ML19322C207

Protests Adjustments in Examination Rept for 1972 & 1973 & Related Carryback Changes to 1970 & 1971.Related Correspondence Encl

ML19322C207
Person / Time
Site:	Crane
Issue date:	05/19/1979
From:	NORTHERN STATES POWER CO.
To:	INTERNAL REVENUE SERVICE
References
TASK-TF, TASK-TMR NUDOCS 8001160601
Download: ML19322C207 (36)

Text

{{#Wiki_filter:" q-o a '^ (7 LG PROTEST A Minneapolin, Minnesota v May 19, 1979 e District Director of Internal Revenue Service 316 1: orth Robert Street, Room 446 St. Paul, Minnesota 55101 Attention: Examination Division, Review Staff

Dear Sirs:

Protest ir herchy made to certain adjuctments contained in your examination report for the years 1972 and 1973 end the related carrybacP changer to the yeara 1970 and 1971, in the amounts of 03,112,510, 39,834,349, si,663,017 and 24,055,498, respectively. (1) Reouest for hearing: Taxpayer requests a hearing in the Office of Regional Director of I.ppealc. (2) Taxpa cer' c narr and addroca: f% 11orthern States Power Company -(Minn( .ta) 41-0448030 and Affiliated Corporations 434 111 collet Mall Minneapolic, Minnesota 55401 (3) Date and synbols from the letter transmitt'n the nroconed adjuntmenta: a March 21, 1979 E:R Room 446 (4) Tax years _ involved: Year ended Decemoer 31, 1970 Carryback year Year ended December 31, 1971 Year ended December 31, 1972 Examination year Year ended December 31, 1973 (5) Adjuctments with which the taxpaver doen not agree: The adjustments t which !!CP objects have been grouped into five categories and will be diccunced in the order of the f ollowing suraa ry. A < 9 fh,in) F,: 4 1:3, n n rel f 9 ,_s V-I., Q b e i-0.< .1-goo 1160

r Report Group Item O Ilo. Ilumber Description 1972 1973 I The date the Prairie Island !!uclear Plant Unit I was placed in nervice.

h. 10.

Depreciation of Plant and ,$17,1166,133 Fuel

j. 11.

Expensea Between 12-16-73 100,385 and 12-31-73 ITC 7 Section 38 Qualified Inventment Tax Credit 206,637,882 Property II The uceful life for depreciation purposes of the Inver Hi)1s and Wheaton Gec Turbine PealQg; Plants. h. 5 Depreciatior. - Inver Hilla 85,679,. 186,7]6 935,056 h. 5 Depreciation - Wheaton l ( 'i ITC 11. Uhcaton Deferred Debit (22,390) ~ III Power plant re p n 3. r c. c. 3 Replacement or High Pressure Spindle Due to a l' ink in the Shaf t - Black Dog E2 440,705 209,351 c. 3 Replacement or High Presnure Spindle Due to Crackin!; of the Shaf t - Black Doc #3 349,367 43,741 ITC 4. Sectioa 33 Property Feca Capi tali",ing the Ite: (790,072) (253,092) Above IV Value of St. Croix land i contribution. 1 f f. 1. An Appraical Made After the 1972 Return Wan Filed Increased the Land Value by $403,800. Durinc, audit, an increase of $176,976 was deter- ~; w} }II mined by the Engineer, p p gy 2-

STATEMENT OF PACTS AND CONTENTIONS I. The date the Prairie Inland Nuclear Plant Unit I was placed in service. l A.

Background

l l This quection wan cubmitted'to tho National Office on l July 20, 1977 for technical advice. The National Office decided on May 8, 1978, that the plant was not placed in nervice within the meaninE, of sections 1.46-3(d) and l.167(a)-11(c)(1)(1) of the Regulations. Northern States Power Company coes not agree with this interpretation of the facts and the application of the Regulationn thereto. D. The Rationa3e of the nam onal Of fice Memor mdum (Meno) The Memo concluded that the plant did not " achieve the con-ditions of readineca and operational status called for "i under the Regu]ation- 'Phe Memo licts six facts and cir-cumstances on which this conclunion is based. N 1. The plant d5.d not deronstrate adequate daily operation before the turbine bre ddown. (Memo page 4.)- t 2. Corpcrate correspcnfence dated Deccmber 18 claimed f the plant " operational" as er December 16, 1973, in opite of and in contradiction to the obv io us plar.t i inoperability cauced by the December 17, 1973 blade failure. (Memo page 4.) 3 The Memo deceribus the 243 hours of electrical generation and the 223,000 kilowatt production level as " negligible". (Memo page S.) I \\ 4. The plant did not complete the "orerational test cycle". (Memo page 5 under Conclusion .) 5. The Regulatic:.1 requiro operationc "following (after) acceptable poaer tenta b fore operationa] require,wnts are m:t". (Memo under Conclunion.) i (A) thirty hour demand (at) nowhere near 6. its capacity, caused a major failure that was not corrected until the following year." j C. The Northern Stater Pooter Comprnv Pocition 1. General The plant in question was constructed by USP. The 1 n

l. National Office Technical Advice Menorandum, page 4 under

" Rationale:". U n ? {} 3 f.i,.)),{w#jh. 1 ,. m ;o ..U} _4_ l

construction was complete in every material aspect on or about tiovember 30, 1973 The initial start-up or the plant began November 30, 1973. The plant began producinc electricity on December 4, 1973. It produced electricity which was sold to NSP customers during and between variour tests for about 200 hours between December 4 and December l 17. On December 17, the low pressure turbine threw a blade caucir. ; a shutdown of the turbine generator. The appropriate circumstances that deterrcine, the beginning of the depreciation deduction are defineu in acctions 1.46-3(d) and 1.167(a)-11(c)(1)(1) of the Regulations. l Supplementing the rer;ulatory definition are a number of court cases that have preccedeu and influenced the wording l and the meaning of the Regulations. It is the position of IISP that the.Rerulnttons and court case:. place the start dnte of the de p re cia t io:i deduction at t.nt_ point at wn.ch n ~ n vhe mac ine or pTa. t is event la_teQ than the~ ready to begin operating and in no date it is first us e d -~fii op e ra t ions. ' - " ~~. 2. The Orestion.- l The questica then is; at. bat poJnt in time did Congre.. Onc the writert of the no ulations place the ( start c,f the deprecirition deduc'.lon'l Dous deprecic. tion begin, as li3? would urge, at the end point of the constructi.cn process and at the point at which initial \\ operations cegin? Or does the depreciation deduction begin, as the Hr,tiona3 Office Memorandum writer would urge, upon the successful completion of "the opera-tional test cycle" or "following acceptable powe-t e s t s " '.' 3 The Reenlatio. a. Regulaticns section 1.167(a)-11(c)(1)(i), states in pertincnt p.rt that "(p)roperty is first placed in service.inen first placed in a condition or utste of ecad! ness and.vallability for a specifically accigned function." b. Regulations secs 5cn 1.46-3(d)(1) states in pertinent part t m. t property shall be con-sidered placed in service in (ii) The taxab3e year in 'lhich the preperty is i placed in n condi tion or stpica.of radj nens te ay11 ability for a speciJ uy anu 2 gneu i and function ,snMR J 'i t:q 2' l t i T u$f6 %pe.... e-- u l. u n l 1 l r -i

l (NSP Comment) - The general rules listed in the regulations above state that the "placed in service" requirement is to be considered fulfilled when the property reaches the state (condition or position) of being ready to l operate, to produce the product it was built l to produce. The general rule is stated j without reservation and without f.ndication that actual operation must begin or that actual operations must reach any level of success during the year the state of readi-ness is reached. Repeating the question: does the depreciation deduction begin at the point at which operations are about to begin or does the depreciation deduction begin upon I the successful completion of the " operational test cycle"; the answer to be found in the l general rules must be that there is no indi-cation at all that the latter is intended. c. Regulations section 1.46-3(d)(2) provides three examples to illustrate the meaning of when property "shall be considert'd in a condition or state of readinnua and availabill ty for a specificall:/ acsigned function." The 'irst two are examples which relate to prope.ty thnt is ren'dy to be used but has not actually been used: 0 (1) Parts are acqtiired and set aside during the taxable year for use as replacements for a par-ticular machine (or machines) in order to avoid operational time loss. (ii) Operational farm equipment is acquired during the taxable year and it is not practical to use such equipment for its specifically assigned function in the taxpayer's business of farming until the following year. In the third erample notice the word " operational". The complete example is: .(P)coperty shall be considered in a con-dition or state of readiness and availability for a specifically assigned function (where 1-(iii) Equipment is acquired for a specifically j L assigned function and is operational but is l undergoing testing to' eliminate any defects. The National Office Memo relies on th'e word "oper-ational" in example (iii) as its sole - M c-w. g( 2 l l

