989, and 1990
under sec. 49(e)(1)(C). Transitional relief pursuant to sec.
49(e)(1)(C) applies only to property placed in service before
Jan. 1, 1987.
 - 129 -

that the property purchased and installed thereunder was readily

identifiable with and necessary to those contracts. The

equipment was placed in service during the 1988, 1989, and 1990

taxable years with tax bases of $39,605,571, $2,648,789, and

$1,169,866, respectively. Respondent argues that the Southern

company contracts are not TRA section 204(a)(3) contracts because

FPL was not supplying anything under those agreements. Indeed,

respondent argues that FPL contracted for the purchase of

electricity and FPL’s counterparties were obligated to supply

electricity. For support of his interpretation, respondent cites

the House Ways and Means Committee report, which explains:

An example of a case to which * * * [the supply or
service contract rule] would apply is that of a
taxpayer who entered into a written binding power sales
contract before September 26, 1985, and is required to
construct (or have constructed) two facilities that
will produce the power necessary to fulfill a
contractual obligation. * * *

H. Conf. Rept. 99-426, at 165 (1985), 1986-3 C.B. (Vol. 2) 1,

165. Furthermore, respondent contends that the property and

equipment purchased and installed by FPL was not readily

identifiable in the Southern company contracts.

We disagree with respondent’s interpretation that only the

“supplier” under a supply contract is entitled to transition

relief. TRA section 204(a)(3) provides:
 - 130 -

The amendments made * * * [to repeal the ITC] shall not
apply to any property which is readily identifiable
with and necessary to carry out a written supply * * *
contract * * * which was binding on * * * [December 31,
1985].

We believe that respondent’s interpretation is too restrictive.

If Congress had wanted to except only the supplier under a supply

contract, it would have specifically so stated. The language

excepts any property that is readily identifiable with and

necessary to carry out a written supply contract. Surely,

equipment purchased and installed by the party receiving goods

and services under a supply contract constitutes “any” property

that is necessary to carry out that contract. Respondent’s

interpretation is inconsistent with the plain meaning of TRA

section 204(a)(3) because, under the Southern company contracts,

FPL arguably needed to purchase and install certain equipment to

accept the electricity supplied by the Southern companies. We

hold that the Southern company contracts constitute supply

contracts for purposes of petitioner’s potential entitlement to

the benefits of TRA section 204(a)(3). Accordingly, we must then

decide whether petitioner’s property is readily identifiable with

and necessary to carry out the Southern company contracts.

The amendment to the power agreement entered into on

February 18, 1982, increased the amount of power that the

Southern companies would supply FPL. That agreement specified

the number of megawatts that the Southern companies would make
 - 131 -

available to FPL until May 31, 1995. The agreement contemplated

that FPL would provide the necessary facilities and equipment to

receive this power. The agreement states, in pertinent part:

4.1 Points of Delivery: Southern Companies shall
deliver the power and energy purchased by FPL hereunder
to the Points of Delivery specified in Article III of
the FPL-Southern Companies Interchange Contract dated
October 18, 1979 and amended by Agreement dated
February 19, 1981 and the points of delivery to be
established pursuant to Section 4.2 below.

* * * * * * *

4.3 Construction of FPL’s Internal Transmission:
It is recognized that FPL must construct certain
internal transmission lines to allow it to increase
purchases of unit power capacity during the contract
period beginning January 1, 1985 * * *. Those
facilities are (i) a 500 kV transmission line from its
Duval Substation to its Rice Substation continuing to
its Poinsett Substation, (ii) a separate 500 kV
transmission line from its Duval Substation to its
Poinsett Substation, and (iii) a 500 kV transmission
line from its Poinsett Substation to its Martin
Substation. * * *

FPL completed each of the transmission lines by January 1, 1985,

as required by the amended power agreement.

Many of the documents that FPL offered as evidence to show

that it spent funds on facilities and equipment reference the

Southern company contracts. For example, BI Nos. 272, 273, and

274 and ER Nos. 1248, 1249, 1776, 1778, 2383, and 1224 all state

in pertinent part: “Additional bulk power transfer capacity

* * * is also needed to reliably transfer contracted firm power

purchases from the Southern Company”. Similarly, ER Nos. 3216,

3623, and 3219 all state: “According to the existing contracts
 - 132 -

net firm interchange power available to the FPL system during

the 1988-1992 * * * which includes a 2000 MW firm interchange

from Southern.” Some documents do not reference the Southern

company contracts at all; i.e., BI Nos. 304 and ER Nos. 1984,

1479, and 3276. Other documents appear to relate to the Southern

company contracts; for example, ER No. 5334, which concerns the

installation of one 500-kV bus tie breaker at the Poinsett

substation, states: “With the present configuration * * * a

maintenance outage of one of the mid-breakers greatly reduces

FPL’s import capability.” Also, BI No. 129 and ER Nos. 9326,

9327, 9329, 9334, 9337 state: “While importing large amounts of

power”. (Emphasis added.)

Respondent cites United States v. Commonwealth Energy Sys.,

235 F.3d 11 (1st Cir. 2000), for the proposition that FPL’s

property at issue was not readily identifiable with the Southern

company contracts, and as such, should not receive transition

relief. The court explained that the legislative history

indicated that the specifications and amount of the property must

be readily ascertainable from the source documents, which are the

contract and related documents. Id. at 16. Because the statute

requires that the specifications and amounts of property be

ascertainable, this examination must be specific, but not exact.

Id. In that case the taxpayer sought an ITC for replacement

property. Id. at 13. The court found that the taxpayer could
 - 133 -

not identify the future replacement property, nor specifications

and amount of replacement property from the pertinent documents.

Id. at 16. In holding against the taxpayer, the court stated

that its decision was consistent with the reasoning of other

courts that have interpreted the same provision. See Bell Atl.

Corp. v. United States, 224 F.3d at 225; S. Multi-Media Commcns.,

Inc. v. Commissioner, 113 T.C. at 419; United States v. Zeigler

Coal Holding Co., 934 F. Supp. at 294-295. Generally, those

cases held that the contract must contain more than a casual link

to the property purchased to qualify for transition relief. Bell

Atl. Corp. v. United States, supra; S. Multi-Media Commcns., Inc.

v. Commissioner, supra at 421-422; see also United States v.

Zeigler Coal Holding Co., supra at 295.

We believe that only the equipment that is readily

identifiable from the language of the amendment to the Southern

company contracts should qualify for transition relief. See

supra p. 131 (quoting amendment to power sales agreement, par.

4.3). Paragraph 4.3 of the amendment specifically identifies the

following property:

(i) a 500 kV transmission line from its Duval
Substation to its Rice Substation continuing to its
Poinsett Substation, (ii) a separate 500 kV
transmission line from its Duval Substation to its
Poinsett Substation, and (iii) a 500 kV transmission
line from its Poinsett Substation to its Martin
Substation. * * *
 - 134 -

Petitioner seeks an ITC for property that it placed in service

after placing the specifically identified property in service by

January 1, 1985. The property for which petitioner seeks an ITC

is not readily identifiable from the language in the amendment to

the Southern company contracts. We do not believe that the

transitional rules contemplated providing relief from the ITC

repeal when taxpayers upgrade their electrical systems, even if

the upgrades improved reliability. If we were to accept

petitioner’s position, any equipment that could somehow be traced

back to the purchase of power under the Southern company

contracts would be entitled to transition relief. The link

between the Southern company contracts and the property in issue

is too attenuated to be the type contemplated by Congress in

providing transition relief.

3. Are the DRI Documents TRA Section 204(a)(3)
Supply Contracts?

Developers of large projects applied to regional development

boards for permission to develop properties, and those regional

development boards required verification from FPL that the

electrical needs of the development would be satisfied.

Petitioner argues that the exchange of letters with respect to

the DRI projects constituted TRA section 204(a)(3) supply

contracts. Petitioner seeks ITCs for equipment related to the

DRI projects. This equipment was placed in service during 1988,
 - 135 -

1989, and 1990 taxable years with tax bases of $1,464,901,

$3,609,855, and $4,832,205, respectively.

We do not think the exchange of these letters contained

sufficient specificity to constitute binding contracts. Rather,

they appear to merely state FPL’s belief that it would be able to

supply service in anticipated but unspecified amounts.

Assuming arguendo that the exchange of documents concerning

the DRI projects constitutes a TRA section 204(a)(3) contract, we

do not think that any of the property for which petitioner claims

ITCs is “readily identifiable” in those documents. The evidence

shows that, at the time of the supposed contract, FPL had only a

general idea of how much or what equipment it would need to meet

the developer’s expected requirements. For example, the record

contains a letter from FPL concerning a proposed DRI that states:

[FPL] anticipates no problem in providing electric
service to this project both during and after
development.

In one of the responses, FPL explained:

Electric service will be made available to the
above development * * *. The required installation of
either overhead or underground electric facilities will
be coordinated between the developer and * * * [FPL].

Upon presentation of required plats and load data,
the engineering required for the installation of
electric service will be initiated by * * * [FPL].
* * *

FPL had only a generalized idea of the DRI project demands for

power, and thus, only a general idea of the equipment that would
 - 136 -

be needed to supply the power. As Mr. Hernandez, an FPL

operations support supervisor, was asked and answered:

Q: At the time FPL issues the response letter,
is it possible to know exactly how much cable
and trench will be required?

A: No, it wouldn’t because the developer hasn’t
finalized his plans; and, therefore, we don’t
know the exact routes of these cables.

The specifications and/or amount of property were not

readily ascertainable from the DRI documents. See H. Conf. Rept.

99-841 (Vol. II), supra at II-60, 1986-3 C.B. (Vol. 4) at 60; cf.

Newhouse Broad. Corp. v. Commissioner, T.C. Memo. 2000-270

(“Rather, we find that the description contained in the pre-1986

documents of the equipment to be utilized * * * is sufficiently

detailed for us to determine whether any particular property is

‘specifically described’ in such documents.”). Accordingly, we

hold that the property/equipment purchased and installed by FPL

with respect to the DRI projects fails to qualify for transition

relief.

C. TRA Section 203(b)(1)(A)--The “Binding Contract” Rule

TRA section 203(b)(1)(A), known as the “binding contract”

rule, in conjunction with section 49(e), grants transition relief

to “any property which is constructed, reconstructed, or acquired

by the taxpayer pursuant to a written contract which was binding

on” December 31, 1985. Petitioner argues that the following

items qualify for transition relief on the basis of the binding
 - 137 -

contract rule: (1) A nuclear fuel transfer system pursuant to a

contract with Stearns Catalytic Corp. (Stearns Catalytic); (2)

transmission equipment constructed pursuant to the interchange

contract with the Southern companies; (3) the LMS equipment

acquired under the A.B. Chance contract; and (4) equipment

purchased for the SJRPP pursuant to the JEA contract.

There are few cases that have interpreted the binding

contract rule. However, the conference report sheds light on

Congress’s intent in granting transition relief to taxpayers:

The conference agreement does not apply to
property that is constructed, reconstructed, or
acquired by a taxpayer pursuant to a written contract
that was binding as of * * * (December 31, 1985, for
investment tax credits), and at all times thereafter.
* * *

The general binding contract rule applies only to
contracts in which the construction, reconstruction,
erection, or acquisition of property is itself the
subject matter of the contract.

A contract is binding only if it is enforceable
under State law against the taxpayer, and does not
limit damages to a specified amount (e.g., by use of a
liquidated damages provisions). A contractual
provision that limits damages to an amount equal to at
least five percent of the total contract price is not
treated as limiting damages.

* * * * * * *

A binding contract to acquire a component part of
a larger property will not be treated as a binding
contract to acquire the larger property under the
general rule for binding contracts. * * *

* * * * * * *
 - 138 -

The conferees wish to clarify the general binding
contract rule with respect to investment credit * * *.
Design changes to a binding contract to construct a
project that are made for reasons of technical or
economic efficiencies of operation and that cause an
insignificant increase in the original price will not
constitute substantial modifications of the contract so
as to affect the status of the project under the
binding contract rule. * * *

The conferees also wish to clarify that the
general binding contract rule does not apply to supply
agreements with manufacturers, where such contracts
fail to specify the amount or design specifications of
property to be purchased; such contracts are not to be
treated as binding contracts until purchase orders are
actually placed. A purchase order for a specific
number of properties, based on the pricing provisions
of the supply agreement, will be treated as a binding
contract.

H. Conf. Rept. 99-841 (Vol. II), supra at II-54 to II-56, 1986-3

C.B. (Vol. 4) at 54-56.

1. Nuclear Fuel Transfer System

Petitioner seeks an ITC for the nuclear fuel transfer system

purchased from Stearns Catalytic. This equipment was placed in

service during the 1988 and 1990 taxable years with tax bases of

$241,469 and $233,742, respectively. In support of its position,

petitioner submitted copies of two purchase orders, its ERs and

BIs, and the testimony of its employee. Respondent argues that

petitioner failed to produce the required written contract.