? authority to restrict the depreciation deduction to plants that have successfully demonstrated daily ope ra tion, the operational test cycle, and p 0:ceptable power tests. The use of the word " ope ra t io na l. " does not, in MSP's opinion, move the v poi.it in '.,ime that depreciation begins from the point at which operations are about to begin to the point at which successful daily operations are established or operational testing is complete. d. The Meaning of the Word Operational in Nxample ($11). "abic The dictionary definition of operational is to function or be used; functional:" as in "How soon will the trucks be operational? Subrtituting thin definition into the wording in oxan ple (111): " Equipment is acquired for a speci-fically assigned function and is (able to function or be used) but is under~,oing testing to eliminate any defects (in considered in a condition or state of readinosa K To put the name ccmplete thought into different words, a plant that has reached the point or being able to function 12 considered in coevice during the testing process. It is MSP's contention that, % aced on example (iii), a plant must be concidered p in service despite the fact that the testing pro-cens and the potential or real defects can be expected to interfere with or prevent either nor-This view of mal operations or optinu:n production. 'the meaning of example (iii) does not impose an additional requirement for successful ope er tions not contained in the general rules or exanples one and two discunced above, but is instead entirely in harmony with the literal meaning of the words " condition or state of readiness", in tha', the event that t rigg;c rs the beginning of depecciation in example (iii) also occurs before or right at the point of the commencement of operations. c. Summarv 'The Law and Regulations place the key event and the com-triggering the Investment Tax Credit the mencement of the depreciation deduction at point the plant is ready to begin producing its product. Example (iii), read in its entirety, this point at the beginning of the clearly places operational testing period rather than the end of the operational testing period by stating that a is considered plant in the process of being tested w w+mn R f{ O. in service. pt pro' D %., a q !i O ;, f <J... i fdn % C ;u o

14. The Starting Point Determined by the Courts The courta have conaictently determined that the ready for service requirement is met before actual oc normal operations are achieved. 1 a. In Sears Oil Co., Inc. v. Comminnioner, 359 F 2d 191 l j (1966), the court founc tnat the useful life of l barges began when they were ready for cqrvice in ( the nence that conntruction was complete instead of i when they were first put into une. The barges were delivered by a builder in Louiniana to the Seacu 011 Co. headquarters in Rome, New York for final outfitting, where they were completed and made l available for cervice by December 1, 1957. They were not put into actunl use until the ice in the canal where the barges were held had melted in May, i 1958. The court held that the barges were available for service when the final construction was completed even though ctual use was prevented j by the ice blockage. b. In Fatj onal Ev-Produc'.x. Inc.

v. U.

S., 39 AFTR 2d j '/ '/ - 17 0 0, the court round that a rendering nyctem J was deaaed to have been acquired for.invvatment t n;. l credit pu rpoise n when it una fully installed. The court held that the nyctem was operational in the p conse that it wan capable of processinc; material, althouch not fully tested and not capable of w operating at the guaranteed performance standards. I c. In Fort Howard Paner Connanv, 1977 P-H TC Memo 77,h22, a buildini; ut signed and constructed for two electric tu rb ine generators was found to be in ce" - vice in its entirety even though only one generator had been installed during 1970, the year at iccue. Th. court caid "(t)he fact that the uccend turbine itself was not inctallea until 1976 in not deterninative; rather, we must determine uhen the j structure houning the tu rbines van placed in cer-vice. As of 1970, the turbine roca van ready and available for the second turbine. Accordingly, we hold that the turbine room was placed in cervice i during such year." I e d. For the last 40 years it has been a well l established point of law that neither actual use i nor successful use in required for a valid depre- [ f clation deduction. Kittredce v. Commissioner, 83 P 2d 632, 19 AFTR 17'l kna dir 1937); Oti s Beall f ont 54,011 P-H Memo TC (1953); and George S. Jenhnon, 37 BTA 1117 (7.938). n w nM -B-WW u! W

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c. Summary p The courts support the NSP pocition. The point at which depreciation begins is at the end of the construction period, no later than the start of actual operations. A cyctem is concider'ed operational within the meaning of cection 1.146-3(d)(2)(iii) of the Regulations when it in capable of producing the appropriate product, even though the system hac not reached optimum perfo,rmance. D. Rebuttal to the National Office Technical Advice Memorandum The cir statements or reasonc given in the Memo, listed on page-14 o.f this-protect, can be grouped into four categoriec: I 1. Operations - the lack of adequate operatienc; I 2. Testing - the lack of completion of the operational l tect cycle; { 3 Breakdown - the blade railure; l. Corporate Correspondence - the " operational plant" with i broken turbine bladen. u (N NSP offers the following rebuttal to these sta 'c emen t o : ~ ~ 1. Oceratior. - the Lack or Adecuate Ouerationc The Memo's conclusions about the magnitude of opera-tions in December of 1973 are ner wapported by the factc. The plant operated extensively and succecofull, from Decenber !) to December 17, until the blade rajluro. The plant produced 26.9 million kilowatt hours of electri. city, using about 6 million kilowatt hours in the plant during the procean. The 21 million net kilowatt houro cold to MSP'c customero hac a retail value today of about $700,000 or a wholesale value of $380,000. During the 2 !! hour period before the tu rbine bladec failed, the plant generated about 5.3 million Pilowatt hours of electricity. The electric power con-cumed by the 3 million people in MSP'c service area during thic 221 hour period was about lill million kilowatt hours. The Prairie Island Plant, therefore, previded about 127, of the ::SP syctem's energy durin.; this 211 hour period. The City of Buffalo's municipal ' system purchaced 22.7 million kilowatt hours of I clectricity f rem NSP in 1973 The 21 million net kilowatt hours of electricity produced by the plant in December would, therefore, cupply the approximate annual concumption of a city with a population of 3,000. 000{ \\; \\ O QdQ ;,~ l, q; p - { a u r-- ~

v I i The operations of the plant in December were substan-tial, not " negligible". The plant proved it was ready Q to operate, to perform its specifically accigned fune-tion by operating and performing succescrully for in excccc of 200 hours. It operated " daily" for eight days, and steadily above the 20% power level frcm December 13 through December 16. 2. Testing - the Lack of Completion of the Operational Test Cycle While USP cubmits that applying an additional test that requires operations to the literal meaning of the phrace " ready for cervice" is an errencoun interpreta-tion of the Regulations, NSP will now accume for the purpose of this argument only, that a certain degree of operational success is implicit in the ready for cer-Vice requirement. accause the general rule places the point at which the depreciation deduction begins at the point a plant is ready to operate, any implied requirement that the immediate operations be cuc.ceccful can caly be based on an obliga',4.on the taxpayer has to prove through demonstration that a plant cas indeed ready to cperate. In this context, failure to demonctrate cperational cuccess could indicate that the plant was, in fact, not p ready. If the best the, plant could produce wa: " negligible", it could cast doubt on the readinocc. An appropriate test th2n, would impose an operational test level that relates to and is in harmony with the question of whether or not the plant had reached the point of construction ecmpletion and the cc encement of real operations rather than ne;;11gible production (production too inconsequential to signal the end of the conctruction phase and the beginning of the operationc phase). The burdens placed on a taxpayer by the objections to the USP plant's readiness outlined in the Memo, however, go far beyond the obligaticn to demonstrate that the plant was ready to operate. The phrases " failure of the cystem following each attempt to comnlete the operational test cycle" and the requiring of operationc "following acceptable power tectc", go beycnd using the cubsequent operations to provide evidence of proof or . disproof that the plant was ready to operate at the time the operations in question began. These phraces would, if allowed to stand as valid requirements, move I the beginning of all depreciation deductions to the end of the operational test period. j b ~ w o u. ", W iU@Q (0 W k@ita 4 dum DI /

The additional requirements described in the Memo are not only out of harmony with the Regulations, they are also unrealistic. The Memo appears to require testing at 100", for 100 hours as the test the plant failed. This test level would be an imponsible requirement for the government to administer. What would happen to plants that have an uncorrectible design error? If the warranty cays 100 megawatts and the actual maximum 10 90, would the plant be forever non-depreciable? The testing requirements of the Memo are also vague and subjective. For example, the Memo writer concludes that 200 hours of successful operations and the 21 million kilowatt hours of electric power produced are " negligible". The Memo writer describen " attempts to complete the operational test cycle" without telling what an operational test cycle in. 11uclear planto are constantly tested throughout their useful lives. There is no such thfng as a complete operational test cycle as the Memo is applying the phrase to l'S P 's " negligible" operations. The same problem is contained in the phrase " acceptable power tests". The tests performed before the blades failed were acceptable to !!Sr engineers and the Atomic Energy Co:Imiccion. 1 It must be remembered that the failure which occurred on December l'/ was not of the nuclear powered (q generating plant, to which the writer of the Meno seems to be directing his attention, but rather waa of the low pressure turbine, for which there were no power tectc prescribed. Summary It is the pocition of IISP that, contrary to the Memo's conclusion as to tha plant falling in 1973 to pass a test er testa implied by the term ready for cervice, the immediate successful operation of the plant rein-forces the conclusion that the plant was ready fcr ser-Vice on or about !!ovember 30, 1973 3. Breakdown-the Blade Failure Prom discussions IISP hac had with local and national office IRS personnel, it in obvious that if the blade in-cervice problem.q had not broken, there would be no 2. Also see Revenue Hulings 70-428 and 7b-256, generating plants declared in service with less testing and actual operations than Prairie Island I and Revenue Ruling 76-233 where March 26, 1973, the date the plant was caoable of oroducine, a saleable product was b the in-cervice date rathe'r than June 30, 1973 the apparent end of a serien of test runc designed to increase production levels and i improve the quality of the product. g "d'Ih@$@h kdri, s W r e.

There is also no question that if this ide7tical blade failure had occurred at a seasoned plant, and it has,3 p/ that the blade failure would not have prevented depre-ciation or even have raised any question about the depreciation deduction.4 The blade failure and particularly the timing of the blade failure is the kej, the crux of the matter. The question is very simple. Ilypothe tically, should a blade failure occurring after only four days of opera-tions give a different result than a blade failure after four years of operations? It is the position of NSP that a blade failure of the type that occurred on December 17, 1973, after 200+ hours of successful operations, has the some impact upon the depreciation deduction as the exact same type of blade failure that occurred December 16, 1975, at our second Prairie Island unit after 200+ days of suc-cessful operations, which is clearly no impact at all. The technical advice memorandum mentions in its conclu-sion ". a thirty hour cemand (at) nowhere near its capacity caused a major f ailure that was not corrected until the following year". The inference that there is a cause and effect relationship between the " thirty-hour demand", or more accurately, the 200 hours of operations and,the failure, is contrary to the s facts. The fact the blades failed after only 200 hours is not a reflection on the status of the construction of the plant. The plant was complete in all respects; the blade failure was the resu3t of vibrations from an unexpected source. The turbine was properly designed to dampen vibrationc from all known sources. This new and unusual source caused vibrations to travel along the longitudinal axis from the generator to the tur-bine. The cond5tions that caused the damaging vibra-tions were the result of 0nique circumstances, the occurrence of which could not be reasonably 1,redicted. 3. There are three other Westinghouse " power block SJ" tur-bogenerators that have had blade failures traceable to the same origin. The three other units had failures after operating 1, 2-1/2 and 3 years and had produced 3, 9, and 11 billion kilowatt-hours of electricity, respectively, at the time of the failures. 4. Coincidentally, another Westinghouse " power block 80" plant was ,b out of service from October 21, 1973, to January 22, 1974, for,,..qc repair of a blading failure. This plant, howev f r)fas 4Tyearsholk {- -hjjy M W dBuff and had produced 15.6 billion kilowatt hours, i l i y

l The conditions that created the particular vibrations that unfortunately matched the resonance of certain ]' turbine blades and allowed these vibrations to travel undampened through the turbine generator are the result of the chance coming together of a number of factors. It is thought that if the conditions of either NSP's transmission system or the generator.had been only slightly different on December 17, 1973 at 6: 15 a.n., the blade failure would not have occurred. Summarg The timing of the blade failure is related to the chance coming together of a number of factors. The timing is unrelated to the running time of the plant. This being the case, the blade failure is unrelated to the construction completion question and irrelevant to the in-service question. 4. Corporate correspy dence-the " operational plant" with broken turoine blades The corporate correspondence mentioned in the Rationale portion of the memo is the document that transferred for accounting and regulatory purposes the Prairie Island Plant from the construction department of Northern States Power to its operating department. This was done in recognition of the fact that the-construction phase was over and the operational phase had begun. \\[3 This internal correspondence is entirely irrelevant to the question of whether the plant is or is not in ser-Vice for tax purposes. The tax in-service date is defined in the tax law, and the determination thereof is totally independent of the decision to transfer reoponsibility for the plant, including the blading problem, from one internal department to another. The decision to transfer the plant from the construc-tion to the operating department was made on December 16. The decision was simply not recorded until December 18. In any event, foreknowledge of the blade failure would not have caused a different decision because the blade failure was an operating, not a constructicn, problem. The Company has not asked IP.S to consider the plant in service on the grounds of this internal responsibility i l transfer. t I tThe inclusion of this bit of information in the section of the Memo, including the r " Rationale apparent contradiction in "ooerational" status existing at the time the correspondence was signed, ! p adds nothing to the information necessary to decide the pertinent tax question. f d n & J~ d{3, gr3 /J W@

E. Conclusion O' The plant operated for a long enough period and with enough operational succeca to demonstrate conclusively that the plant did reach the point of being in a condition or state 4 of readinecc and availability for electrical energy produc-tion on or about November 30, 1973 Section :.46-3(d)(2)(iii) makes it clear that the existence of a defect is compatible with the depreciation, deduction even in the early operational stage of a plant. The occurrence of an event that made a complete and otherwise operational electric plant temporarily shut down for repairs does not make the plant inoperative for the purpose of the ready for service determination. The subacquent blade failure cannot be distinguiched from other blade failurec or mechanical defects that appear at various times in the life of all power plants and all mechanical devices. II. The Uceful Life for Depreciation Purpoces of the Inver Hills and Wheaton Gns Turbine ?eak!nq Plants. A.

Background

Northern States Power Com tny (Minnesota) and its wholly -owned subsidiary, Northern States Power Company D (Wisconsin), are operating public utilities engaged in the Eeneration, transmission, and distributt-" of electricity throughout a 40,000 scuare m3' vice area in Minnecota, North Dakota, 00, m ... m, and Wisconsin. NSP usec a cyctem-wide power grid to furnich electri-city to its customera, rather than utilicing cpecific plants to furnish electricity to specific customers. In deciding which plnnts should be in operation at any given time, NSP considers total cyctem demand and the production costs of the various plants. HSP's variouc types of plants listed in order of production costs (from lowest to highect) are ac followa: bydro plants; nuclear plants; large coal-fired steam plants; cmaller coal-fired steam plants; and oil-fired plants. The decisions as to which plants operate at any particular time are made in the Systemo Operation Department which is located on the eighth floor of NSP's general office building in Minneapolis. The hydro and nuclear plants are operated ac much as poscible because they are the cheapes c to operate. The Inver Hills Generating Plant and the Wheaton Plant d are each peaking plants employing six gan-turbine

A powered electric generatore.

These plants were built in order to provide energy to meet peak summer energy 1 demand on a system-wide basis. Because the NSP D hbb b Y um ca-

f= ( s. pg C j y% U~ U v ._. o A aT!alb ",uts,N;g .e IETERNAL REMEMUR7 SIS,Yka en P#gng = !C s NATIONAL O'2 rice TECiggM, XIW1CR'gq9;FfGl$M Index Ntnaber: 0107.18-00 go IntorD" i 0 8L'AY 1378

• i District Director C000 *. /

/ j;. St. Paul, Minn. l Taxpayer's I!ar.e : Northern States Power Company i Taxpayer's Address: 414 Nicollet Mall Minneapolis, Minn. 55401 Identification No.: 4140440030 Years Involved: 1973 ? .i Lenend:

.o Tax p <,y e r Northern States Power Company j

Nuclear Generatin", Plant Fra:i.rie Isi.and No.1 w s t a t e.. A Minnesota City -B Minneapolis /;. Issue: H., cs .wnetner one taxpayer,s nuclear power plan t was placed t x: n c in service" durin;; 1973 within the r.eening of sect:_cas 1.167 0, (a)-11(e)(1)(i) and 1.46-3(d)(1) and (2) of the Incom2 Tax negul._ticas. --Pacts: The taxpayer was incorporated in 1909 un.er the laws ~ n o f s t a tc. l.. Its c.;cutivu offices are loca ted ia ci t:c l'. l~l-Taxpayer and its subsidiaries are operating public utilities cngaged in the geacration, transmilsica, and distribution of electricity throughour a 40,000 nauare mile service area in re"eral crates, and the dittribution of gas in 78 C concunities within this area. C.. J; The uork relating to the nuc1(ar power facility bec.an D k-with site preparation in October 1067,' fol]o' ed by fountiatlon concrete.htk on June 20, 1968. T'te nuclear pouer pibat !f? was constructed for the ta: payer pursuant to r. contract. 151 3.. < y.,. A vendor was to furnish the hard.oarc and to provide k,s adequate demonstration of performance such as ]OO-hour P.; and all other appurtenent equipment parforming suitably it test within design rating withcut over-load, excess velocity, F u.~ ~ ',b' ,[ e pim! o. ,i ^ 3, m l... o h h 'u, m .,') I l =*e. .w e.,.w. ee ae 3 w as.m-.w gp y--woe G ege = w