We agree with respondent that a purchase order is not, by

itself, a contract. Indeed, a purchase order is typically an

offer. See, e.g., Philip Schwartz, Inc. v. Gold Coast Graphics,

Inc., 623 So. 2d 819 (Fla. Ct. App. 1993). Performance
 - 139 -

constitutes acceptance of that offer. Id. at 820. However, even

assuming the existence of a contract, the evidence lacks any

contract between FPL and Stearns Catalytic that was binding on

December 31, 1985, an express requirement of the transitional

rule. One purchase order has an effective date of December 17,

1984, and an expiration date of November 1, 1985. Apparently, a

change order to the purchase order was issued, having an

effective date of December 19, 1985. However, we have no

evidence showing whether the agreement between Stearns Catalytic

and FPL was a binding contract as of December 31, 1985. No

testimony identifies the date that Stearns Catalytic accepted

FPL’s written offer. The purchase orders in evidence are FPL’s

purchase orders. Mr. Bible testified that FPL purchased

equipment/services from Stearns Catalytic as stated in the

purchase orders. But no evidence indicates when the contract to

provide such equipment/services was created. The record contains

only information establishing when FPL made its offer to Stearns

Catalytic. Accordingly, we hold that the FPL/Stearns Catalytic

relationship is not a binding contract for purposes of TRA

section 203(b)(1)(A); therefore, petitioner is not entitled to an

ITC with respect to the nuclear fuel transfer system in the 1988,

1989, and 1990 taxable years.
 - 140 -

2. Southern Interchange Contract

Petitioner seeks ITCs for property/equipment purchased

pursuant to the interchange contract with the Southern companies,

which petitioner contends is a TRA section 203(b)(1)(A) binding

contract. Petitioner argues that the interchange contract was

binding on December 31, 1985, and required FPL to purchase

certain property/equipment. This equipment was placed in service

during the 1988, 1989 and 1990 taxable years with tax bases of

$39,605,571, $2,648,789, and $1,169,866, respectively.

Respondent argues that the property/equipment purchased was not

the subject matter of the agreement and thus does not qualify for

an ITC. Respondent supports his contention by referring to the

following excerpt from the legislative history: “The general

binding contract rule applies only to contracts in which the

construction, reconstruction, erection, or acquisition of

property is itself the subject matter of the contract.” H. Conf.

Rept. 99-841 (Vol. II), supra at II-55, 1986-2 C.B. (Vol. 4) at

55. To resolve this issue, we must examine the interchange

contract and its amendments and the amended power agreement to

determine the subject matter of that contract.

The interchange contract, dated October 18, 1979,

established a mechanism to facilitate the contractual

relationship between the Southern companies and FPL. The

interchange contract provided for, inter alia, the creation of
 - 141 -

the initial interconnection between the entities, the

responsibilities of the parties to maintain their facilities, the

services to be rendered, the methodology and periodic rate

computation procedure, metering, delivery points, records and

statements, billings and payments, and the establishment of an

operating committee. Amendment No. 1 to the interchange contract

(amendment No. 1) was entered into on February 19, 1981, to

account for changes required when the parties executed a new unit

power sales agreement.108 Amendment No. 1 contemplated, inter

alia, the establishment of a second and third interconnection at

which:

(b) FPL shall, at no expense to GPC, construct,
operate, and maintain a 500 kV transmission line from
FPL’s Duval Substation to the point on the Georgia-
Florida state line noted in (c) below.

(c) The interconnection point is hereby defined
as that point where the aforementioned 500 kV
transmission line crosses the Georgia-Florida state
line, approximately one and one quarter miles northeast
of Boulougne, Florida at the St. Mary’s River on the
South side of the river bridge.

(d) FPL and SOUTHERN COMPANIES shall each,
respectively, for their 500 kV transmission line
provide, install, operate, and maintain such associated
terminal and other facilities as may be necessary to
permit effective use of such interconnection.

FPL and the Southern companies entered into amendment No. 2 to

the interchange contract as of July 23, 1981 (amendment No. 2).

108
The copy of amendment No. 1 in the record does not
contain a signature page.
 - 142 -

Amendment No. 2 provided for the “potential acceleration of the

effective date of the increase in the sale of long term power”.109

On February 18, 1982, the Southern companies and FPL entered

into an amended and restated power sales agreement (amended power

agreement). In the amended power agreement, FPL agreed to

acquire additional power from the Southern companies, and the

Southern companies agreed to sell more power to FPL. FPL agreed

to use its best efforts to construct internal transmission lines

to allow FPL to increase purchases of unit power capacity during

the contract period.110

In Katerelos v. Commissioner, T.C. Memo. 1996-340, the Court

addressed whether equipment purchased and used by a taxpayer to

operate a restaurant qualified for a credit under the binding

contract transitional rule. During 1985, the taxpayers executed

a lease for the premises where they operated a restaurant. The

taxpayers argued that they were required to purchase property for

use at the premises in order to operate the leased property;

therefore, the binding contract rule applied to the

109
The copy of amendment No. 2 in the record contains a
signature page, which is signed only by FPL.
110
Specifically, the amended power agreement provided that
FPL would construct: (i) A 500-kV transmission line from its
Duval substation to its Rice substation continuing to its
Poinsett substation; (ii) a separate 500-kV transmission line
from its Duval substation to its Poinsett substation; and (iii) a
500-kV transmission line from its Poinsett substation to its
Martin plant. FPL completed each of these transmission lines by
Jan. 1, 1985.
 - 143 -

property/equipment that they purchased for the restaurant. The

Court disagreed and quoted the legislative history confirming

that, for the exception to apply, the subject of the “binding

contract” must be the “construction, reconstruction, or

acquisition of property for use at that premises.” Id.

Despite petitioner’s protestations, the subject matter of

the interchange contract and the amendments was not the

construction, reconstruction, or acquisition of property.

Instead, this contract defined the relationship between the

parties and the sale and exchange of electricity between them.

Although we agree that the interchange contract acknowledged that

FPL was responsible for providing the property or equipment to

facilitate the exchange of power (at least on its side of the

Florida State line), we do not believe that that provision was

the subject matter of the contract.

Similarly, the subject matter of the amended power agreement

is to provide the terms for the purchase and sale of electricity.

While the amended power agreement includes a provision that

describes the internal transmission lines that FPL would

construct, these transmission lines were completed by January 1,

1985. Rather than serving as the subject matter of the amended

power agreement, the provision relating to the construction of

the transmission lines describes how FPL shall satisfy its

obligation to purchase the power.
 - 144 -

We agree with respondent that the purchase of

property/equipment for which petitioner seeks ITCs was not the

subject matter of the interchange contract or the amended power

agreement; accordingly, petitioner is not entitled to an ITC.

3. LMS Equipment Under A.B. Chance Contract

Petitioner argues that FPL acquired the LMS equipment

(substation equipment and transponders)111 “pursuant to a written

contract with A.B. Chance, and that contract was binding on

December 31, 1985.” Petitioner seeks ITCs for the LMS

property/equipment placed in service during the 1988, 1989, and

1990 taxable years with tax bases of $362,837, $16,045,190, and

$39,351,031, respectively. Respondent argues that “No contract

existed between A.B. Chance (or anyone else) and FPL regarding

Phase II and III prior to January 1, 1986.” Additionally,

respondent argues that, even if there was a contract, it was not

binding because FPL could terminate the contract for convenience.

To resolve this issue, we must examine the A.B. Chance

contract to determine whether it is a TRA section 203(b)(1)(A)

binding contract. In October 1985, both parties executed the

“General Conditions” section of the A.B. Chance contract. As

found above, the contract incorporates and includes a copy of

111
“Petitioner limited its ITC claim strictly to the
substation control equipment and the transponders acquired during
the Periods in Issue because the computer equipment has a five-
year class life.”
 - 145 -

FPL’s purchase order. The purchase order lists the documents

that make up the contract and states a total contract price of

$11,477,432.

To support the existence of a binding contract, petitioner

relies heavily upon the testimony of its employee, Mr. Garcia.

For example, petitioner argues in its brief that “Mr. Garcia

testified that the [A.B.] Chance Contract was finalized in

October 1985, and that it was in fact one contract from that

point in time forward.” However, Mr. Garcia testified as a fact

witness, not a legal expert.

Indeed, the A.B. Chance contract in evidence obligated FPL

to expend more than $11 million for phase I, committing it to

purchase a finite amount of equipment. The contract had no term

but did contain a price guarantee, which controlled and limited

the price A.B. Chance could charge FPL for purchases of the LMS

equipment after phase I. The price guarantee clause obligated

A.B. Chance to charge FPL the then-lowest price that it charged

to its other customers for the LMS. However, the A.B. Chance

contract contained no obligation that FPL must purchase any other

equipment from A.B. Chance. In fact, a contrary intention is

indicated in the contract: “It is FPL’s intent to competitively

bid its requirements for Phases II and III.”

We do not agree with petitioner’s argument that the A.B.

Chance contract was a binding contract for purchases after phase
 - 146 -

I.112 Although the parties relied upon many of the terms and

understandings embodied in that agreement for the purchases made

after phase I, nonetheless, that contract obligated the parties

only to phase I. We believe that the legislative history sheds

light on the contractual relationship for phases II and III:

The conferees also wish to clarify that the
general binding contract rule does not apply to supply
agreements with manufacturers, where such contracts
fail to specify the amount or design specifications of
property to be purchased; such contracts are not to be
treated as binding contracts until purchase orders are
actually placed. A purchase order for a specific
number of properties, based on the pricing provisions
of the supply agreement, will be treated as a binding
contract. [Emphasis added.]

H. Conf. Rept. 99-841 (Vol. II), supra at II-55 to II-56, 1986-3

C.B. (Vol. 4) at 55-56. Petitioner has not offered any written

contract or purchase order under which property was purchased

after phase I. The record contains only the A.B. Chance contract

and FPL’s ERs and BIs for the property/equipment claimed.

Accordingly, petitioner is not entitled to claim an ITC under TRA

section 203(b)(1)(A) for the LMS equipment purchases after phase

I.

112
We think that the property and equipment purchases during
phases II and III, the period before us, were more akin to a
supply or requirements contractual relationship. Under the
Uniform Commercial Code, requirements contracts are enforceable.
E. Air Lines, Inc. v. Gulf Oil Corp., 415 F. Supp. 429, 435 (S.D.
Fla. 1975); see Fla. Stat. Ann. sec. 672.306 (West 2004).
However, we do not make a finding or conclusion that this
relationship was a supply or requirements contract.
 - 147 -

4. St. John’s River Power Park (SJRPP)

Petitioner claims ITCs for the property that was constructed

or reconstructed at the SJRPP pursuant to FPL’s written joint

agreement (or JOA) with the JEA, and argues that this agreement

is a TRA section 203(b)(1)(A) contract. In claiming an ITC,

petitioner, in its reply brief, states that it “clearly limited

this argument to the JOA” and does not rely on the third-party

construction contracts entered into by the JEA.113 The equipment

in issue was placed in service during the 1988, 1989, and 1990

taxable years with tax bases of $1,702,649, $2,376,238, and

-$360,804,114 respectively.

Respondent argues that the joint agreement is not a

construction contract because the binding contract rule applies

only to contracts in which construction, reconstruction,

erection, or acquisition of property is itself the subject matter

of the contract.

TRA section 203(a)(3) provides relief from the ITC repeal

for “any property which is constructed, reconstructed, or

acquired by the taxpayer pursuant to a written contract which was

113
Respondent had argued in his brief that, because FPL was
not a signatory to the many contracts entered into by the JEA,
there are no TRA sec. 203(b)(1)(A) contracts under which
petitioner may claim an ITC.
114
Petitioner claims a negative number as the ITC in its
proposed ultimate findings of fact. Mr. Engstrom testified that
the negative number was the result of FPL’s debit/credit
accounting system.
 - 148 -

binding on” December 31, 1985. The conference report clarifies

that “The general binding contract rule applies only to contracts

in which the construction, reconstruction, erection, or

acquisition of property is itself the subject matter of the

contract.” H. Conf. Rept. 99-841 (Vol. II), supra at II-55,

1986-3 C.B. (Vol. 4) at 55.

The agreement for the SJRPP, dated April 2, 1982, is

entitled “Agreement for Joint Ownership, Construction and

Operation of St. John’s River Power Park Coal Units #1 and #2

Between Jacksonville Electric Authority and Florida Power & Light

Company”. The agreement states part of its purpose as:

“WHEREAS, the parties desire to provide for the construction and

operation of Coal Units 1 and 2 by JEA and FPL in accordance with

this Agreement”. Section 2.1.4 of the agreement states that

“This Agreement * * * [constitutes] legal, valid and binding

obligations of FPL enforceable against it in accordance with

their terms”.

Section 3 of the agreement describes the ownership and

construction of the SJRPP. Subsection 3.7 states:

At or before Closing, JEA, as agent, shall establish a
separate account or accounts in the name of the Co-
owners (the “Construction and Plant Account”)
* * *. The Co-owners shall pay into the Construction
and Plant Account (i) in proportion to their Ownership
Interests amounts of Costs of Construction * * *. Such
payment into the Construction and Plant Account shall
be made in accordance with Section 3.8 hereof. * * *
 - 149 -

Subsection 3.8 states:

3.8 Payment for Costs of Construction, Costs of
Plant and Other Costs. Payment by the Co-owners of
their share of Costs of Construction and Other Costs
* * * shall be made based upon the statements prepared
and submitted to the Co-owners by the Project
Management Committee * * *

Subsection 3.12 states:

3.12 Completion of Construction. The Co-owners
agree, consistent with their respective
responsibilities and obligations and the other terms
set forth in this Agreement, to complete the
construction of the Joint Facilities in accordance with
the schedule established pursuant to Section 5.4.2.

Section 5 of the joint agreement is entitled “Coordination

and Administration”. Subsection 5.4.2 states:

5.4.2 Completion Of Construction. The Date of
Commercial Operation for Coal Unit 1 shall be December
31, 1986, and for Coal Unit 2 shall be June 30, 1988,
unless such Dates of Commercial Operation are changed
pursuant to this Section 5.4.2. The Project Management
Committee shall perform its responsibilities hereunder
to effect the completion of the construction of the
Joint Facilities in accordance with such schedule.
* * *

The project management committee is comprised of one

representative and one alternate from each of the coowners.

Subsection 5.4.1 describes the responsibilities of the project

management committee with respect to the construction of the

SJRPP.

Section 9 of the agreement is entitled “Liabilities”.

Subsection 9.1 states, in pertinent part:

any liability or payment, cost, expense or obligation
arising from a claim of liability to a third party or
 - 150 -

parties * * * against one or both of the Co-owners and
arising out of or resulting from the acquisition of the
Joint Facilities or any part thereof, the planning,
engineering, design, licensing, procurement,
construction, installation or completion of the Joint
Facilities * * * shall be considered a Cost of
Construction, Cost of Plant or Cost of Operation, as
appropriate.

We agree with respondent that the subject matter of the

joint agreement was not for the construction of property. As we

discussed earlier, in Katerelos v. Commissioner, T.C. Memo. 1996-

340, this Court found that the taxpayers were not entitled to an

ITC for equipment used in a leased premises because the subject

matter of the lease was the use of the premises, not the purchase

of the equipment. Here, we think that the parties entered into

the joint agreement to create a joint venture between FPL and the

JEA, and to define the relationship of the coowners.

We do not think that the title of this agreement, which

includes the construction of the SJRPP, defines the subject

matter of the contract; instead, we look at the terms of the

contract. The recitals indicate that “the parties desire to

provide for the construction and operation of Coal Units 1 and 2

by JEA and FPL in accordance with this Agreement”. This explains

the parties’ intentions or the expected plan for the joint

venture. We do not think that this statement shows that the

subject matter of the contract is the construction of the SJRPP.

While the purpose of the joint venture is to operate the

SJRPP, the terms of the joint agreement do not provide for the
 - 151 -

actual construction of this property. Instead, the contract

explains how each coowner will pay for the construction, details

the management structure that the coowners will use to construct

the facility, and provides the dates when the parties plan to

operate the power plant. Subsection 3.7 describes the

“Construction and Plant Account”, which the coowners use to pay

for the construction of the plant. Subsection 3.8 provides for

the billing and payment of the construction costs. Subsections

3.12 and 5.4.2 establish the date that construction will be

completed. These terms relate to construction, but they provide

few details regarding construction. The terms concern the

coowner’s obligations and responsibilities as joint venturers.

We think that the conference report’s requirement that the

subject matter of the contract be the construction,

reconstruction, erection, or acquisition of property demands a

contract between the taxpayer and the persons who will provide

construction services or supply the property to be acquired.

Neither party to the contract in issue was the general contractor

nor was to provide labor or materials.

Because the subject matter of the contract is not the

construction, reconstruction, or acquisition of property, we find

that the joint agreement fails to satisfy the written contract

requirement of TRA section 203(b)(1)(A). Accordingly, we hold
 - 152 -

that petitioner is not entitled to ITCs for the SJRPP property

constructed pursuant to the joint agreement.

D. TRA Section 203(b)(1)(B)--“Self-Constructed Property”

Section 49(e) and TRA section 203(b)(1)(B) provide taxpayers

with relief from the ITC repeal for “self-constructed property”.

Specifically, TRA section 203(b)(1)(B) provides relief for:

(B) property which is constructed or reconstructed
by the taxpayer if--

(i) the lesser of (I) $1,000,000, or
(II) 5 percent of the cost of such property
has been incurred or committed by * * *
[December 31, 1985] March 1, 1986,[115] and

(ii) the construction or reconstruction
of such property began by such date, * * *

The repeal of the ITC does not apply to “transition

property”. Sec. 49(b)(1). As a subcategory of “transition

property”, self-constructed property, falls within the types of

property excepted from the ITC repeal. Sec. 49(e)(1); TRA sec.

203(b)(1)(B). TRA section 203(b)(1)(B) begins by providing that

it encompasses “property which is constructed or reconstructed by

the taxpayer”. (Emphasis added.) Neither the statute nor the

regulations define property for purposes of the ITC. Consumers

Power Co. v. Commissioner, 89 T.C. 710, 725 (1987). The

definition of property is crucial because it provides the basis

for analyzing the requirements set forth in TRA section

115
See supra note 99.
 - 153 -

203(b)(1)(B). For example, in order to qualify under TRA section

203(b)(1)(B), a taxpayer must establish the identity of “the

property” in order to meet the requirements that it incurred or

committed a sufficient amount of the cost of such property by

December 31, 1985, and that construction of “such property” began

by December 31, 1985.

In determining whether components constituted a single

property for purposes of the safe-harbor leasing rule, courts

have examined the meaning of property in other contexts of the

Internal Revenue Code, including the ITC. See Armstrong World

Indus., Inc. v. Commissioner, 974 F.2d 422 (3d Cir. 1992)

(citing, inter alia, Haw. Indep. Refinery, Inc. v. United States,

697 F.2d 1063 (Fed. Cir. 1983), affg. 49 AFTR 2d 675, 82-1 USTC

par. 9183 (Ct. Cl. Trial Div. 1982), and Consumers Power Co. v.

Commissioner, supra), affg. T.C. Memo. 1991-326.

In sum, courts appear to agree that individual
components will be considered a single property for tax
purposes when the component parts are functionally
interdependent--when each component is essential to the
operation of the project as a whole and cannot be used
separately to any effect. The converse, thus, should
be equally valid in this case. Accordingly, if a
project has component parts which can function as
planned in a wholly independent manner, then a court
may find that each component is a “property . . .
placed in a condition or state of readiness and
availability for a specifically assigned function.”
[Alteration in original.]

Id. at 434 (quoting Consumers Power Co. v. Commissioner, supra at

723). We interpret the single property requirement to mean that
 - 154 -

component parts constitute a single piece of property when the

components are interdependent, essential, and integral to the

operation of a unit at the time it is placed in service. Id.;

Haw. Indep. Refinery, Inc. v. United States, supra at 1069;

Consumers Power Co. v. Commissioner, supra at 725-726. For

purposes of the ITC, the components that make up a unit on the

date that the property is operational and placed in service

constitute a single unit of property, even though additional

components may be necessary in the future for the unit to

continue to function properly. These additional components would

constitute separate property. See Armstrong World Indus., Inc.

v. Commissioner, supra at 434, 436.

Petitioner argues that components that are added to property

in years subsequent to the year the property is placed in service

can be considered part of the same property for purposes of the

ITC. Petitioner argues that section 1.46-3(d)(4), Income Tax

Regs., allows property to qualify for an ITC in “‘portions’ from

one year to the next, as construction continues and the remainder

of the functionally integrated components * * * are completed and

placed in service.”

Section 1.46-3(d)(4)(i), Income Tax Regs., allows an ITC

under section 38 “only for the first taxable year in which such

property is placed in service by the taxpayer.” Section 1.46-

3(d)(4)(i), Income Tax Regs., provides:
 - 155 -

The credit allowed by section 38 with respect to any
property shall be allowed only for the first taxable
year in which such property is placed in service by the
taxpayer. The determination of whether property is
section 38 property in the hands of the taxpayer shall
be made with respect to such first taxable year. Thus,
if a taxpayer places property in service in a taxable
year and such property does not qualify as section 38
property (or only a portion of such property qualifies
as section 38 property) in such year, no credit (or a
credit only as to the portion which qualifies in such
year) shall be allowed to the taxpayer with respect to
such property notwithstanding that such property (or a
greater portion of such property) qualifies as section
38 property in a subsequent taxable year. For example,
if a taxpayer places property in service in 1963 and
uses the property entirely for personal purposes in
such year, but in 1964 begins using the property in a
trade or business, no credit is allowable to the
taxpayer under section 38 with respect to such
property. See § 1.48-1 for the definition of section 38
property.

Section 1.46-3(d)(4)(i), Income Tax Regs., illustrates two

situations where an ITC is not allowed in subsequent years.

First, when property is placed in service and it does not qualify

for an ITC in that year, but does qualify for a credit in a

subsequent taxable year, the taxpayer is not entitled to an ITC.

Second, when only a portion of the property qualifies for an ITC

in the year that it is placed in service, but in a subsequent

year an additional portion of the property qualifies for a

credit, the taxpayer is entitled to a credit only for the portion

of the property that qualified for the ITC in the year that the

property was placed in service. Except as provided in section

1.46-3(d)(4)(ii), Income Tax Regs., a credit is allowable only
 - 156 -

for property in the first taxable year that it is placed in

service.

Section 1.46-3(d)(4)(ii), Income Tax Regs., provides the

following exception:

if, for the first taxable year in which property is
placed in service by the taxpayer, the property
qualifies as section 38 property but the basis of the
property does not reflect its full cost for the reason
that the total amount to be paid or incurred by the
taxpayer for the property is indeterminate, a credit
shall be allowed to the taxpayer for such first taxable
year with respect to so much of the cost as is
reflected in the basis of the property as of the close
of such year, and an additional credit shall be allowed
to the taxpayer for any subsequent taxable year with
respect to the additional cost paid or incurred during
such year and reflected in the basis of the property as
of the close of such year.

Section 1.46-3(d)(4)(ii), Income Tax Regs., provides the taxpayer

with an ITC in subsequent years when the cost of the property

actually placed in service is indeterminate in the year it is

placed in service. However, this regulation does not allow a

credit for additional components or property placed in service in

subsequent years. We agree with respondent that this regulation

has limited applicability. Section 1.46-3(d)(4)(ii), Income Tax

Regs., applies only to property that the taxpayer actually placed

in service in the first taxable year, where the “basis” of the

components of the property that was actually placed in service

does not reflect the full cost of the property because “the total

amount to be paid or incurred by the taxpayer for the property is

indeterminate”.
 - 157 -

The example contained in section 1.46-3(d)(4)(ii), Income

Tax Regs., supports this interpretation:

in 1964 X Corporation, a utility company which makes
its return on the basis of a calendar year, enters into
an agreement with Y Corporation, a builder, to
construct certain utility facilities for a housing
development built by Y. Assume further that part of
the funds for the construction of the utility
facilities is advanced by Y under a contract providing
that X will repay the advances over a 10-year period in
accordance with an agreed formula, after which no
further amounts will be repayable by X even though the
full amount advanced by Y has not been repaid.
Assuming that the utility facilities are placed in
service in 1964 and qualify as section 38 property, X
is allowed a credit for 1964 with respect to its basis
in the utility facilities at the close of 1964. For
each succeeding taxable year X is allowed an additional
credit with respect to the increase in the basis of the
utility facilities resulting from the repayments to Y
during such year.

The regulation contemplates an ITC in subsequent years only when

the total cost of the property is indeterminable at the time the

property is placed in service. The example does not suggest that

the taxpayer is entitled to an ITC in subsequent years for the

costs of components added after the property was placed in

service.

We interpret section 1.46-3(d)(4), Income Tax Regs., as

requiring all components to be placed in service simultaneously

in order to qualify as a single unit of property for purposes of

receiving an ITC. This is consistent with the previously cited

cases. Consequently, we hold that additional components added to
 - 158 -

a unit of property after the first year that the property was

placed in service do not qualify as being part of the same

property for purposes of the ITC.116

Petitioner claims an ITC under TRA section 203(b)(1)(B) for

the following items: (1) The “wrap up” work and “enhancements

and deficiencies” work on Unit 1 and the common facilities at the

SJRPP; (2) distribution and transmission substations; (3) the

integrated transmission line systems at Jensen-Midway-Turnpike

and Andytown-Lauderdale; (4) the “backfit” items at the St. Lucie

nuclear power plant facility; and (5) the spent fuel rack systems

installed at St. Lucie Unit 1 and Turkey Point Unit 4.

1. “Wrap Up” Work and “Enhancements and Deficiencies” Work
at the SJRPP

Petitioner seeks an ITC under the “self-constructed

property” rule for costs incurred in the acquisition,

installation, and construction of the “wrap up” work and

“enhancements and deficiencies” work at Unit 1 and the common

facilities at the SJRPP during the 1988, 1989, and 1990 taxable

years of $1,702,649, $2,376,238, and -$360,804,117 respectively.

Respondent disagrees. Respondent argues that petitioner did not:

(1) Incur or commit $1 million or 5 percent of the construction

116
To the extent that the additional components themselves
constitute separate property that meet the requirements for the
ITC, there could be an ITC for that separate property.
117
See supra note 114.
 - 159 -

costs by the applicable date; nor (2) begin construction by

December 31, 1985. Petitioner argues that it met these

requirements because the “wrap up” work and “enhancements and

deficiencies” work was part of the SJRPP Unit 1 property.

We find that the “wrap up” work and the “enhancements and

deficiencies” work constitute separate property from Unit 1 and

the common facilities because they were not essential or integral

to the operation of Unit 1 and the common facilities at the

SJRPP. Both petitioner and respondent rely on Haw. Indep.

Refinery, which we find particularly instructive. In Haw. Indep.

Refinery, Inc. v. United States, 697 F.2d at 1064, the court

analyzed the meaning of property under section 50 of the 1971

Internal Revenue Code, which restored the ITC. The taxpayer

built an oil refinery facility comprised of a tanker-mooring

facility, pipelines, and a refinery. Id. at 1065-1066. The

taxpayer argued that the tanker-mooring facility and the

pipelines qualified for an ITC because these two components were

separate pieces of property from the refinery.118 Id. at 1069.