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.u. o sync rOO 'L a,... -' " ' c.., s. L.'. i. s. <1 p-i. d r. . 4. g,.,.,.w 1 1..'.; 5 0 7 r, u < r C. '.) 1 ' r. },p,.] (.F e s-r ..j_ until failure occm w<1 on Doce Ser 17 177' 'rbc cc ~ vlant cac t o:..jer, in a day after une power escalation ir u nce, ~ letter dated Dectr.,ber 18, 19'i3 frer che Msr. ; cr oi 7e:2r ..nni,.:c r;.2, c.n c t,on-ne o,.cner al ma r cr, i le.n t cne nucaecr nic.nr uns onO m m.,. as t. n 1,roductica to. or 7 ceruet.mn cec.Lare: December 16, 1973. Detail: of pm ir im.el ge m:c i ion f.:c:. t .3, 1 9.,../3, l e a u3ng up to the tu.mne inure os g. December December 17, 1973 are: ' C-nysten' produced or cn intermittent t . 1) the nuclrar powe. basin, 26,900,000 r,rous T.G of ener!,, ret. chin 3 a tf, . -, Lq ,3 manicum generation or.g., t.b v .x L(' L f o r t'.c the Lima period on an inter: i ttcat basi.s, 19,460,000 gras: K..'ll c orrm pe r.f e d r.': 2) pouer level of C to the t est of Decm:bcr 1,1973 throt.& Decc.6cr '/- 15, 1973 or for 213 hours of operaticn; b raised from 15, 1973, power output waz on December 3) approximately 500 P.' to 800 L:U for a total ofa p p r o n m.it.e ly 4 npproximat elv 30 heurs of operation at1973 a turbine 50% of capaci tv, and on Decerber 17, ~ failure occurred. Power generation was -.. - ~. { l~ ): l, l f ;,'., f f s .<- -,k . '.\\, d U \\ e.

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~~f-v.. w. MM p :,p Northern. States Power Company gV resumed at a low level in Febrpary 1974, follow-ing generator modifications. Malfunctioning of the turbine continued to occur forcing generator shutdoun in March 1974 with repairs continuing into April 1974. Later in April, generation ~Ja was resumed with power increased to 90Z followed %f again by a turbine failure. In July 1974, the generating plant was again synchronized into the %"lJg g power grid and tested at 100% power generation in mid July 1974, ending up a 100 hour warranty test in August 1974. b Applicable Law: F Section 38 of the Internal Revenue Code of 1954 allows a credit against Federal income tax for qualified investment C F's s in section 38 property, and the determination of what property qualifies is made in accordance with the rules provided in section 48. Section 1.167(a)-11(c)(1)(i) of the regulations provides that property is first placed in service when first placed in a condition or state of readiness and availability for a N specifically rssignad functica whether in a trade or business, in the production of income, in a tax exempt activity, or in In general, the provisions of (d)(1)(ii) a personal actu ity. r and (d)(2) of section 1.46-3 shall apply for the purpose of determining the date on which property is placed in service. j-ac Section 1.46-3(d)(1) of the regulations provides that for purpose of the credit allowed by section 38, property 44-shall be considered placed in service in the earlier of M the following taxable years: (i) the taxable year in which, IRC under the taxpayer's depreciation practice, the period M for depreciation with respect to such property begins; or (ii) the taxable year in which property is placed in a con-dition or state of readiness and availability for a specifically F.-g assigned function. W "r Section 1.46-3(d)(2) of the :egulations urovides that 2. equipment acquired ty a taxpayer for a specif'ically assigned t function in his trade or busi=ss that is operational but is Q undergoing testin", to eliminate any defects is considered E:.? placed in a cond1. tion or state of readiness and available w for a specifically assigned function. @ u b h a[ h' d IM b wu S t. (& b dWNO.p. YW.h$Y Yh ?$ bYh5hN$ 'k Y YYY b J M YO'*Y 1 F $

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Hort.hcrn States Power Company .s.. Rev Rul. 76-428, 1976-2 C.B. 47 states that a nuclear electrical generating unit was fully operational on December even though it would still undergo further tescing 23, 1975, to eliminate any defects and it would be considered placed Criticality of the reactor had been achieved. 6 in service. All critical tests necessary for power operation and ,f synchronization were performed prior to date unit was The nuclear electrical generating Lg placed in se fice. plant was partially shutdown on b'cember 24, 1975, due to an abundance of hydro-genei ted electricity rather than to any problems concernin the unit. Rev. Rul. 76-256, 1976-2 C.E. 46 states that where a l f?l-T coal-fired electric generator unit was first placed in pC service, the ucccusary permits and licenses had been approved, the critical tests for the various components f.sy were completed on the components systems and the facility p that the generating unit l was in daily operation to assure could operate in its intended manner. g ~ nati onale : The sequence of events summarized earlier from the hd taxpayer's report to the id'c clearly illustrates the status in view of the several :._..empts of the generating plantthe conditions of readineos and operational, p made to achieve L-status as called for under the regulations. p,.., Of particular importance is the lack of adequate N.E demonstration of daily operation. Electrical power genera-hp' ocenrred after the taxpayer i..,. tion for approxi..ately 30 hourt, considered the plant placed in service, December 16, 1973, Gjyp htit the generating plant was forced to shutdown on Duc-hlJ 8 cmber 17, 1973 due to a turbine break down. L t.g the .:.,.7 Corporate correspondence dated two days after ifl.. December taxpayer considered the plant placed in service, failure and claimed the D;.- 18, l'973, acknowledged the turbine" operational" as of December electrical generating plant t' 16, 1973, wi.th only 30 hours of operation in which the power escalation was abruptly halted, an obvious condition 7', belying operational status. .c n ?& l T LUMn m AN " 6 l.' l '

l 4 / L.. .g .s'f' g (:he s s 8 l , _5_ g \\ Northern States Pouer Company \\ I = In the 243 hours of gene ( ration in early December 'v. 22 19'/3, caution should be exercised here in 2.nterpreting 44, the maximum of 223,000 K'd of electricity produced. This only means that at some interval of time, and indeed a s small interval of time the system produced a maximum 223,000 Kh'. In affect, the nuclear potte r f acility operated for 243 hours at a negligible power output level.

Conclusion:

~

The nuclear generating system uas not "placed in service due to a major malfunction causing.talture of n the system follo ing each attempt to complete the opera-tional test cycle. This malfunction was not corrected until the follouing year. w "Placed in service" for tax purposes is a factual ~ I ~, deternn nation una ch covers critica11tv achlev., ment ror [9 the reactor core and synchronir.atien of all svstems complete uith the unit's pc.:er dis tributed to the grid System in e f fcct 1011: Jinc, acceptable poicr tests before operat'onal reGuirementF are n'o P ln the instant case' L a thirty.nour Ge r.Pid af ter ta. payer Cons 10C ree the plant 3 placco in service for pcuar generacion nowhere near its 1 p n that Was not CorreCteG Capacity, Caused a m3jor tailure until the folic:tnn, year. Hence the several be" innings o m of testing or pavar escalation re:,ulted each tir.e in .a failure in t.ne t it. e f ra:m unuer con. tce ration. != In vic..; of the above, synchroniration of an electrict1 power generatirc planL alone does nottr.We the plant pparati o: al. Abo, during the period following the po.:cr i the nuclear power generatin,, r escalatien, the t e :, tin g o j f acility for demonstrating its specifically desi.gned function, was aurupta; enced by a n.,j or co: ponent r a l. ] u re. ,,t ~ .an "not" 'y,t Con. e a.uen tiv > the nuclear )>ower f acility s placed in service on or before December 31, 1973. r; t. g..o END s )di 60 C6..,nt UC,. ,10t DU 17 citS ,ge, OrJhiG SecticaG-{0($)(N i used er I N dent' T.3 'g r n31 'D' ev or,uO 4 Ol' 1DU coM,' l a, Vph ~ o 4 1 .s ..i 1

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Subject:

Requert for Technic,1 Advice Prom the National Office Re: 1orthern States Power Company I D 1 umber 41-0448030 Taxabic Year 1973 luar Sir-Purnuar.t to Section (01.105(b)(5) of t he Cod of Federal Regulatio:9, Ibrthern Stntes Foue-Cc: 11nmy res pe c t in i h r e ep t en t that you refer to the 1:n tional Of fice (Assia t:m t Cecci < ~ i c ncr, Technical), the questien of whether, based on the fcet: set forth belw, the reairic Island 1:acicar Generatina Plant, Unit I, Jan "placed in nervice" during 1973 within the mouning of Sections 1.46-3(d) and 1.16'/(a)ll(e)(1)(1) of the Regul t.tions. The qucation developed duric3, thc cycminatica of car 1973 Incene Tcn Return, thich is currently being c: amined by St Pr ol District egener.. Technical advice fren t'.e Pational Of fice is warrcuted beenune the issue to cenplex cr.d also to ruintain unifomi ty. The e t:

• r ent cd Iact: nn:1 point' at itsue that fo ? ? ova J n a j oi ut n tat emnt agreed to by both t.hu Dist) ict e; nmining of ficer(c) ani I?orthcra States l'aaer Coupany.