118
Construction on the tanker-mooring facility and the
pipelines began on May 21 and Nov. 30, 1971, respectively. Haw.
Indep. Refinery, Inc. v. United States, 697 F.2d 1063, 1069 (Fed.
Cir. 1983). The construction of these items began after sec. 50
restored the ITC. Id. If the tanker-mooring facility and the
pipelines constituted separate property from the refinery, these
two components would have qualified for the ITC. Id. However,
if these components were considered a single piece of property
with the refinery, they would not qualify for the ITC because
construction of the refinery began before the effective date of
(continued...)
 - 160 -

In an unpublished opinion, the Court of Claims reasoned that

these three components constituted a single piece of property

because the refinery could not function properly without the

tanker-mooring facilities and the pipelines. Haw. Indep.

Refinery, Inc. v. United States, 49 AFTR 2d at 691, 82-1 USTC

par. 9183, at 83,311. The Court of Appeals for the Federal

Circuit affirmed the holding of the Court of Claims that the

refinery, tanker-mooring facility, and refined products pipelines

constituted a single property for the purposes of the ITC. Haw.

Indep. Refinery, Inc. v. United States, 697 F.2d at 1069.

Agreeing that the components “functionally form a single

property”, the Court of Appeals noted that “the refinery complex

was conceived, designed, and constructed as a unit, the three

components being placed in operation concurrently.” Id.

In Consumers Power Co. v. Commissioner, 89 T.C. 710 (1987),

this Court addressed the meaning of “a single property” under a

prior ITC repeal and its transitional rules. The taxpayer and

Detroit Edison Co. built a hydroelectric plant, consisting of a

pump storage plant and a reservoir. Id. at 716-717. The

taxpayer and Detroit Edison Co. began pumping water into the

reservoir in October 1972 as part of the preoperational testing.

Id. at 717. In November 1972, the plant generated electrical

118
(...continued)
sec. 50. Id.
 - 161 -

power during preoperational testing. Id. at 718. During the

preoperational testing, the unit sustained damage to parts of the

turbine generator and further testing was suspended. Id. at 719.

The repairs were completed in January 1973, and the taxpayer

placed the unit in service later that month. Id. The taxpayer

argued that, even if the entire power plant was not placed in

service in 1972, then the reservoir was placed in service in 1972

when it was used in testing. Id. at 725. The Court found that

the pump storage plant and the reservoir comprised a single unit

of property because each item operated simultaneously and both of

these components were necessary to produce electrical power. Id.

at 726. The Court concluded that the plant was placed in service

in 1973, when it was ready to produce power. Id.

With respect to petitioner’s property, the SJRPP Unit 1 and

the common facilities were placed in service on March 27, 1987,

while the “wrap up” work and “enhancements and deficiencies” work

were placed in service during the 1988, 1989, and 1990 taxable

years.

Unlike Haw. Indep. Refinery, Inc., where the tanker-mooring

facility, refinery, and pipelines were necessary to operate the

unit, Unit 1 and the common facilities at the SJRPP were placed

in service and commercially operational before petitioner

completed the “wrap up” work and “enhancements and deficiencies”

work. To be considered a single property, the components must be
 - 162 -

integral to the function of the unit at the time the taxpayer

places the unit in service. Petitioner’s facilities, however,

had been placed in service and produced power without the “wrap

up” work and “enhancements and deficiencies” work, demonstrating

that these items were not essential to the SJRPP’s ability to

produce power when this unit was placed in service.

Similarly, we find that the power plant property in

Consumers Power Co. is distinguishable from petitioner’s “wrap

up” work and “enhancements and deficiencies” work. In Consumers

Power Co., even though the reservoir was used in preoperational

testing, the hydroelectric plant was unable to produce power for

commercial purposes until the testing was completed the following

year. Because the taxpayer in Consumers Power Co. needed both

the reservoir and the pump storage facility to produce power

according to its intended function, the unit was not placed in

service until both components were functional. Here, the SJRPP

Unit 1 and the common facilities were placed in service in 1987,

which was before the completion of the “wrap up” work and

“enhancements and deficiencies” work. As these components were

not necessary, or integral, to the production of power when Unit

1 and the common facilities were placed in service, the “wrap up”

work and “enhancements and deficiencies” work do not qualify as a

single property with Unit 1 and the common facility for purposes

of the self-constructed property transitional rule.
 - 163 -

Petitioner argues that the “wrap up” work and “enhancements

and deficiencies” work serve no function on their own, and

therefore, constitute a single unit of property with SJRPP Unit

1. We find it irrelevant that these components have no

independent purpose because Unit 1 and the common facilities at

the SJRPP were already placed in service and performed their

designed function without these components. When Unit 1 and the

common facilities were placed in service, these items formed a

complete unit that served the intended purpose of producing

power; these components functioned without the “wrap up” work and

“enhancements and deficiencies” work. See Consumers Power Co. v.

Commissioner, supra at 725. While the “wrap up” work and

“enhancements and deficiencies” work might be necessary to the

production of power at the SJRPP at some date in the future,

these components were not essential on the date Unit 1 and the

common facilities were placed in service.

Because the SJRPP Unit 1 and the common facilities were

placed in service and produced power in a year before the “wrap

up” work and “enhancements and deficiencies” work was completed,

we conclude that these latter components constitute separate

property. Petitioner makes no argument that the “wrap up” work

and “enhancements and deficiencies” work qualify as self-

constructed property independently from the SJRPP Unit 1 and the

common facilities. As a result, petitioner has not shown that it
 - 164 -

committed or incurred by December 31, 1985, the lesser of $1

million or 5 percent of the cost of property consisting of the

“wrap up” work and “enhancements and deficiencies” work and

therefore does not meet the requirements of TRA section

203(b)(1)(B).

TRA section 203(b)(1)(B) also requires that a taxpayer had

to begin construction of the property for which it seeks an ITC

by December 31, 1985. The conference report clarifies when

construction begins for purposes of TRA section 203(b)(1)(B).

Construction of a facility or equipment begins when “physical

work of a significant nature starts.” H. Conf. Rept. 99-841

(Vol. II), supra at II-56, 1986-3 C.B. (Vol. 4) at 56. “Physical

work does not include preliminary activities such as planning or

designing, * * * researching, or developing.” Id. When the

property at issue is a building, “‘property’ includes all of the

normal and customary components that are purchased from others

and installed without significant modification”. Id. As we have

previously held, petitioner cannot meet this requirement by

treating the “wrap up” work and “enhancements and deficiencies”

work as one property with Unit 1 and the common facilities at

SJRPP.

Mr. Reid testified that “ER4110 was the ER that was opened

as the wrap ER * * * to do the remaining construction items under

unit 1 and common [facility].” This ER was first authorized on
 - 165 -

July 22, 1988. With respect to the “wrap up” work, we find that

petitioner did not begin construction by December 31, 1985,

because this work was not authorized until 1988.

Similarly, Mr. Reid testified that the work orders for the

“enhancements and deficiencies” work were authorized in 1989.

With respect to the “enhancements and deficiencies” work, we find

that petitioner did not begin construction by December 31, 1985,

because this work was not authorized until 1989.

We hold that petitioner is not entitled to an ITC under TRA

section 203(b)(1)(B) for the “wrap up” work and “enhancements and

deficiencies” work because it did not incur or commit the lesser

of $1 million or 5 percent of the cost of the property by

December 31, 1985, and did not begin construction until after

December 31, 1985.

2. Distribution and Transmission Substations

Petitioner seeks an ITC under the self-constructed property

transitional rule for costs incurred for the components of the

distribution and transmission substations during the 1988, 1989,

and 1990 taxable years of $3,264,386, $8,091,517, and $4,413,670,

respectively. Petitioner asserts that “Each Distribution and

Transmission Substation constitutes one functionally integrated

piece of property comprised of all its component parts, as

evidenced by its original designs and plans, and its ultimate

construction and use in FPL’s business.” As functionally
 - 166 -

integrated pieces of property, petitioner argues that the

components at issue satisfy the requirements of TRA section

203(b)(1)(B). Respondent argues that these component parts

constitute separate pieces of property, which fail to satisfy the

requirements of TRA section 203(b)(1)(B).

We find that petitioner misinterprets the single property

rule to allow components to constitute a single piece of property

when “all of the component sections and related substations were

planned and designed to serve a specific, integrated function”.

As we discussed in the analysis of the SJRPP “wrap up” work and

“enhancements and deficiencies” work, Haw. Indep. Refinery, Inc.

and Consumers Power Co. hold that components make up a single

unit of property when each component is necessary for the unit to

operate as intended at the time that the unit is placed in

service. Petitioner’s components differ from those in Haw.

Indep. Refinery, Inc. and Consumers Power Co. because

petitioner’s substations performed their intended function when

they were placed in service several years before the addition of

the components at issue.

Because the relevant facts for each component at issue are

very similar, we shall not address each item individually.119 We

shall use the Alva substation as a representative example. The

119
See appendix A for a list of the distribution and
transmission substation components for which petitioner seeks an
ITC.
 - 167 -

Alva substation was commercially operational in 1980; however,

FPL installed the second transformer at this substation at least

8 years later. Although FPL originally designed the Alva

substation as a two-transformer substation, petitioner installed

the second transformer only when growth and reliability concerns

demanded the additional transformer. Because the substation

operated for an extended period of time without the components at

issue, these components were not required or essential to the

substation’s ability to produce power. See Armstrong World

Indus., Inc. v. Commissioner, 974 F.2d at 434 (“if a project has

component parts which can function as planned in a wholly

independent manner, then a court may find that each component is

a ‘property . . . placed in a condition or state of readiness and

availability for a specifically assigned function.’”) The second

transformer improved FPL’s service. While additional components

may have been integral to the production of power at a later

date, these components were not necessary for the production of

power when the substations were placed in service. As

improvements, these components may allow petitioner to provide

better service to its customers; however, the transitional rules

establish a higher threshold than improving existing equipment.

Because the distribution and transmission substations were placed

in service and operational in years before the installation of

the components at issue, we conclude that these components
 - 168 -

constitute separate property. Petitioner makes no argument that

the distribution and transmission substation components at issue

qualify as self-constructed property independently from the

substations.

As a result, we find that petitioner did not incur or commit

$1 million or 5 percent of the construction costs by December 31,

1985. Even though petitioner’s original plan for these

substations included the components at issue, petitioner provided

no evidence that it actually incurred any costs for these

components before 1986. Also, petitioner failed to offer any

evidence showing that it had a binding obligation, or a

commitment, to pay the construction costs for these components.

Similarly, we find that petitioner failed to establish that

the construction of the distribution and transmission substation

components began by December 31, 1985. For example, the ER

authorizing the construction of the second transformer at the

Alva substation was not authorized until late 1986/early 1987.

Mr. Veronee testified that petitioner did not begin construction

of a component before the budget items and expenditure

requisitions were authorized. Further, petitioner did not

provide any evidence to suggest that it did not follow this

procedure when it installed the components at issue. As a

result, we find that petitioner did not begin construction at the
 - 169 -

Alva substation before 1986. As with the Alva substation, FPL

did not have authorization to construct the other components at

issue as of December 31, 1985.120

Because petitioner did not incur or commit the lesser of $1

million or 5 percent of the construction costs of the property by

December 31, 1985, and did not begin construction as of December

31, 1985, we hold that petitioner is not entitled to an ITC for

the distribution and transmission substation components under the

“self-constructed property” rule.

3. Transmission Line Systems

Petitioner claims an ITC for costs incurred for the

components that it added to the Jensen-Midway-Turnpike and the

Andytown-Lauderdale transmission lines.121 With respect to the

Jensen-Midway-Turnpike transmission line, petitioner placed

property in service with tax bases of $119,911 and $3,109,573 in

the 1989 and 1990 taxable years, respectively. With respect to

120
See appendix A, which lists the distribution and
transmission substation components at issue and the authorization
date as stated on its expenditure request.
121
Specifically, petitioner claims an ITC for the following
components of the Jensen-Midway-Turnpike transmission line: (1)
Turnpike substation--install third-feeder position; (2) Turnpike
substation--add a third 230-kV line terminal; and (3) Crane-
Turnpike 230-kV line--construct a new line.

For the Andytown-Lauderdale transmission line, petitioner
claims an ITC for the following components: (1) Hiatus-Melaleuca
230-kV line construction; (2) Andytown-Trace 230-kV construction;
(3) Andytown Sub-add 230-kV Lauderdale #4 Terminal; and (4)
Lauderdale plant-revise relay for 230-kV Andytown.
 - 170 -

the Andytown-Lauderdale transmission line, petitioner placed

property in service with tax bases of $6,436,912, $545,188, and

$16,707 in 1988, 1989, and 1990 taxable years, respectively.

Petitioner claims that these transmission lines were essential

components to the Jensen-Midway-Turnpike and Andytown-Lauderdale

substations; therefore, the costs incurred and construction date

requirements of TRA section 203(b)(1)(B) must be analyzed from

the perspective of the transmission line system.

Respondent argues that the transmission line components

constitute separate property from the transmission line system.

As a separate property, respondent asserts that petitioner failed

to incur or commit any costs before January 1, 1986, and that the

construction of these components had not begun before that date.

We agree with respondent.

Components will constitute a single property when all parts

are functionally interdependent and essential to the operation of

the unit as a whole when the unit becomes operational. Armstrong

World Indus., Inc. v. Commissioner, 974 F.2d at 434; Haw. Indep.