STATPMC::T OL' PACTS Cenoral ifattern !!orthern States Power Co.npnay (lisp) vaa incorporat ed in 1903 under the laws of liinnesota. Its executive offices are located at 414 1:ico11e t !!all, I!1nneapolis, Minnesota 55401. I;SP and its cubsidiarfen are pre-dominantly operating public utilities engaged in the generation, trans-raiscion, and distributien of electrici ty throughout a 40,000 square mile service area in Minnesota,1:erth Dakota, South Dakota and llisconsin, and liorthern . af 9 the distribution of gan in 78 coc= unities uithin this area. .,yb n h\\ h[

General !!atters (Contd) States Power Company files its rederal income tax returns with the Ogden Service Center on a calendar year basis and computes income under the accrual pethod of accounting. For the year 1973, NSP clected the class life and asset depreciation range systems and the " half-year convention" under the provisions of Treasury Regulation Section 1.167(a)-11. Generating Plant in Ouestion Prairie Island I is the first of two nucicar generating units located on the Mississippi River near Red Wing, Minnesota. Each unit consists of a -Westinghouse pressuri::cd unter steam supply systen designed to operate at 1,650 megawatto of thermal power and a Ucstinghouse " power block 80" turbogenerator, designed to produce 530 uegawatts of not electrical output. Unit I first produced electricity in December of 1973. 'lhe second unit van odded at a later date. The question to be resolved relates only to Unit I. The book cost of Unit I is approximately $234 nillion. Construction of the plant Certain site work began under a licited work authori: ation in October, 1967. The foundation concrete work started June 20, 1903. '1he construction proccus took about five years. On August 9,1973, The Atouic Energy Comission issued the facility operating license. The license stated in pcrt: "1. The Atomic Energy Couraission (the Conaission) having found that: A. The application for license filed by Northern States Power i Company (the licensee) complies with the standards and requirements of the Atenic Energy Act of 1954, m. cmer.ded (the Act), and the conu:ission':, rules and regulations set forth in 10 CF2 Chapter I and that all required notifications to other agencies or bodies have been duly made; D. Construction of the Prairic Island Nuclear Generating Plant, Unit I (the facility), has been substantially completed in conformity eith Provisional Construction Permit No. CPPR-45, an amended, the application, an amended, the provisions of the Act, and the rules and regulations of tha Conciscion; C. The facility will operate in conformity uith the application, as amended, the provisions of the Act, and the rules and regulations of the Conniasion;... 2. Facility Operating License No. DPR-42 is hereby issued pursuant to an Order of the Atomic Safety and Licensing Board dated June 15, 1973, and Memorandtun and Order dated July 11, 1973, in accordance uith the provisions of the Connission regulations in 10 CFR 50, Section 50.57(c), and Appendix D to Part 50, to Northern States Power Company to read as fo11cus:... This license shall be deemed to contnin and is subject to the C. in conditions specified in t he follouing Connission regulations 10 CPR Chapter I: Part 20, Section 30.34 of Part 30, Sections pl Wi?{?f? h y#, u,D m-ah um

sf Part 70; is .t and to the rules, s ob j o-or hercafter in rq u':<-

tions specified or

l-i. iw, Ii )l tr ..lity for testing ':n c ilc 1: em 1: cxcess of 1485

".= r p o r

o r ' pacity), and for power icvels not p> "~_ r - of the rated .see shall not

until spec.ifically i--

.;:2_. ' t F __J' c; , b m < '. pendices A and B . tic liccuse. The aJ. " dance with the - 'i echaical Specifi- -:e a requircoent f/

ted on cloced-the inaxirm:n extent unnce and shall i

rended for good e cubsequent licencing 1 iched as Ib:hibit A. tor began on 1.ugust 28, cy to proceed beyond 'ain plant evalua- 're completed. The avember 21, 1973. This

ing operations, the

the conpletion of 1.ns p e c tors.

The 4 l ...the Regulatory

r. -

of / ugus t 9,1973, + t. b '-c.ic fied and that the s 'Jacility Operating 1 ( s e I I L u j a m)!soci4 6 t I l i

4-Construction of the Plant (Contd) The preoperating test program simulated operating conditions by operating cycry system, except the generation of heat through nuclear power,at the designed temperature and pressure. With the !?ovcraber 21, 1973 letter, the AEC concludes that there has been a satisfactory completion of construction and a satisfactory completion of the preoperational tests neccusary to begin operations in compliance with the standards and requirements of the Atomic Energy Act of 1954. The letter is also an illustration of the extent of the AEC evaluation and verification process. This letter is attached as Exhibit B. Operations, The initial start-up of the reactor cotmaenced at 6:30 pH on L'ovember 30, first sustained nuclear reaction (criticality) was achieved at 1973. The 12:17 MI on December 1,1973. Initial synchronization into the power grid occurIed at 7:35 IM on December 4,1973. The plant produced electrical energy intermittently for the next 12 days. It was connected to the I;SP pouer grid and producing electrical energf at a rate exceeding 17 percent of the design capability for 159 hours during Decet:bar of 1973. The plant reached the J 7 percent, 25 pcreent and 46 percent production rates on December 7, Deccnber 10 and December 16, respectively. The plant produced 26,900,000 gross hilowatt-hours of electric energy in 1973. 1Gp decisred this facility in service for book purposes as of Sunday, Decet6er 16,1973 at 12:01 AM. The income for book and tax purposes van handled in the follouing manner: Ucfore the book in service declaration, the gross kilowatt-hours of energy generated, multiplied by a costing factor, was subtract.cd from the cost of the facility and likewise the hilowatt-hours of energy used in the plant, times a costing factor, was added to the cost of the plant. 'Ihe energy gen-d at , crated of 19,460,00013H1 between December 1 and December 16 was price $114,230.20 and the energy used during the sam 2 period of 11,492,000 lam was priced at 067,458.04 icavin;; a net decrease in the cost of the plant froa energy generated and energy used of $46,772.16. After the plant was declared in service fer book purposes, the plant generated 7,440,000 gross kilovatt-hours of energy on Deceuber 16 and 17. The energy uns sold to custaaers and no book entry ucs made to associate the value of the energy with the cost of the plant. Likcuise the value of the energy used by the plant fraa December 16 to December 31 of kilowatt-hours was not added to the cost of the prairic Island I 7,946,000This power was generated by other plants and the expense of generating plant. the electricity used in plant from Decerber 16 to December 31, 1973 was Between December 16 and Dec(c'ber 31, the plant use exceeded the cxpensed. generation by 506,000 kilowatt-hours. I

5-The Defect On December 17, 1973, the low pressure turbine threw a blade which damaged other blades and forced the plant to shut down. The turbine is part of the Westinghouse " power block 80" turbogenerator. In addition to Prairie Island various util-Unit I, there are six other such turbine units in operation at i ties. Of the six, three have had precisely the same type of blade failure as Prairie Island I. These other three failures occurred after the units had been operating for 1, 2, and 3 years and had produced 3,000,000,000, 9,000,000,000, and 11,000,000,000 kilowatt-hours of electrical energy. In the opinion of the Westinghouse and USp engineers that worked on the problem, the reason the blades failed is a design flaw involving the harmonic frequency of the turbine generator. Apparently, certain conditions such as perturbations in the power grid (the interconnected transmission systen) must exist for the problem to arise. The problem cpparentb occurs when various factors af fecting the power grid, the generator, cnd the vibrations of the turbine, come together by chance circumstances. NSP engineers conclude that the December 17 binde failure was not related to the pcuer. level at which the plant was being operated, any particular test that uas being performed nor the degree of construction-co;.pletion as of Deccaber 17, 1973. USP belicves it had a valid dnm ge claim against Wcatinghouse related to the blading problem. USP also believen the proper ceasure of the damages should be the additional cost of power incurred during the forced outages caused by the blading problem. Under the cons truc tion contract ';5F could not reject the plant, corpel Westinghouse to return the purchase price nor compel Wes tinghouse to repince the turbine. USP could only require that the performance standards be met, which Ucctinghouse has accomplished through turbine modifications. ]Acence Mc:triction_ An de:cribed above, the Atenic Energy Cn::ainsion incued the facility generating license on August 9,1973. In addition to requirin;; certain evaluations, podifications, and tests before actual cperations could begin, the license rcotricted the reactor core power to 1,435 enavatts of thereal power (S0 percent of the rated capacity) for testing purpaces and 330 cegawatts thermal (20 percent of the rated cap:. city) for steady operati ons. The licenac was effective for cue year, scheduled to expire August 9, 1974. On Decetber 14, 1973, the AEC issued License Amendment No. 1 which relaxed the operating restriction so that the plant could c perate for power generation purposea at steady state reactor core power levels of 1,4C5 megawatts theraal (90 percent). The license was to expire on August 9,1974, unless c:: tended for good cause nhown, or upon the earlier issuance of a cubsequent licensing action. On April 5,1974, License Amendment No. 2 raised the authorized power Icyc1 to 1,650 megawatts of thermal power (100 percent) and increascd the teru of the liccuse to June 25, 2008. In the opinion of the NSP engineers, the license restrictions that vere in force during Decenber, 1973, vere not due to any lack of construction-l completion, or physical probica with the plant. g]l h@@ a 0 > 1_,_, _ J IN L - ls