Refinery, Inc. v. United States, 697 F.2d at 1069; Consumers

Power Co. v. Commissioner, 89 T.C. at 726. We find that the

Jensen-Midway-Turnpike and the Andytown-Lauderdale transmission

line components constitute separate property.

Unlike Haw. Indep. Refinery, Inc., where the refinery’s

function depended on the offsite components, petitioner received
 - 171 -

power using the transmission line systems before the installation

of the components at issue. When a unit of property has been

placed in service and is available to perform its intended

function, component parts added to the unit after it has been

placed in service constitute separate pieces of property. See

Armstrong World Indus., Inc. v. Commissioner, supra at 434-435.

The fact that the transmission line systems received power before

petitioner installed these components indicates that the Jensen-

Midway-Turnpike and the Andytown-Lauderdale transmission lines

functioned properly without the additional components at issue.

Instead, the components at issue enhanced the reliability of the

Jensen-Midway-Turnpike and the Andytown-Lauderdale transmission

lines, helping petitioner meet the growing demand for power.122

122
Mr. Sanders testified:

The dispatch of the resources to serve the load
changes over time, and the facilities that you would
place in service, say, initially to receive the power
may not be all that’s required to receive the power
forever or through the duration of whatever period of
time you plan on buying power. As time marches on, the
dynamics of the resources serving the load change.

Part of system planning is to continually review
the plans that we have for expansion and decide whether
or not it’s prudent to add a particular facility at a
particular point in time or not. We may think we need
A, B, C, D pieces, but we only need A and B to begin
with, and part of planning is to continually reevaluate
that plan and to decide whether or not you really need
C and D * * *
 - 172 -

Noell v. Commissioner, 66 T.C. 718 (1976), is

distinguishable from petitioner’s case. In Noell, the taxpayer

sought an ITC for a runway that he constructed on his property.

Id. at 719. The construction of the paved runway began in 1965

and finished in 1968. Id. at 721. The runway consisted of three

base layers of rock and two layers of asphalt. Id. After the

rock base layers were installed in 1967, some planes used the

runway, but the roughness of the rock surface made it

unsatisfactory for permanent use, and pilots risked damaging

their planes by landing on the runway. Id. at 721, 729. In

addition, it was usable only in good weather. The Commissioner

argued that the runway was placed in service in 1967 when the

rock surface allowed planes to use the landing strip. Id. at

728. The Court rejected this argument, reasoning that the rock

surface could not be used on a permanent basis, and that it “was

clearly only a stage in the construction of the facility.” Id.

at 729. The Court found that the runway was placed in service in

1968, when the paved runway was in full service. Id.

Unlike the temporary runway in Noell, FPL installed the

original equipment for the Jensen-Midway-Turnpike and the

Andytown-Lauderdale transmission lines to receive power

permanently. The transmission lines were not temporary or works

in progress. By subsequently adding the components in issue,

petitioner sought to enhance the existing transmission line
 - 173 -

systems to satisfy increased demand and to improve reliability.

The initial transmission line equipment was a completed unit that

performed its intended purpose when petitioner placed it in

service. The equipment for which petitioner claims an ITC

constitutes an expansion or improvement to the original

transmission lines.

Petitioner makes no argument that the components in issue

qualify as self-constructed property independently from the

Jensen-Midway-Turnpike and the Andytown-Lauderdale transmission

lines.

We find that petitioner failed to incur or commit the lesser

of $1 million or 5 percent of the construction costs by December

31, 1985. The costs to construct the Jensen-Midway-Turnpike

transmission line components were authorized in late 1988/early

1989. Similarly, the Andytown-Lauderdale transmission line

components were authorized in late 1986/early 1987.

In addition, petitioner argues that it had committed to the

construction costs in its Application for Corridor Certification

Under the State of Florida Transmission Line Siting Act.123 We

find nothing in the approved application that obligates

petitioner to begin construction in the future or to make any

future payments for the construction costs of the transmission

123
We note that the application offered into evidence refers
only to the Jensen-Midway-Turnpike transmission line.
 - 174 -

lines. We agree with respondent that “a granted application only

constitutes permission to proceed” with the construction of the

transmission lines, not a binding contract to incur the

construction costs. Petitioner further relies on Mr. Saunders’s

testimony that it was “not likely” that FPL would abandon the

completion of the transmission lines after its certificate

received approval. While it may have been unlikely that FPL

would have abandoned these plans to construct the transmission

lines at issue, Mr. Saunders’s testimony does not indicate that

FPL had incurred any costs or had a binding obligation to incur

these costs.

Additionally, TRA section 203(b)(1)(B) mandates that a

taxpayer begin construction as of December 31, 1985, to receive

an ITC under the “self-constructed property” transitional rule.

FPL generally does not begin construction before an expenditure

requisition has been authorized. The expenditure requisitions

that relate to these items indicate that petitioner authorized

the construction of the transmission lines after December 31,

1985.124

124
The following table lists the transmission components at
issue and the authorization dates stated on the expenditure
requests:

Transmission Line Component Year Authorized Expenditure Requisition

Crane-Turnpike 230- 1989 ER 5366
kV line

(continued...)
 - 175 -

Also, the expenditure requisitions that relate to the

transmission line components refer to budget items. With the

exception of the budget item for the Hiatus-Melaleuca 230-kV

line,125 each budget item states that petitioner planned to begin

construction after December 31, 1985.126 We find that petitioner

124
(...continued)
Third feeder- 1988 ER 4512
Turnpike Substation

Third 230-kV line- Late 1988/early 1989 ER 5056
Turnpike substation

230-kV line- Late 1986 ER 1333
Andytown-Trace

Lauderdale #4 terminal- 1987 ER 1645
Andytown substation

230-kV line-Andytown 1987 ER 1676

230-kV line-Hiatus- 1986 ER 1332
Melaleuca

125
ER 1332, which authorizes expenditures for the Hiatus-
Melaleuca 230-kV line, refers to BI 254. BI 254 states that the
“Date work to be started” is November 1985.
126
ER 5366, which authorizes expenditures for the Crane-
Turnpike 230-kV line, refers to BI 206. BI 206 states that the
“Date work to be started” is September 1989.

ER 1333, which authorizes expenditures to construct the 230-
kV Andytown-Trace line, refers to BI 246. ER 1645, which
authorizes expenditures to construct the Lauderdale #4 terminal
at the Andytown substation, also refers to BI 246. ER 1676,
which authorizes expenditures to install relay equipment for the
230-kV line at Andytown, refers to BI 246. BI 246 states that
the “Date work to be started” is July 1987.

BI 634, relating to the third-feeder position and the third
230-kV line at the Turnpike substation, was not offered into
evidence. “[T]he failure of a party to introduce evidence within
his possession and which, if true, would be favorable to him,
(continued...)
 - 176 -

did not begin construction of the transmission line components at

issue by December 31, 1985.

We hold that petitioner is not entitled to an ITC under TRA

section 203(b)(1)(B) for the Jensen-Midway-Turnpike or the

Andytown-Lauderdale transmission lines because it failed to incur

or commit the $1 million or 5 percent of the construction costs

by December 31, 1985, and petitioner did not begin construction

of the components at issue before 1986.

4. “Backfit” Items at St. Lucie

Petitioner claims an ITC for the following “backfit” items

at the St. Lucie nuclear power plant facility: (1) The

underwater intrusion system; (2) the condensate polisher tie

line; and (3) the instrument air upgrade. Petitioner seeks an

ITC for the cost of the underwater intrusion system of $338,665

in the 1990 taxable year. Petitioner seeks an ITC for the costs

incurred for the condensate polisher tie line during the 1989 and

1990 taxable years of $3,826,317 and $388,906, respectively.

Petitioner also seeks ITCs for the costs of the instrument air

upgrade property in the 1988, 1989, and 1990 taxable years of

$1,541,721, $1,717,941, and $316,912, respectively. Petitioner

126
(...continued)
gives rise to the presumption that if produced it would be
unfavorable.” Wichita Terminal Elevator Co. v. Commissioner, 6
T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).
Thus, we conclude that BI 634 would have shown that petitioner
began construction of the third-feeder position and the third
230-kV line at the Turnpike substation after Dec. 31, 1985.
 - 177 -

makes no argument that these backfit items qualify as self-

constructed property independently from St. Lucie Units 1 and 2.

Respondent argues that FPL satisfies the requirements of TRA

section 203(b)(1)(B) only by “bootstrapping” these items to St.

Lucie Units 1 and 2.

a. Underwater Intrusion System

In arguing that the underwater intrusion system qualifies

for the self-constructed property transitional rule, petitioner

relies on Steelcase, Inc. v. United States, 76 AFTR 2d 5185, 95-2

USTC par. 50,336 (W.D. Mich. 1995). In Steelcase, the taxpayer

began building its “Corporate Development Center” in October

1985. Id. On December 13, 1985, the taxpayer temporarily

stopped construction to redesign the shape of the building. Id.

The taxpayer continued construction using a new design on April

7, 1986. Id. The court found that the taxpayer was entitled to

an ITC under the self-constructed property rule, reasoning that

the self-constructed property rule does not prohibit the taxpayer

from making modifications. Id. While the binding contract rule

and the equipped-building rules specifically forbid taxpayers

from making substantial modifications after the transition date,

the self-constructed property rule does not include a similar

restriction. Id. By failing to include this language, Congress

chose not to limit modifications under the self-constructed

property rule. Id.
 - 178 -

We find that the underwater intrusion system is separate

property for purposes of TRA section 203(b)(1)(B). We disagree

with petitioner that Steelcase supports a finding that the

underwater intrusion system is entitled to an ITC under the self-

constructed property rule.

Although Steelcase acknowledges that a taxpayer may modify

construction plans and still qualify for an ITC for its self-

constructed property, we do not think that this case applies to

FPL’s underwater intrusion system. In Steelcase, the taxpayer

redesigned the “Corporate Development Center” in the early stages

of construction and before the building operated as the

corporation’s headquarters. Petitioner, however, redesigned the

underwater intrusion system after St. Lucie Units 1 and 2 became

operational.

St. Lucie was placed in service and functioned as a power

plant before the underwater intrusion system was redesigned and

installed; therefore, the redesigned system was not integral or

necessary to the operation of the plant. See Armstrong World

Indus., Inc. v. Commissioner, 974 F.2d at 434-435. Because the

redesigned underwater intrusion system was not essential for St.

Lucie to produce power, we find that the system constitutes

separate property. See Haw. Indep. Refinery, Inc. v. United

States, 697 F.2d at 1069; Consumers Power Co. v. Commissioner, 89

T.C. at 726. Because we have found that the redesigned
 - 179 -

underwater intrusion system constitutes separate property, the

system must satisfy the requirements of TRA section 203(b)(1)(B)

independently from St. Lucie Units 1 and 2.

As a result, we find that petitioner failed to incur or

commit $1 million or 5 percent of the construction costs of the

redesigned underwater intrusion system before December 31, 1985.

ER 4866, which was not approved until late 1988/early 1989,

authorized FPL to construct the underwater intrusion system. We

find that FPL did not begin construction before December 31,

1985, because petitioner did not receive authorization for the

redesigned underwater intrusion system until late 1988/early

1989. We find that the underwater intrusion system does not

qualify for an ITC under the self-constructed property rule

because petitioner failed to incur or commit $1 million or 5

percent of the construction costs as of December 31, 1985, and

petitioner did not begin construction of the system as of

December 31, 1985.

b. Condensate Polisher Tie Line

Petitioner contends that the condensate polisher tie line

qualifies for an ITC under the self-constructed property

transitional rule. Petitioner asserts that the condensate

polisher tie line and St. Lucie Unit 2 constitute a single unit

of property. Respondent argues that these items constitute

separate property, and that petitioner is not entitled to an ITC
 - 180 -

under TRA section 203(b)(1)(B) because Unit 2 was placed in

service before FPL built the condensate polisher tie line.

We disagree with petitioner, and find that the tie line

constitutes separate property. Although a condensate polisher is

necessary to prevent excessive corrosion in the steam generator,

St. Lucie Unit 2 was placed in service and operated without the

tie line system. Petitioner operated St. Lucie Unit 2 while it

conducted a study to determine the best method for preventing

corrosion, demonstrating that St. Lucie Unit 2 had an independent

function before the completion of the condensate polisher tie

line property in issue. See Armstrong World Indus., Inc. v.

Commissioner, supra at 435-436. Petitioner states that the tie

line was placed in service in 1989 and 1990. The parties

stipulate that St. Lucie Unit 2 was operational in 1983. Unlike

Haw. Indep. Refinery, Inc., where the oil refinery facility could

not perform its function without the pipelines and the tanker-

mooring facility, St. Lucie Unit 2 produced power years before

the installation of the condensate polisher tie line.

Petitioner’s condensate polisher tie lines are

distinguishable from the “Corporate Development Center” in

Steelcase, Inc. v. United States, supra. In Steelcase, the

design modification took place during the construction of the

building, which had not been placed in service. In this case,

petitioner built St. Lucie Unit 2, placed it in service, and then
 - 181 -

redesigned and installed the condensate polisher tie line. We

find that St. Lucie Unit 2 and the condensate polisher tie lines

are separate properties.

We find that petitioner did not incur or commit $1 million

or 5 percent of the costs for the condensate polisher tie line as

of December 31, 1985.127 ER 195, which was processed in 1987,

authorized the condensate polisher tie line at St. Lucie Unit 2.

We find that petitioner failed to begin construction before

January 1986. We hold that petitioner is not entitled to an ITC

with respect to the condensate polisher tie line.

c. Instrument Air Upgrade

The final backfit item for which petitioner seeks an ITC is

the instrument air upgrade system. Petitioner argues that the

St. Lucie power plant’s original design included the instrument

air system. Further, petitioner asserts that the self-

constructed property rule provides relief from the ITC repeal for

the redesign of an essential component. Respondent argues that

the instrument air upgrade system constitutes a separate piece of

property from St. Lucie Units 1 and 2 because these power plants

operated for several years without the instrument air upgrade.

127
A condensate polisher was included in the design plan for
St. Lucie Units 1 and 2. Petitioner, however, did not install
the condensate polisher tie line at Unit 2 as designed, but
instead, FPL conducted a study to determine the need for the
condensate system. FPL’s engineers recommended the condensate
polisher tie lines in a November 1985 study, and FPL’s corporate
staff agreed to the engineering recommendation in January 1986.
 - 182 -

Because the system constitutes separate property, respondent

argues that petitioner failed to incur or commit $1 million or 5

percent of costs as of December 31, 1985, and failed to begin

construction as of that date.

Petitioner relies on Steelcase, Inc. v. United States, 76

AFTR 2d 5185, 95-2 USTC par. 50,336 (W.D. Mich. 1995), to support

its argument that “The redesign of ‘property’ during construction

simply does not create separate ‘property’ as Respondent

suggests.” We find that the building in Steelcase is

distinguishable from petitioner’s instrument air upgrade. The

taxpayer in Steelcase redesigned its building after construction

had begun and before the completion of the building, while

petitioner placed the instrument air system in service in St.

Lucie Units 1 and 2 when they became operational, and then

redesigned the system several years later. The rationale of

Steelcase, which found that property could qualify as self-

constructed property when a taxpayer made design modifications

during construction, does not allow taxpayers to redesign

property after the transition date when it has placed the

facility in service and then decides to reconstruct the component

at a later date. Because St. Lucie Units 1 and 2 were placed in

service and operated before the installation of the instrument

air upgrade, we think that the components at issue constitute

separate property. Armstrong World Indus., Inc. v. Commissioner,
 - 183 -

974 F.2d at 435-436; Haw. Indep. Refinery, Inc. v. Commissioner,

697 F.2d at 1069.

We find that petitioner failed to incur or commit $1 million

or 5 percent of the construction costs for the instrument air

system upgrade as of December 31, 1985. In the fall of 1985, ER

9009 was approved for the instrument air upgrade at St. Lucie

Unit 1 of $692,000. However, this ER indicates that petitioner

only received authorization to incur $692,000 to upgrade the

instrument air system. TRA section 203(b)(1)(B) demands that a

taxpayer actually incur the expenses to construct its property,

or that a taxpayer commit to such construction costs in the

future. Here, petitioner simply received authorization to expend

funds of the construction for the instrument air upgrade;

petitioner did not become liable for the instrument air system

upgrade costs when it received this authorization.

Petitioner began construction of the instrument air upgrade

at St. Lucie Unit 1 on October 16, 1985. Construction of the

instrument air upgrade at St. Lucie Unit 2 began on May 12, 1986.

While petitioner has satisfied the construction date requirement

with respect to St. Lucie Unit 1, it failed to begin construction

of St. Lucie Unit 2 as of December 31, 1985.

Accordingly, we hold that petitioner is not entitled to an

ITC for the instrument air system upgrade because it failed to

incur or commit $1 million or 5 percent of the construction costs
 - 184 -

of the instrument air upgrade at Units 1 or 2 as of December 31,

1985, and it failed to begin construction of the system at Unit 2

as of December 31, 1985.

5. Spent Fuel Rack Systems

Petitioner also claims an ITC for the costs of the spent

fuel rack systems installed at St. Lucie Unit 1 and Turkey Point

Unit 4 (spent fuel racks in issue) during the 1988, 1989, and

1990 taxable years of $6,713,729, $532,892, and $6,646,960,

respectively. Petitioner contends that the spent fuel rack

system was conceived, designed, and constructed as a unit, and

that the spent fuel racks at St. Lucie and Turkey Point nuclear

power plants constitute a single functionally integrated

property. Respondent argues that the spent fuel racks in issue

and the already existing spent fuel racks at St. Lucie Unit 2 and

Turkey Point Unit 3 constitute separate property; and therefore,

petitioner failed to (1) incur or commit any costs before 1986,

or (2) begin construction before 1986.

Petitioner relies on the testimony of Mr. Bible, FPL’s

engineering manager, to support its contention that the spent

fuel racks constitute a single property. Specifically, Mr. Bible

testified:

We have in the past had the licenses and we have
transferred fuel from one pool to the other. The
designs are such that they can accommodate fuel from
either unit.

* * * * * * *
 - 185 -

Q: Do FPL’s nuclear engineers such as yourself
view the total capacity of both spent fuel pools at
each of the nuclear power facilities as available for
the storage of any spent fuel generated at that
facility?

A: Yes, with any of our design activities, we’re
looking at spent fuel storage capability. We consider
the sum total of the pools as the useable inventory.

We find that the spent fuel racks in issue and the spent

fuel racks at St. Lucie Unit 2 and Turkey Point Unit 3 are

separate properties. The spent fuel racks added at St. Lucie

Unit 1 and Turkey Point Unit 4 increase FPL’s overall storage

capacity. While the spent fuel racks in issue might have become

necessary or essential at some future date, components constitute

a single unit of property only when they are necessary for the

unit to perform its intended function at the time the unit is

placed in service. See Armstrong World Indus., Inc. v.

Commissioner, 974 F.2d at 432, 434; Consumers Power Co. v.

Commissioner, 89 T.C. at 725. Here, the nuclear power plants and

the respective spent fuel rack systems operated before the

installation of the spent fuel racks in issue. Once petitioner

placed operational spent fuel racks into service, any subsequent

racks added to the power plants constitute separate units of

property.

Further, the fact that the spent fuel rack system is

designed to “accommodate” fuel from another unit fails to show

that the units are functionally interdependent. Although the
 - 186 -

flexibility created by interchangeable spent fuel racks may make

these items more useful to petitioner, we do not think that this

feature makes the spent fuel racks interdependent or essential to

the other racks. Because the spent fuel racks at St. Lucie Unit

2 and Turkey Point Unit 3 were placed in service before the

components in issue, we conclude that the spent fuel racks in

issue constitute separate property. As a result, we find that

petitioner did not incur or commit $1 million or 5 percent of the

construction costs for the spent fuel racks at St. Lucie Unit 1

or Turkey Point Unit 4 as of December 31, 1985.

We also find that petitioner did not begin construction of

the spent fuel racks in issue as of December 31, 1985. ER 9304

indicates that petitioner authorized construction of the spent

fuel racks at St. Lucie Unit 1 in January or February 1986. This

ER refers to BI 190, which describes the spent fuel storage racks

planned for St. Lucie Unit 1 and states that “Date work to be

started January, * * * 1986". We find that petitioner began

construction of the spent fuel racks at St. Lucie Unit 1 after

December 31, 1985.

With respect to the spent fuel racks at Turkey Point Unit 4,

ER 1760 authorized the construction of the spent fuel racks at

Turkey Point Unit 4 in March 1987. ER 1760 refers to BI 198;

however, this budget item is not contained in the record. We

believe that petitioner did not begin construction of the spent
 - 187 -

fuel racks before it received authorization to expend funds on

these items. We find that petitioner began construction of the

spent fuel racks at Turkey Point Unit 4 after December 31, 1985.

Accordingly, we hold that petitioner is not entitled to an

ITC under TRA section 203(b)(1)(B) for the spent fuel racks at

St. Lucie Unit 1 and Turkey Point Unit 4 because petitioner did

not incur or commit the lesser of $1 million or 5 percent of the

cost of the property by December 31, 1985, and petitioner did not

begin construction until after December 31, 1985.

E. TRA Section 203(b)(1)(C)--“Plant Facility Rule”

In affording relief from the ITC repeal, section 49(e)

incorporates the transitional rule provided in TRA section

203(b)(1)(C), known as the equipped building/plant facility rule.

Specifically, TRA section 203(b)(1)(C) provides:

(1) In general.–- The amendments made by section
201 shall not apply to--

* * * * * * *

(C) an equipped building or plant
facility if construction has commenced as of
[December 31, 1985] March 1, 1986,[128]
pursuant to a written specific plan and more
than one-half of the cost of such equipped
building or facility has been incurred or
committed by such date.

TRA section 203(b)(4) defines “plant facility” as follows:

(4) Plant facility.--For purposes of paragraph
(1), the term “plant facility” means a facility which

128
See supra note 99.
 - 188 -

does not include any building (or with respect to which
buildings constitute an insignificant portion) and
which is--

(A) a self-contained single operating
unit or processing operation,

(B) located on a single site, and

(C) identified as a single unitary
project as of [December 31, 1985] March 1,
1986.[129]

TRA section 203(b)(1)(C) mandates that a taxpayer construct

a plant facility “pursuant to a written specific plan”. The

statute and the regulations fail to define the term “written

specific plan”; however, the legislative history explains why

Congress included this requirement in the plant facility

transitional rule. According to the conference report: “The

plan referred to must be a definite and specific plan of the

taxpayer that is available in written form as evidence of the

taxpayer’s intentions.” H. Conf. Rept. 99-841 (Vol. II), supra

at II-57, 1986-3 C.B. (Vol. 4) at 57. The two words “written”

and “specific” modify the word “plan” to ensure that taxpayers

have physical evidence that memorializes their intent to

construct the specific items for which they claim the ITC. Id.

We look to the plain meaning of the word “specific”. Black’s Law

Dictionary 1434 (8th ed. 2004), defines the word “specific” as

129
See supra note 99.
 - 189 -

“Of, relating to, or designating a particular or defined thing;

explicit”.

Petitioner argues that TRA section 203(b)(1)(C) provides

relief from the ITC repeal for the following items: (1) The

“backfit” items at St. Lucie nuclear power plant; (2) the “wrap

up” work and “enhancements and deficiencies” work at the SJRPP;

and (3) the equipment installed at the distribution and

transmission substations. Respondent argues that petitioner is

not entitled to an ITC for these items because petitioner (1)

failed to offer evidence of written specific plans, (2) did not

begin construction by December 31, 1985, and (3) did not incur or

commit more than one-half of construction costs by December 31,

1985.

1. “Backfit” Items at St. Lucie

In asserting that FPL is entitled to an ITC for the

“backfit” items, petitioner specifically lists the following

properties that qualify under the plant facility exception: (1)

The underwater intrusion system; (2) the condensate polisher tie

line; and (3) the instrument air system upgrade. Petitioner

asserts that the construction plan for St. Lucie Units 1 and 2

satisfies the “written specific plan” requirement of the plant

facility rule. St. Lucie Units 1 and 2 were placed in service in

1976 and 1983, respectively. The underwater intrusion system

property was placed in service during the 1990 taxable year with
 - 190 -

a tax basis of $338,665. The condensate polisher tie line was

placed in service during the 1989 and 1990 taxable years with tax

bases of $3,826,317 and $388,906, respectively. The instrument

air upgrade property was placed in service during the 1988, 1989,

and 1990 taxable years with tax bases of $1,541,721, $1,717,941,

and $316,912, respectively. Respondent argues that petitioner

fails to satisfy the written specific plan requirement because

the one-page plot plan does not specifically identify the

“backfit” items at the St. Lucie Units 1 and 2. We conclude

that petitioner failed to introduce a “written specific plan” for

the “backfit” items. Although the parties stipulate that the

one-page plot plan constituted construction plans for the St.

Lucie Units 1 and 2, petitioner has failed to prove that the plan

satisfies the specificity required by TRA section 203(b)(1)(C).

Mr. Paduano, a retired FPL manager,130 testified that the

construction plan identifies “the top view of the power plant

showing the major buildings and some of the major equipment and

the general layout locations of those equipments and buildings”;

however, he further testified that this document does not

specifically identify the “backfit” items at issue. Mr. Paduano

testified that petitioner constructed St. Lucie Units 1 and 2

using “tens of thousands of drawings for this site plan”;

130
Mr. Paduano worked on a “broad area of projects”,
primarily resolving “technical issues and plan modifications and
backfit.”
 - 191 -

however, petitioner failed to introduce any drawings detailing

the “backfit” items.

Because the construction plans for St. Lucie Units 1 and 2

lacked the precise detail necessary to identify the “backfit”

items, these plans fail to satisfy the requirements of the plant

facility rule. While TRA section 203(b)(1)(C) requires a

“specific” plan, petitioner’s plot plan neither specifically

identifies any of the “backfit” items nor identifies the location

of these items at St. Lucie nuclear plant. Although Mr. Paduano

testified that petitioner has specific drawings for these items,

petitioner failed to introduce these drawings into evidence.

Absent written plans that precisely and unambiguously

identify the “backfit” items, we hold that petitioner’s plot plan

lacks the specificity required by TRA section 203(b)(1)(C). The

underwater intrusion system, the condensate polisher tie line,

and the instrument air system upgrade do not qualify as

transition property under TRA section 203(b)(1)(C).