Licenne Restrietig (Contd) License Amendments No. 1 and 2 arc attached as Exhibits C and D. Danerr. hip Northern States Power Company was both the owner and construction c:anager of Prairie Island Nuclear Plant. Therefore, icgal ownership of the plant belonged to USP throughout the construction period. Control USP vas in ccaplete control of the plant facility on November 30, 1973. TOINTS AT ISSUE Northern Statcc Power Company hereby requecto technical advice in response to the following questions: 1. Was the plant "placed in service" during 1973 uithin the meaning of Sections 1.167(a)-11(c)(1)(i) and 1.46-3(d)(1)(ii) of the Treasur'/ Regulationn? 2. Ic the plcnt " considered in a condition or cla:.c of readinesn and availability fer a specifically accigned function" during 1973, consistent with the cwcplen given in Section 1.46-3(d)(2) of the Tecacury 'egulations? Tllr REGULATIONS ASD INTER:MT/,TIONS TIEREOF The pertinent parte of the Renulationn: The ADR depreciation Regulat ior.s incorporate the Regulations of Invest:nent Credit to define the placed in nervice date. The pertinent points are identified and quoted as follous: [il.46-3(d)(1) "... property shall be ccnaidered placed in oct rice in..." (fi)"The ta>mble year in which the property in placed in a condition or state of readineco nud availability for a npacifically ansigned function..." gl.46-3(d)(2) "...the following are exampics of cases where property shall be considered in a condition or state of readiness..." (ii)" Operational farm equipuent is acquired during' tile tannble year and it is not practicable to ur,e such equip;ent for its cpecifically assigned function in the taxpayers businers of f arming until the following year." i ' (iii)" Equipment in acquired for a cpecifically assigned function and is operational but is undergoing tecting to eliminate any l defects." TNn w

The requirements of the Regulations have been applied to the following cituations as follows: 76-428, 1976-2, en 47, a nucicar power plant was ruled 1. In Revenue Ruling to have met the requirements as of 12-23-75, the synchronization and power operation date. 76-256, 1976-2, C3 46, a coal burnire power plant was In Revenue Ruling deemed placed in service even though a vaste disposal system was not 2. The rationale was that the vaste system was complete enough (the complete. to "not interfere with the generating units intended purpose on" The key date was also the date of initial date placed in service). cynchronization and power operation in this case. a rendering In Untional By-Products, Inc vs U S, 39 AFTR 2d 77-1406,tax credit 3. system uns dccted to have been ac quired for inves trent purposes when it was fully fustalled and operational in the sense it was capabic of processing material, even though complete satisfaction in its performance had not been achieved and the contract that ctandards not fully net. 69-201, 1969-1, CB 60, spare parts were decmed pinced In Revenue Ruling the standby parts 4. in service before actual use under the rationale thattaxpayer's business". are "neccurary and essential to the operation of the allowed on an 17 Arra 2d 833, depreciction was In Scars oil co, Inc, 5. oil barge from the time it uas ready for service even though it was to actual use until !!ay of the ncet frozen into a canal and not put yearp. Y . Tilt POSITION OF NORTHFRU STAES_ POER CCMFAN 'hn position of NSF that Trairic Isir,nd I c.et the "placed in service" It ic of the CLAUR regulations in the year 19 73. requ,ccenti Comparison 1 The key events in the construction-conpletion and start-up process of and the dates thc cvents occurred at the three clectric generating plant:> plants befrc compared are ac follows: Prairie Rev Rul Rev nul Island I 76-423 76-256 Muclear Nuclear Coal 8-9-73 11-21-75 Unktuvn 1. Issuance of operating License 8-30-73 11-25-75 Uot Applicable 2. Campletion of Puel Leading 12-1-73 12-15-75 Not Applicable 3. Criticality 12-4-73 12-22-75 12-11-75 4, Initici Synchronization 12-7-73 12-23-7S 12-13-7S 5. Reached at Least 167. Pouer 12-16-73 Not in 1975 Unknown 6. Reached at Least 467. Powcr 7. Kilowatts Q nerated cross 26,900,000 2,651,000 Unknown m,a o gh.fi o? _. Lu m J

_8-Comparinonn (Contd) The comparison makes it obvious that the Prairic Island I plant una ahead Therefore, of either of the plants described in the Revenue Rulings above. absent any other relevant facts, Prairic Island I would be considered "placed in service" in 1973. The examining agent has raised two additional facts where the prairic The Island I situation differs from the plants described in the rulings. examining agent asserts that taken together, these two items prevent the plant from beir.g considered in service until 1974. Fact 1 - As of 12-31-73 the plant performance had not been accepted and a the turbogenerator manufacturer possibic damage claim existed against relating to tue blade failure. the operating license was restricted to 907 of the Fact 2_- As of 12-31-73, rated power capacity and scheduled to expire on September 9, 1974. It is the position of the Company that neither fact above is relevant to the question and that these facts tihen together or separately chould not from being considered in service within the meaning of prevent the plant the Regulat. ions. RATIC:: ALE clain 1. ,1pek of Acceptance and possiblo The lack of acceptance in t.he case of Prairic Island I is na different the initial synchronization date of than the lack of acceptance at It is the industry practice for the utility other generating plants. (ovncr) to defer equipment acceptance until the end of a rather extensive the turbine binde The possible damage clato relating to tent period. is not relevant to the in cervice quection because obviously failure ret:cission of the contract was imposnible. In the nuclear plant situation, the size of the plant, the manufacturing land tite, the 1crge investment by the owner and the large cost incurred by the manufacturer mahn it impor,nible for the manuf acturer to take back the turbine generator and return the cuner's payments. Under the contract, Westinghouse van only faulty turbine. The obligated to repnir, replace, adjust or r::odify the decision whether to repair or replace belonged to Ucstingboase. The District Court faced a similar situation in National Ly-Products, Inc, It decided that neither full customer satisfaction ncr completion of the testing process is essentini I efore the yctea can be considered supra. Under this rationale USP " acquired" " acquired" for iny, tax credit purp< =cs. in 1973. the turbine generator, with no right of rescission, k 0 ~ F 7 ' SE-6

.. - 4 2. License Restrictiona_ The Regulations require property to be placed in a condition or state of readiness and availability for a specifically assigned function in order to be considered placed in acrvice. possension of the neccanary licenses is thercCore required by the Regulations. The pertinent question is, however, do the Regulations require the license to be free from rer.trictions of the type imposed in this cace? NSp believes the annuer is negative for two reasona. Pirot, the restrictions were minor. Second, substantial restrictiona have been permitted in other circumstancen. The restrictions are minor in that the 107 restricti.*n did not interfere with the actual plant operations nor would it have interfered with the planned plant operations for the balance of 1973 had the turbine blade failure not occurred. Depreciation is permitted notwithstanding the substantial restrictions to availability or operability described in the following casco: 1. Tha Regulations call farm nmehinery available for a specifically assigned function even though the assigned function is out of seanon until the next year. Section 1.46-3(d)(2)(ii), supra. 2. Revenue Ruling 69-201, supra, permito dcpreciation of spare parts before installation. 3. In Scaro 011 Co, Inc, supra, an oil barge van consfdered in a condition or state of readiness and availability for a specifically assigned function even though frozen into a canal for the balance of the vinter. A. Autocobilcc are considered in nervice even though the governmental cgencies that control automobile operations impose restrictions on r;pecl and vill grant only a one year license. SUmfARY 'ihe Prairic Island Plant did operate during 1973 and in to doing it produced 10 times the electricity in the year in question as the nucicar plant described i-Revenue nulite 76-423. A plant that did operate must be con-oldered to have met the requirements of the Regulations that only require the plant to be ready to operate. The license restrictions did not prevent nor interfere with operations. Acceptance of the plant is not essential before the plant can be considered " acquired" by the owner. D OjkI @MEd k f

v..