2. “Wrap up” Work and “Enhancements and Deficiencies”
Work at the SJRPP

Petitioner contends that the SJRPP “wrap up” work and

“enhancements and deficiencies” work qualify for the plant

facility rule of TRA section 203(b)(1)(C). This property was

placed in service during the 1988, 1989, and 1990 taxable years

with tax bases of $1,702,649, $2,376,238, and ($360,804),

respectively. Respondent argues that the SJRPP items do not
 - 192 -

qualify under TRA section 203(b)(1)(C) because petitioner failed

to introduce a written specific plan and failed to incur or

commit more than one-half of the construction costs by December

31, 1985.

a. Written Specific Plan

Petitioner and respondent agree that the SJRPP was built

pursuant to written specific plans. However, respondent contends

that petitioner fails to meet the written specific plan

requirement of TRA section 203(b)(1)(C) because petitioner failed

to proffer any plans, drawings, blueprints, etc., verifying its

intentions to construct these items as of December 31, 1985.

Petitioner offered the testimony of Mr. Reid, a lead project

scheduler for petitioner, that FPL constructed the SJRPP using

more than 70,000 drawings. He testified that specific plans were

used for even the smallest components of the SJRPP’s

construction. However, petitioner offered into evidence only the

general maintenance drawings for the SJRPP.

TRA section 203(b)(1)(C) expressly requires that a taxpayer

construct a plant facility pursuant to a “written specific plan”.

The conference report indicates that this element is necessary to

establish that a taxpayer intended to construct the item for

which an ITC is claimed. H. Conf. Rept. 99-841 (Vol. II), supra

at II-57, 1986-3 C.B. (Vol. 4) at 57.
 - 193 -

No doubt, petitioner constructed the SJRPP using extensive

and specific drawings and diagrams. Yet the plan introduced by

petitioner lacked the specificity necessary to identify the “wrap

up” work and “enhancements and deficiencies” work. While

petitioner argues that Mr. Reid linked each work order in issue

to the original written plan, TRA section 203(b)(1)(C) requires

that a taxpayer introduce an actual written plan that

specifically identifies the items in order to receive the ITC

under the plant facility rule. Without the “written specific

plan”, we cannot determine whether these items were part of the

plans for the SJRPP as of December 31, 1985, or whether these

specific items result from subsequent plans.

We also note that the plan introduced by petitioner is the

seventh revision, dated after December 31, 1985. The exact date

of the revision is illegible, but it appears to have been made in

1988. The conference report indicates that insignificant

modification to the “written specific plan” will not jeopardize

an ITC under the plant facility rule; however, significant

revisions after December 31, 1985, will disqualify a plant

facility construction from the relief provided by TRA section

203(b)(1)(C). H. Conf. Rept. 99-841 (Vol. II), supra at II-57,

1986-3 C.B. (Vol. 4) at 57. Petitioner failed to prove that

these revisions were insignificant, and Mr. Reid testified that

he did not know whether the revisions were significant.
 - 194 -

We find that petitioner failed to offer into evidence a

“written specific plan” relating to the “wrap up” work and

“enhancements and deficiencies” work.

b. Costs Committed or Incurred

Even assuming arguendo that petitioner’s plan satisfies the

written specific plan requirement, we find that petitioner did

not commit or incur one-half of the construction costs as of

December 31, 1985. Petitioner asserts that it satisfied this

requirement because it was jointly obligated for the construction

contracts entered into by the JEA. Respondent argues that

petitioner cannot incur or commit more than 20 percent of the

construction costs to the SJRPP because petitioner owns only a

20-percent interest in the power plant.

While respondent relies on Payless Cashways, Inc. v.

Commissioner, 114 T.C. 72 (2000), petitioner attempts to

distinguishes its case from Payless Cashways. In Payless

Cashways, this Court examined the equipped building rule of TRA

section 203(b)(1)(C).131 The Court found that the taxpayer did

not “incur or commit” more than 50 percent of the costs because

131
TRA sec. 203(b)(1)(C) provides the elements for both the
equipped building and the plant facility transitional rules. The
conference report indicates that the elements of these two
transitional rules have the same meaning. See H. Conf. Rept.
99-841 (Vol. II), supra at II-57, 1986-3 C.B. (Vol. 4) at 57
(noting that the equipped building rule applies when there is a
building and that the plant facility rule applies “where the
facility is not housed in a building.”).
 - 195 -

the limited partnership incurred the expenses under the

construction contract, not the taxpayer who was a limited

partner. Id. at 82. “The TRA transitional provisions make no

accommodation for attributing costs incurred by a limited

partnership to the partners for the purpose of determining

whether they have ‘incurred or committed’ costs.” Id.

Furthermore, the Court stated that even if the taxpayer could

attribute the costs incurred, those costs attributable to the

taxpayer would be limited to its percent interest in the

partnership, which was approximately 16 percent. Id.

According to the agreement for joint ownership, construction

and operation, the JEA and FPL agreed to own the SJRPP as tenants

in common. The JEA owned an 80-percent undivided interest, and

FPL owned a 20-percent undivided interest. The agreement

provides

that “The Co-owners shall pay into the Construction and Plant

Account (i) in proportion to their Ownership Interests amounts of

Costs of Construction and Costs of Plant incurred or accrued

after the date of the Closing”.

We agree with respondent that petitioner’s 20-percent

ownership interest in the SJRPP limits its costs incurred or

committed to no more than 20 percent. Payless Cashways supports

the finding that petitioner did not satisfy the costs incurred or

committed requirement of the plant facility transitional rule.
 - 196 -

We find Payless Cashways instructive because it notes that “if

such attribution were proper, we would be unwilling to attribute

to Payless more than 16.67 percent of the costs of construction,

which was the extent of Payless’ interest in the TPS,

partnership.” Id. at 82. In this case, we find that attribution

to FPL is proper because petitioner incurred the expenses as a

tenant in common, not as a partner. We follow the guidance of

Payless Cashways by limiting the construction costs committed or

incurred by petitioner to its percentage of ownership. Because

FPL owned only a 20-percent interest in the SJRPP, its percentage

of the construction costs is limited to 20 percent; therefore,

FPL does not satisfy the plant facility requirement because it

has not incurred or committed more than one-half of the

construction costs.

Because petitioner failed to provide a written specific

plan, and failed to incur or commit one-half of the construction

costs, we hold that petitioner is not entitled to an ITC for the

“wrap up” work and “enhancements and deficiencies” work at the

SJRPP under TRA section 203(b)(1)(C).

3. Distribution and Transmission Substations

Petitioner claims that transformers and other equipment

installed at the distribution and transmission substations

qualify for ITCs under the plant facility transitional rule.

The distribution and transmission substation components for which
 - 197 -

petitioner claims ITCs were placed in service during the 1988,

1989, and 1990 taxable years with tax bases of $3,264,386,

$8,091,517, and $4,413,670, respectively. Respondent contends

that petitioner failed to introduce written specific plans. In

addition, respondent asserts that these substations do not

qualify for the plant facility rule because petitioner did not

begin construction and did not commit to the construction costs

by December 31, 1985.

a. Written Specific Plan

We find that petitioner satisfies the “written specific

plan” requirement of the plant facility transitional rule. Ken

Veronee, a substation engineer for FPL, testified that the plot

plans showed “the location and the number of the transformers” at

the substations. At trial, Mr. Veronee specifically identified

the equipment on each plot plan and testified that the equipment

for which petitioner seeks an ITC was “within the scope” of the

original plan.132 The plot plans consist of diagrams that

132
For the following substations, petitioner introduced the
plot plans and Mr. Veronee testified that the transformers and
other equipment at issue were included in these plans: Alva
substation; Babcock substation; Cedar substation; Court
substation; Broward and Crystal substations; Deltona substation;
Dumfounding substation; Golden Gate substation; Hollybrook
substation; Lakeview substation; Lewis substation; Lindgren
substation; Miami Lakes substation; Milam substation; Park
substation; Howard and Proctor substation; Remsburg substation;
Rubonia substation; Saga substation; Southside substation;
Springtree substation; St. Joe substation; Sweetwater substation;
Willow substation; and Winkler substation.
 - 198 -

specifically depict and locate the transformers at the

distribution and transmission substations.

Respondent asserts that petitioner does not satisfy the

“written specific plan” requirement because the “diagrams

submitted by FPL included revisions after December 31, 1985.” We

disagree with respondent. As we noted, the conference report

indicates that a taxpayer may modify the written plan as long as

the modifications are not significant. H. Conf. Rept. 99-841

(Vol. II), supra at II-57, 1986-3 C.B. (Vol. 4) at 57. Mr.

Veronee testified that the revisions made after December 31,

1985, reflect the original design for each substation. Because

these modifications adhere to the original design, we believe

that they are insignificant and allowable under TRA section

203(b)(1)(C).

Although Mr. Veronee testified that the Hiatus substation

plot plan would have contained information similar to that in the

other plot plans, petitioner did not introduce the plot plan for

this substation. As a result, petitioner does not satisfy the

“written specific plan” requirement for the Hiatus substation.

For the remaining substations at issue, the plot plans satisfy

the “written specific plan” requirement of TRA section

203(b)(1)(C) because the plans provide written diagrams of the

substations and specifically identify the equipment that

petitioner constructed.
 - 199 -

b. Commencement of the Construction

Petitioner argues that it began construction of each

substation before December 31, 1985, and for each of the items at

issue, construction commenced on the same date as the underlying

substation. Respondent argues that construction did not begin

until after December 31, 1985, because the plant facility rule

requires that the equipment at these substations must be analyzed

separately from the original construction.

TRA section 203(b)(1)(C) requires that the construction of a

plant facility must have commenced as of December 31, 1985, to

qualify for relief from the ITC repeal. Further, TRA section

203(b)(4) defines the term “plant facility” as a “single

operating unit” and as a “single unitary project”.

In a prior repeal of the ITC, plant facility transitional

relief applied to each operating unit separately. In OKC Corp.

v. Commissioner, 82 T.C. 638, 658 (1984), this Court rejected the

taxpayer’s argument that the entire refinery, including the

alkylation unit, constituted a plant facility. In citing the

legislative history, the Court indicated that Congress rejected

this interpretation of a plant facility. The Court stated:

“‘the fact that a single operating unit or processing operation

is connected, by pipes, conveyor belts, etc., to one or more

other units or processing operations in an integrated processing

or manufacturing system does not cause the whole system to be a
 - 200 -

plant facility.’” Id. at 653-654 (quoting S. Rept. 91-552, at

235 (1969), 1969-3 C.B. 423, 572, and citing similar language in

H. Rept. 91-413 (Part 1), at 187, 1969-3 C.B. 200, 317). The

refinery’s operation did not depend on the alkylation unit, as

demonstrated by its operation for several years before the

construction of the alkylation unit. Id. at 654. The Court held

that the alkylation unit itself, not the refinery as a whole, was

the “plant facility” under section 49(b)(3) of the 1969 Code.

Id.

Like the alkylation unit in OKC Corp. v. Commissioner,

supra, petitioner’s transformers and other equipment at issue are

distinct from the original substation construction. The

substations were placed in service and in operation before the

installation of the items at issue.133 For example, the Alva

133
See appendix A, which provides the dates that petitioner
approved the ER for each of the items at issue. Each substation
and the date that it was placed in service or scheduled to be
completed is as follows:

Substation Date

Alva Sept. 1980
Babcock May 1985
Cedar June 1981
Court May 1981
Crystal Sometime between 1970 and 1972
Deltona July 1984
Dumfoundling Nov. 1982
Golden Gate Dec. 1983
Hollybrook 1988
Lakeview Mar. 1982
Lewis May 1972
(continued...)
 - 201 -

substation operated for at least 8 years before petitioner added

the equipment for which it claims an ITC. Because petitioner

operated these substations for several years before the addition

of the items at issue, we conclude that the transformers, not the

entire substations, constitute the plant facilities for purposes

of TRA section 203(b)(1)(C).

Because we find that the equipment at issue, not the entire

substation, constitutes the plant facilities, petitioner had to

commence construction of these items by December 31, 1985. Sec.

49(e); TRA section 203(b)(1)(C). The record reveals that

construction of the items at issue did not begin by December 31,

1985. Mr. Veronee testified that FPL’s procedure generally

requires that both a budget item and an expenditure requisition

receive approval before construction begins. For the items at

issue, all of the expenditure requisitions received approval

after the year 1985. See appendix A (listing the expenditure

133
(...continued)
Lindgren Sometime between 1971 and 1973
Miami Lakes Sometime between 1970 and 1972
Milam 1973
Park June 1986
Proctor Nov. 1984
Remsburg May 1984
Rubonia Nov. 1985
Saga June 1981
Southside May 1983
Springtree July 1980
St. Joe 1973
Sweetwater Sometime between 1980 and 1982
Willow Dec. 1982
Winkler June 1986
 - 202 -

requisition approval dates). We find that petitioner failed to

begin construction by December 31, 1985, as required by the plant

facility transitional rule.

c. Costs Committed or Incurred

Even assuming arguendo that petitioner had commenced

construction as required by TRA section 203(b)(1)(C), we agree

with respondent that FPL failed to incur or commit to the

construction costs by December 31, 1985. TRA section

203(b)(1)(C) requires that “more than one-half of the cost of

such * * * facility has been incurred or committed by” December

31, 1985. See sec. 49(e).

Petitioner asserts that it had committed to 100 percent of

the construction costs, as evidenced by the plot plan. We

disagree. We think that the plain meaning of “committed”, as

used in TRA section 203(b)(1)(C), requires that a taxpayer

contract for, or be obligated to, the construction of the

property. See Webster’s Third New International Dictionary 457

(1986) (defining “commit” as to “contract or bind by obligation

to a particular disposition”).