CONCLUSION Based on the f acts as stated above, the Prairie Island Nuclear Generating Plant, Unit I, was first "placed in service" in 1973 within the meaning of Sections 1.46-3(d) and 1.167(a)11(c)(1)(i) of the Regulations. Therefore, based on these conclusions, we respectfully request that you issue techni-cal advice that the depreciation deduction and the investment tax credit related to this plant are allowable for the year 1973. REQUEST FOR CONFERENCE AND COPY OF !!EMORANDUM Purs uan t to the provisions of the Code of Federal Regulations, Northern States Pcuer Company requests a conference in the National Of fice and an opportunity to subnit additional infornation for consideration before the issuance of a technical advice memorandura in the event that a decision adverse to NSP is contemplated. Northern States Pcuer also requests, pursuant to the provisions of the Code of Federal Ret;ulation, that a copy of the technical advice itemorandum be furnished to it. Questions or comments concerning this request should be directed to the undersigned at (612) 330-5907. A poacr of attorney is attached authorizing two persons from the Washington office cnd two persons f rom the Minneapolis of fice of liaski ns & Sells, Certified Public Accountants, to act on this matter on behalf of Northern Stater rover Company. Sincere]y, NORTilERN STATES POWER COMPANY T.y G S Pettersen, Controller Attachments W l figg;u w coh' n, l f

a,s, b,MC, y&- J. i~.. q ~~r \\m'n w;)Jm.y- / a Wowm).

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(L T4 O M T 11 C TT T4 STATCS P O W C rt C O r.1 P A T4 Y 1 M I N N C A D O L.S S. M I N r4 E G O T A M5408 . t., m Felfruary 27, 19 78 !!r Albet t L '. codman . Chief,.\\ppraital Section Eng,ineering and Valuation Uranch Internal Revenue Service (T:C:1:: A) Mantiington, DC 20224 y== Re: Norther n S tates Powe r Company Request d for fechnical Advice; Depreciatica on J' r ai r i e Is land _ :;ucl, a r Generat i ne Plant

Dear llr Woodu.in:

At the conc 3u-ion of the conference i t was our unders tandin;; that in Unuhington on February 7,19 7S, we, Jorthet n S tate: Po.-ze r Co:cpcuiy, woul d ? cubmit additional information rela t ing t o the pendi o;; r eq ue n t. for technical advice and, in aJdition, res tat e the ec cence of our ary,u:nen t that we UI ent it]cd to rotwnce depreciatica on the subject facility l in 1973. In compl iance wi th t his unders tandin;;, we encione herewith a copy of: a 3. Description of the Pr eoperational Ten t Prop, ram (b:hibit A). m ?. _ List of Preoperaticual Testr Ui t h Co:.:pl e t ion Da t et. (E y h i b i. t 5). 3.

1. i n t of St a rt-Up Tent Seq tn'n ce Through Lou Pe.te r Tenit Uith Completion Date: (Uxhibit C).

i 1he que:: tion uhether depreciation on the subject facility is to com-roence in 19 73 t ures, in our view, on uhether such facility was "first pfaced in servit.e" in 1973. Pursuant to T rea;;ury Re;;ula t ion, Sectica 1.16 7(u)- i l (c) ( 1), "(p) rope rty is first placed,in service when f i rs t placed in a condition or state of readi ne:,, speci fically assigned f unction .utd availability f or a It is our contention that the subject facilitj was fi rn t placed in a condition of readines, to e.ene r-ate elect rical power for cale to customera, its specifically as ;Igned function, en Decembe r 4, 19 7 3, for i t. una on that date that the facility, in fact then y,enerating elect rical power, was synchroni: ed into Conipany ' t, potter grid. the gg @ @flOIlf\\Il 9 I rh m l

( We cannot, we feel, overemphasi::e the 'li gn i f i c a n ce of synchroniration. ) A newly coirit ructed imcicar powered elec t ri cal generat i ng

facility, co:;t ity; some 234 nillion dollain, is to be integrated into an elect ri-cal supply systen costing in the billions of dollarr.

,c ,i It would seem inconceivable, as ue would expect you to fully appreciate, that the responsible engineers would attenpt such integration, considering the mt cost,s of the equipvent involved nul t he enormoto dauage which could r e s ul't from an equipment failure, if they did out feel certain that to facility was in fact in a condition of readines' to perfetn within new the grid. The preoperational and t he cold and hot uhut-down tests, an well as the si gnificant zero power tests, indicate in our view a s T-ficient engineerinp basis. f or predicting at t he t i:w of :ynchronization not only the capac:ity of the new facility to generate electrical power, but the capacity to do so without risk of dn.nge. The fact that the subject f acili t y gene' ated t aleab le elect rical power for some 12 days subsequent to synchroniration ie in our view of no legal consequence. Thin vould seem to be the teaching of Sears Oil Co., Inc.

v. Co::, n i s s i on e r, 3M F.2d 191 (2d Cir.1960), where depreciation was allewed for the t m. p a y > r ' - barre en the basis that it 1.

was ready for use in th< t axpayet 's busine. e ve n though not yet actually used. bi mi l a rly, depr eciation wa allwed in the situation described in Revenne Huling 70- 4 N, 19 7t.-2 C. B 4 7, a l though t here we, a partial shutdeun of the pe ne rat i n r, pl an t one day f o] lowing synch ron-1 ation, if we ate cor: c ct in av et: ing that une i: not a paesequinite to deprecIalfun, then t h >:. Iact that a coUpunent of the subject Jysten failed subsequeat to readine: can liheuite be of no legal significance. Certainly t h b. cont] m ion coupor t: with the e xpr et s regulatory language, whe re "p la ced i n s e rvi ce" in ec,uat ed t o a "cc edi t ion of leadine." to perform a iunction, and not to the actual potfort:ance of a function. If you should not, how cer, agree an to the manner in which we have stated this icz.ue er the det e nd nin; la i, I u would ask that you provide os with ehat you beliert to be a cortect t ' at emen t of t he jsuuc or of the Jas. i f you do agi e" an to the u r ai c. cot of the inaue and the lav, en inclination en your part to zuJe adveim to our pesition would I r.c e m to be a connequent t ;olely of our failutt to trmo,i t to you a cuiIicicat *aount of the dat a that w.,s available to our engintera tu 1973 and.which led them to conclude that the ;ubj ect f acili ty wa:, Decenber 4, 1973, in a conditica 01 t e a d i n e: on to generat e elect rical pouer for ica ile '. o c u a t e. e t c.. If you should feel that th is lat t er cane does in fact exist, we vould he cager to m h one of our enntneer: having a corplete kn ow ) ( dy,c of the pertinent circut ;tanten available t o you at your convenience. Ub e t b e r o r no t, you wish to avail yourself 01 this opportunity, we would, in the event y.n u contemplate i:.;ui ng an adverse ruling, mk that we he afforded anethe,r oppottunity to discus, this matter with you in Washingten before any such ruling i :, is;ued. Sincerely, f\\ W P]W W 1 NOR'ihl:RN STATES POWLt CmipAiW f_p,(q bc: C K 1.ci rson p A Il Renquist

1) A 1.awrence Qs " q,.

Hy gCt/y1.,r/ A C Sather J u neir (itts) G S Pettelsen, Conttoller .I U l.ittlefield (Hriggs 6 !!angan) enclosuren

l'n 1 of 1 1:Ol;TilEll:1 STATES poutit CO!! patly plt A_II!1 E I S I.\\t:1) UNIT 1 i 1)escr.ij,it ion _of the preoperational Tes t program The preoperational test program was designed to assure that. all structures, systems, and components will satisfactorily perfona their safety-related functions. It was required by the U S Atomic Energy Con:uission as a part of our final safety analysis report (FSAR). The ultimate object of the test program is to prove the safety of the nuclear steam supply system. The AEC regulatory guide broadens the scope of the test program with the words "(t)he test programs should provide additional assurance that the plant has been properly designed and constructed and is ready to operate in a manner that will not endanger the health and safety of the public, that t he proceduret, for operating the plant safely have been evaluated and demonstrated, and that the operating organization facility in a safe manner."ges and fully prepared the plant and proce is knowledgeable about to operate the Because the AEC testing requirements were broadly stated in terns of proper design and construction, the prairie Island preopgational test program van designed to test all of the plant systems, ~ not just the systems directly related to reactor safety. fl. U S Atomic Energy Commission llegulatory Guide, 1.68 preoperational and ini tial Star tup Test programs f or Un ter-Cooled power licactors, 1ovember, 1973. /_2. The preoperational test program tested plant systems as opposed to individual items. The cons truc tion tes ting program tested each individual conponent, such as, each pump, piping segment, valve and electrical wiring harness. These individual tests were designed to demonstrate proper assembly, velding, installation and connection. The preoperational test program for a system did not begin until all individual items in the system had been tested under the construction test program. e 8 t ma Muwmu i _ __ -- - 1