Although the plot plans provide for additional transformers

that petitioner may install in the future, Mr. Veronee testified

that the plans did not mandate that petitioner construct these

additional items. Mr. Veronee further testified that petitioner
 - 203 -

would only install the additional transformers when increased

demand required FPL to expand. Mr. Veronee testified:

Q. And Florida Power & Light would have put the
second transformer in only when and if growth reached
the point where it was necessary? [Emphasis added.]

A. That is correct.

These plans were projections for the future, which allowed FPL to

expand its facilities to satisfy increased demand or to improve

reliability. While the plot plans allowed petitioner to add

transformers and other equipment as needed, the plans did not

obligate petitioner to construct any of these items. Because

petitioner was never bound to complete the projects outlined in

the plot plans, we conclude that petitioner did not commit to

one-half of the construction costs as of December 31, 1985, as

required by TRA section 203(b)(1)(C).

Because petitioner failed to begin construction or commit to

one-half of the construction costs as of December 31, 1985, we

hold that TRA section 203(b)(1)(C) does not provide petitioner

with relief from the ITC repeal for the distribution and

transmission substations.
 - 204 -

Conclusion

We find that petitioner is not entitled to relief from the

ITC repeal pursuant to section 49(e) and TRA sections 203 and

204.

To reflect the foregoing,

An appropriate order will

be issued.
 - 205 -

Appendix A

Equipment Installed at Substations

The first column of the table shows the name by which FPL

refers to the substations. The second column, “plot plan,”

depicts the year the first plot plan was created and the number

of transformers shown on that plot plan. Generally, FPL

initially installed fewer transformers on a substation than were

depicted on the plot plan.134 The third column provides the ER

for which FPL seeks an ITC. That column is further broken down

into four subcolumns: (1) The ER number; (2) the date

approved;135 (3) the amount authorized; and (4) how the money was

expended.136

134
For example, Mr. Veronee explained:

Again, on the plot plan we lay the [Alva] substation out for
an ultimate two transformer station. Our distribution
planning group said, you know, that we needed to buy this
piece of property and the ultimate development of this
substation.

Mr. Veronee explained that FPL always planned, designed, and
intended the Alva substation to have a second transformer, but
“It just took those seven or eight years for the load to grow in
the area for reliability to require us to add that second
transformer.” His testimony was generally consistent with the
other substations shown on our table.
135
The ER’s contain numerous areas for signatures.
Typically, the ER was not signed by all of the individuals at the
same time. Accordingly, we have listed the year(s) during which
the ER was signed.
136
Generally, Mr. Veronee testified that equipment added
(continued...)
 - 206 -

Substation Plot Plan Expenditure Requisition
Name

Year # ER Date Amount Equipment for
Transformers No. Approved which ITC
Claimed

Alva 1979 2 1772 1986/1987 $514,752 2d transformer

Babcock 1984 3 3643 1988 103,230 3d feeder

7228 1989/1990 558,171 4th feeder

Cedar 1980 – 4198 1988 664,050 138-kV
terminal line

Court 1980 3 4023 1988 226,500 5th & 6th
feeders

6035 1989 773,918 3d transformer

Crystal 1970 3 2422 1987 121,000 5th feeder

7867 1989/1990 952,345 3d transformer

Deltona 1983 3 4475 1990 733,616 2d transformer

Dumfoundling 1971 3 3091 1987/1988 78,591 4th feeder

Golden Gate 1982 3 5180 1988/1989 97,633 4th feeder

Hollybrook 1985 3 6029 1989 2,214,158 Construct
substation, 2
transformers,
3 feeders

Lakeview 1975 3 2459 1987 89,750 6th feeder

3740 1988/1989 92,000 7th feeder

Lewis 1972 3 2534 1987 83,150 4th feeder

4635 1988 83,327 5th feeder

6810 1989/1990 597,503 add
transformer

Lindgren 1970 4 2406 1987 94,138 9th feeder

136
(...continued)
under each ER was within the original scope of that substation’s
plot plan. He testified that the installation of the equipment
in those ERs was with the original scope of the plot plans, and
that FPL was committed to install the number of
transformers/feeders as depicted on the original plot plan for
each substation.

Generally, the ERs explain that the expenditures for such
equipment were needed because of increased load growth.
 - 207 -

6882 1989/1990 113,129 10th feeder

Miami Lakes 1971 4 4443 1988 1,625,900 Construct 2
transformer
section of
substation
137
Milam 1972 3 4024 1988 100,395 6th feeder

6036 1989 688,007 3d transformer

Park 1985 2 4021 1988 108,124 3d feeder
138
6019 1989 696,--- 2d transformer
4th feeder

Proctor 1985 3 2044 1987 639,169 2d transformer
& 3d feeder

Remsburg 1983 3 4261 1988 549,791 2d transformer

5216 1989 210,616 3d & 4th feeder

Rubonia 1983 3 5336 1988/1989 760,002 2d transformer
& 3d feeder

Saga 1977 4 3245 1987/1988 590,893 2d transformer

Southside 1982 4 4366 1988 81,457 6th feeder
139 140
Springtree 1975 3 6603 1989 815,127 3d transformer

St. Joe 1980 2 2707 1987 115,614 3d feeder

Sweetwater 1981 3 4067 1988 103,669 5th feeder

Willow 1982 3 2643 1987 88,222 5th feeder

Winkler 1985 3 4385 1988 601,438 3d feeder & 2d
transformer

Hiatus 1985 –(no plot 2522 1987 684,095 2d transformer
plan)
4557 1988 114,860 3d feeder

5662 1989 96,015 4th feeder

137
Because of the quality of the exhibit in evidence, we are
not sure that this figure is accurate.
138
Because of the quality of the photocopy in the record, the
Court cannot read the exact amount of the ER.
139
Illegible.
140
Illegible.
 - 208 -

Appendix B

DRI Project

The first column is the name of the DRI project. The second

column is the “effective date” of the DRI project. The third

column lists FPL’s work order number (WO) or sometimes, as

referenced, the ER number. The fifth and sixth columns state the

amount and date authorized under the specific WO or ER.141

Name Effective Work Amount Year
Date Order Authorized Authorized

Boynton Beach 5/7/1974 1450 $115,734 1989
Mall

Frenchman’s 10/23/1973 199 $24,933 1988
Creek
200 $65,193 1990

201 $37,187 1990

516 $35,201 1990

517 $19,017 1990

2474 $30,121 1990

2552 $34,064 1990

2885 $16,570 1990

4259 $25,983 1990

7922 $26,355 1987

Grand Harbor 10/23/1985 7568 $37,552 1988

Harbour Ridge 12/21/1982 2142 $19,919 1990

2555 $26,449 1990

141
Generally, with respect to each WO there are many
revisions, adjustments, etc. These changes generally affected
the amount authorized. Additionally, the changes were made on
various dates. The amount authorized shown in our table is the
amount authorized on the last change/revision in the record.
Additionally, the date authorized listed in the table is taken
from the last change or revision and lists only the year
authorized since the WO’s and ER’s contain numerous signature
lines and dates signed.
 - 209 -

3877 $36,602 1988

3797 $70,003 1990

Maplewood 2/6/1974 1123 $56,332 1988

2341 $35,978 1990

4322 $80,148 1991

5523 $17,678 1990

8537 $15,060 1990

Motorola 1/7/1980 1729 $15,468 1990

6390 $61,160 1990

Palm Beach 2/16/1982 1942 $62,584 1989
Internatl.
Airport 2188 $152,745 1990

2617 $40,322 1990
142
4378 $346,203 1988

PGA National 8/31/1978 1029 $65,273 1990

1139 $20,645 1990

1634 $204,505 1990

1755 $53,922 1990

2156 $60,971 1990

2779 Missing

8795 Missing

Quantum Park 12/18/1984 5002 $79,164 1989

5010 $27,568 1988

5011 $39,368 1989

5019 $47,420 1988

5020 $32,830 1990

5511 $111,014 1990

5514 $53,763 1988

9309 $52,161 1988

Savanna Club 4/27/1982 4762 $34,777 1990

4763 $57,845 1990

4764 $62,653 1990

142
This is an ER number not a WO number.
 - 210 -

143
4768 $43,718 --

4914 $31,308 1989

Vista Center 10/16/1984 2519 $50,298 1990

1992 $39,666 1990

Willoughby 9/24/1985 9009 $12,195 1990

4122 $51,345 1989

4729 $85,855 1990

5559 $18,807 1989
144
Hammock Dunes 3/1984 4774 $76,748 1990

4788 $4,604 1990

5029 $51,559 1991

5205 $21,023 1991

5221 $157,858 1991

5383 $33,392 1990

Matanzas Shore 2/1985 5410 $26,160 1990

5447 $41,487 1990

5668 $54,711 1990

9313 $16,980 1988

Spoonbill Bay 5/28/1975 3615 $134,010 1989
(Perico Bay)
3477 $35,709 1989

3487 $91,918 1989

3601 $16,511 1989
145
Airport Corp. 5/1984 2574 $8,868 1988
Ctr.

143
This WO contains no signature or date.
144
The Development of Regional Impact Project List states
“Date D.O. Issued”.
145
Council review date.
 - 211 -

146
Datran Ctr. 9/10/1985 8169 $102,246 1988

Breakaway 10/2/1985 3838 $13,089 1988
Trails

Heathrow 2/28/1974 1621 $29,051 1989

678 $42,609 1991

1618 $54,074 1990

Waterford 4/24/1974 2862 $16,854 1991

3007 $20,950 1989

3172 $21,509 1989

3531 $20,965 1990

3533 $24,015 1990

3645 $25,548 1990

3646 $45,486 1990

3647 $24,907 1990

Kings Lake 1/15/1974 4757 $24,756 1989

Windemere 9/16/1975 2760 $11,203 1989

4960 $26,005 1989

5744 $19 1990

5779 $23,580 1989

Pelican Bay 4/19/1977 856 $95,965 1989

923 $27,639 1991

926 $114,020 1991

937 $59,680 1990

1171 $33,823 1991

3073 $32,091 1989

5442 $53,530 1988

146
The record contains a letter from the South Florida
Regional Planning Council dated Sept. 10, 1985, which explains to
the then Dade County Mayor that the Datran Center Application for
Development Approval contained sufficient information for
regional impact review. The letter also states that a draft
report and recommendations were tentatively scheduled to be
presented for action at the regular council meeting on Nov. 4,
1985.
 - 212 -

5954 $35,951 1991

6156 $74,175 1990

6268 $77,424 1991

6306 $57,387 1990

6520 $28,880 1990

Burnt Store 2/27/1984 2219 $61,605 1990
Marina
4351 $26,562 1990

Bonita Bay 11/16/1981 4869 $22,995 1989

4870 $23,773 1990

4944 $26,627 1990

5374 $18,992 1988

5646 $27,207 1990

5668 $27,286 1990

5729 $36,965 1990

6219 $15,625 1990

6275 $20,543 1989

6384 $136,490 1991

6387 $29,557 1990

6473 $68,247 1991

6593 $59,070 1990

6629 $18,270 1991

6681 $46,776 1990

6711 $19,269 1990

Emerald Lakes 6/4/1985 5126 $32,317 1989

5966 $30,999 1990

Parker Lakes 1/10/1983 3718 $65,191 1989

3990 $93,658 1989/1990

9296 $28,559 1990

Berkshire 8/16/1983 5197 $49,794 1989
Lakes
5308 $47,068 1988

5309 $16,499 1989

5760 $92,232 1990

6512 $65,903 1990
 - 213 -

6770 $25,740 1990

Gateway 5/31/1985 1007 $22,385 1990

3155 $165,354 1989

3239 $38,722 1989

3244 $54,324 1989

3597 $56,386 1988

3598 $19,209 1989

3768 $19,245 1990

3829 $28,686 1989

3850 $34,395 1989

3928 $33,348 1989

3937 $25,739 1990

4177 $43,808 1990

4208 $43,501 1991

9195 $34,800 1989

Palmer Ranch 12/18/1984 1980 $27,463 1988

4367 $60,819 1990

4378 $59,444 1989

4731 $53,266 1990

Vineyards of 5/7/1985 2548 $16,872 1988
Naples
2988 $19,541 1989

3262 $27,613 1988

3402 $10,298 1989

4872 $63,110 1988

4958 $24,903 1988

5049 $26,363 1989

5217 $59,325 1988

6454 $11,000 1990

Stoneybrook 10/18/1984 7848 $88,661 1990
(Corkscrew
Pines)

Lely Resort 5/21/1985 5528 $28,743 1990

6075 $61,564 1991

6316 $29,834 1990
 - 214 -

6456 $84,443 1991

6457 $29,255 1992

6510 $187,810 1991

Martin Downs --147 4686 $7,234 1990

4893 $2,542 1990

4894 $2,414 1990

3616 $97,753 1990

4161 $113,422 1989

4264 $13,880 1988

4404 $74,433 1990

993 $47,218 1991

4984 $5,791 1990

895 $14,175 1989
148
Weston 6/1984 6140 $19,751 1988

6141 $86,255 1989

5175 $31,143 1990
149
2523 $748,300 1988

5238 $21,375 1990

147
There is no evidence in the record as to the “effective
date”. The record does contain a letter from FPL dated Feb. 22,
1980.
148
The document in evidence states “Review Date”.
149
This is an ER number, not a WO number.