crxervnnr -- Pg 1 of 3 I. int o_fJr_coperational Tes ts Ui t h Cormlet ion Da tes Test Go Code flescription Date Complete i 27.2 SI SI Lou 11ead & Low llend Recire 2-3-73 45 sr Spent Fuel Pit Cooling & Porff 2-23-73 43.1 PS RCS Pressurizer Helief Tank 3-2-73 4 3.5 ' - RC RCS Flow !!casurement 3-15-73 43.4 RC RCS Leak Rate Test 3-18-73 4 CC Component Cooling (Cold) 3-22-73 9 SU llo t Functional outline 3-22-73 42.1 PS RCS Pressurizer Level Inst 4-10-73 31.10 U I. Chemical. Drain Tank & Pump 4-13-73 50 CS Centainment Spray (:?ozzle Flou Verif) 4-15-73 35.4 CS Cencracor Seal 011 System 4-15-73 22 UC llisc Cas N2 Systen 4-19-73 3 RM Reactor Makeup Unter 4-23-73 13.2 VC VC Chargir.g & Letdown 4-26-73 69.1 IP Uattery Inverter 14.>r Sources S-6-73 69.2 CO Instrument AC & Computer AC Dist 5-6-73 31.5 UL Uaste condensate Tanks & Pumps S-6-73 35.2 TP Auto Stop & Lube Cil 5-6-73 13.6.1 VC Concentrates !!aldup Tanks & Pumpc 5-9-73 67 EA . Plant 4 RV Station Aux 5'-11-73 64.2 ZC Dame Recire 5-13-73 5 SA Station Air 5-17-73 35.8 Tn Turning Gear System 5-22-73 31.3 UL Reactor nldg Sumps & Drains Piping 6-1-73 63 En Plant 480 V Station Aux 6-3-73 31.9 UL Aux nldg Sumps & Drains 6-8-73' < 27.1 SI SI Accumulator 6-15-73 4 CC Component Cooling (Hot) 6-17-73 13.6.3 VC Laundry & Hot Shot:cr 6-17-73 72 EAC Cooling Tower Area 4 KV 6-17-73 31.12.5 UL Aerated Drain Systen 6-19-73 22 1;G Misc Gas Systen 6-20-73 6 CD Condensate 6-24-73 71 EL Lighting & Ilise Snall Power Supply 6-27-73 11 CF Chemical Feed (Hot) 7-10-73 70 DC Eattcry & DC Dist Systen 7-10-73 32.1 Pli Reactor Service Tools 7-12-73 49 RTil Reactor Trip nrenhers 7-15-73 27.4.1 SI Slave Relay Actuation Test 7-17-73 73 EBC Cooling Tower Area 480 V 7-19-73 32 Fil Fuel Handling 7-19-73 7-20-73 27.5 SI Safeguards Logic 48.1 US naler System 7-22 s 64.5 ZC Rin;, cirder Cooling 7-22-73 31.2 UL RC Drain Tank, Pumps & Filter 7-23-73 74 I AC Station Annunciators Part 1 7-23-73 64.7 ZC Neutron Detector Cooling 7-27-73 64.6 ZC Reactor Cap Cooling 7-29-73 27.4.2 SI integrated SI Test Uithout Blackout 7-29-73 27.4.3 SI Inter, rated SI Test With Blackout 8-5-73 27.3 SI S1 Iligh Head 8-8-73 t,

_1.X__i_l__l n l T n Pg 2 o f 3 I.is t o f Preopera ti onal Tes ts Ui t h Complet i on pa tes (Contd) _ Test 1;o Code Description Date Complete s 31.4.3 U S/G nloudown 8-9-73 2.8 n!' Residual llent (Cold) 8-12-73 10 SS Turbine Cold Snapling 8-13-73 64s] %C Fan Coil 8-16-73 80 XU Fan Coil Condensate Meas 8-17-73 77 CA Cont ain Spray caus tic Addtn 8-19-73 46 1:1 1:uelear Ins trtunentation 8-19-73 25.3 RP Logic Time nesponse 8-20-73 [ '25.2 RP Logic Fu nc t io n 8-20-73 56 Zil Chilled Unter Safeguards 8-22-73 13.5 VC Boric Acid Transfer 6 Catch 8-23-73 25.4 HP Logic At Power Test 8-24-73 f 26 nD nadiation Monitoring 8-26-73 j 12 CU Communications 8-26-73 64.4 %C Crom Cooling 9-9-73 78 L!! Post Loca H2 control 9-9-73 51.1 UG Gas Analyzer 9-12-73 1 30 FP rire Protection 6 Screen l! ash 9-16-73 35.10 TC Steam Seal & Cylinder Hea t Sys ten 9-19-73 16 CL Ceoling Mater 9-20-73 q 53 2C Diesel Cenerator Geoling 9-20-73 46.1 WJ Movable Incore Ins truuenta tion 9-23-73 31.6 TD Turbine Bldg Sumps & Drains 9-23-73 31.11 WL Hon-Aera t ed IJrain Moni tor 'Ik & Ptmtp 9-23-73 74 11 AC Station Annuncia tors Pa r t 11 9-26-73 31.4.2 1!L S/C nlo;doun 9-28-73 1 29 VC Boron Analyzer 9-30-73 54 ZK nattery' noom Spec ial Vent 9-30-73 35.1 Eli E-Il Control Syr. tem 10- 2-73 2 DC Deepwell H 0 Treatment & Cond Maheup 10 73 3 61 ZF SFP Normal Vent 10- 7-73 6 's. 3 ZC Int ernal Cleanup 10- 7-73 76 ZH Safeguards Eq lit. nem 10- 7-73 15 FX Fire Detection 10- 8-73 31.12.1 UI. A DY Col l Ta nkt Puc.ps 6 Filter: 10- 9-73 31.12.4 l!L ADT Moni tor Tant: 6 Pump 10- 9-73 41 SM Reactor ifot Saupling 10-1G-73 1 DE Domesti.c Uater 10-12-73 13.1 VC Makeup & niending Control 10-12-73 31.12.3 UL ADT Conden Receivers Pumps & Jon Exc 10-12-73 33.1 CU Cire Water Internal 10-12-73 '33.2 CU Cire Uater External 7 10-12-73 31.14 UL 800 Ca1 1:vap flu Tank 6 Cone Tank 10-13-73 35.11 TH Supervisory Instruments 10-14-73 24 RE Reactor control 10-15-73 20 EC Emergency Diesel Gen 10-16-73 31.15 UL Spent Resin Tank 10-16-73 59 ZA Aux nldg Special Vent 10-16-73 60 ZS Shield I;uildi.ng vent 10-16-73 31.8 UL Waste !!oldup Tank & Pump 10-17-73 7 ( (i) } f:,J j ' ~ ' bi [L A_ dhb m

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.j.- L,iLL h. -- o Code t Description ~~~ 57 gg, Elle comp!e t e .k-j, n 58 ntrol nm & Computer n u Aux l'idg 1:ormal vent j jg.f[ " "U) 10-17 73 m 31,1 I,aundry & Ilot Shewer 10-17-73 63 gp 10-19-73 . r 'S Containment Purge 6 no ruel b'N I," I 6 iir'. Steam 1:xclusion 10-21-73 14 irb 0i1 Trans & l'nri fica t ion 0-21-73 31.12.2 g.g 1sc Drains Coll Tank, & l. 10-23-73 62 - I umps 10-25-73 . t, A gyp c 'e('l a l & on In Service p. 10-28-73 31.4.1 c3 wn 47 1c l'ac te piSPonal cas 10-30-73 yj 33 { liain & Aux Steam 1I-2-73 ocreenin;use ventilation Il-7-73 31.7 g,,7' ' 9~73 ff"8"Le Ivan (2 clil) I.eak Test 42.2 p3 4 73 . I"'ssu ri er Pressure control 13.6.2 yc poni tor Tank, & Pump ; 11-13-73 75 77 Rad 1lasto nidg ;;ygg 11-13-73 25.1 3 l; 40 Analon Protection 21-18-73 Aux F eduater 11-21-73 47,1 12 Ilyd rog en 11-22-73 51.2 C3 Analyzer (Ilo t ) 11-25-73 'm 52 3; lle a t Tracing 11-25-73 7 r0 Ioel & pienel Oil 11-25-73 la p' Air Recoval 11-28-73 l 12-1-73 j TOTAT, TI:STS 124 P-I 4 s. ' ) {}f f^ b l j\\ g')\\!{M d b. S i'.. i u d ~ I ['- g I!..-j { ! ;i .l

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