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SERVICE

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.

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

Donald Burkhart,

for respondent.

SERVED .AUG 3 1 2005

2 CONTENTS

MEMORANDUM FINDINGS OF FACT AND OPINION .

FINDINGS OF FACT

. . . . . . . . . . . . . . . . . . . . . . . 5

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

Miscellaneous Nuclear Property . . . . . .

1. Main Steam Isolation Valve (MSIV) Air

Accumulation System. . . . . . . . . . . . . . . .

042 14

Reactor Vessel Probes

Raceway Protection System

.·.

Area Radiation Monitoring System .

Nuclear Fuel Transfer System . . .

. . . . . . . . . . . . . . . . .

Surveillance System for Heat Exchangers

Spent Fuel Rack Systems

Environmental Property

. . . . . . . . . . . . . . .

. . . . . . . . . . . . . .

Wastewater Neutralization Treatment System .

2. .PCB Transformers . . . . . . . . . . . . . . . . . .

Simulator and Training Buildings .

Load Management System . . . . . . . . . . . . . . . . .

St. Lucie Backfit Construction . .

Underwater. Intrusion System .

Condensate Polisher Tie Line .

. . . . . . . . . .

Instrument Air Upgrade . . . . . . . . . . . . . . .

St. John's River Power Park (SJRPP)

The Southern Company Contracts .

Integrated Transmission Line Systems .

Distribution and Transmission Substations

Regional Planning

. . . .. . . . . . . . . . . . . . . .

OPINION . . . . ... . . . - ·. . . . . . . . . . . . . . . . .

The Statutory Landscape . . . . . . . . . . . . . . . . .

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

- 3 1.

Property Purchase.d and/or Installed Pursuant

to the Tariff . . . . . . . . . . . . . . . . . . .

The Tariff Is Not a Contract for

Purposes of.TRA Section 204 (a) (3)

. . .

b. .

The Tariff Does Not Readily Identify the

Property in Issue . . . . . . . . . . .

Documents Incorporated by Reference Into

the Supply or Service Contract . . . .

Property Readily Identifiable From the

Related Documents

. . . . . . . . . . .

Class Life of Nuclear Fuel Assemblies

Pursuant to TRA Section 203(b) (2)

. . .

Are the Southern Company Contracts TRA Section

204 (a) (3) Supply or Service Contracts? . . . .

Are the DRI Documents TRA Section 204 (a) (3)

. 101

. 102

. 106

. 124

. 128

Supply Contracts? . . . . . . . . . . . . . . . . . 134

TRA Section 203 (b) (1) (A)--The "Binding Contract" Rule

1. Nuclear Fuel Transfer System . . . . . . . . . .

2.' Southern Interchange Contract

. . . . . . . . .

LMS Equipment Under A.B. Chance Contract . . . .

St. John's River Power Park (SJRPP)

. . . . . .

TRA Section 203(b) (1) (B)--"Self-Constructed Property" . . 152

"Wrap Up" Work and "Enhancements and

Deficiencies" Work at the SJRPP . . . . . . . . . . 158

Distribution and Transmission Substations . . . . . 165

3. . Transmission Line Systems

. . . . . . . . . ... . 169

"Backfit" Items at St. Lucie . . . . . . . . . . . 176

Underwater Intrusion System .. . . . . . . . 177

Condensate Polisher Tie Line . . . . . . . . 179

Instrument Air Upgrade . . . . . . . . . - :. 181

Spent Fuel Rack Systems . . . . . . . . . . . . . . 184

TRA Section 203(b) (1) (C)--"Plant Facility Rule"

"Backfit" Items at St. Lucie . . . . . . .

"Wrap up" Work and "Enhancements and

Deficiencies" Work at the SJRPP . . . . . .

Written Specific Plan . . . . . . .

Costs Committed or Incurred . . . .

Distribution and Transmission Substations

Written Specific Plan . . . . . . .

Commencement of the Construction . .

Costs Committed or Incurred . . . .

136

138

140

144

147

. 187

. 189

191

192

194

196

197

199

202

Conclusion . . . . . . . . ". . . . . . . . . . . . . . . . . 204

Appendix A:

Equipment Installed at Substations .

Appendix B:

DRI Project

. 205

. . . . . . . . ;... . . . . . . . . 208

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judoe:

Respondent determined the following

deficiencies in pet=itioner's Federal income taxes:

Year

Deficiency

1988

1989

1990

1991

1992

$922,601

15,183,930

5,228,640

1,788,565

5,867,463

Petitioner did not make any claim for investment tax.credits

(ITCs)

in its original returns for the taxable years 1988,

and 1990.

1989,

On the same date that respondent issued the notice of

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

Corporation Income Tax Returns

years 1988, 1989, and 1990.

(amended returns),

for its taxable

In the amended returns, petitioner

claimed additional ITCs1 as follows:

Year

1988

1989

1990

Amount

$33,308,287

44,336,798

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

1989

1990

$31, 737, 038

41,553,822

51, 973, 051

On January 14, 2002, petitioner submitted its trial

memorandum in which it further reduced' the additional ITCs

clairäed as follows:

Year

Amount

1988

1989

1990

$7, 681, 335.

7,862,335

13, 320, 9.79

The issue addressed in this opinion is whetl3er 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 iri 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 accómpanying 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

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 Servïce 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...)

sign the tariff.

Under the tariff, a customer may obtain service

from FPL by ipplying in writing, by telephone, or in person.

The

tariff included a Èuel clause, whiah calculated the cost of fuel

and of purchased power in aácordance with a formula "to reflect

the cost of fóssil and nuclear fuels and purchased.power for ·each

kilowatt-hour deliver'ed".

Nuclear Fuel Assemblies

FPL claims ITCs for nuclear fuel assemblies in the 1988,

1989, and 1990 taxable years.

Gene'rally, to generate electricity

at a pbwer 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 assemblie.s (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 cogponents 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 assembli^es 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.'

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 FPLfs 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.'

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.seconds sales

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

concentrate.

On September 9, ·1974, Potomac Elec.tric Power Co.

(PEPCO) and

Kerr-McGee Nuclear Corp. executed a contract to.chemically

process uranium.

This agreement called for the conversion of

Mr. Villard testified that to change to another NRCapproved supplier, it would take at least 3 to 4 years before

actually getting the first new full ba.tch 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 uran.ium concentrates.into UF6 from 1978

through 1990.

to FPL.

On Febru.ary 10, 1978, this agreement was assigned

T.he 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 th.e 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, ÝPL entered into a contract with Exxon

Nuclear Co. for thë 'supply and delivery of fuel assemblies.

According to the contract, "FPL may terminate Reload Regions

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,-397,000.1°

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."

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.

1° 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 pro'jected 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.

The date that this budget item was approved is illegible

on the Court's copy. The budget item contemplated a projected 5(continued...)

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

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

cost as $2,151,000."

A 1986 BI No. 566 for fabrication of

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

$4,640,000."

A 1986 BI No. 567 for fabrication of.nuclear fuel

for Turkey Point Unit 4 lists the gross cost as $760,000."

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

(...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.

" 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.

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.

" 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.

Miscellaneous Nuclear Property

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)," in which its engineering department

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

unable to close the MSIV in accordance with its originäl

" 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.

" 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."

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 alr 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,

".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 o.rder.

* * *

- '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.

Surveillance System for Heat Exchangers

The surveillan'ce 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 item2o 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 sthere 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.

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 042plant.

- 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), 4 the NRC imposed "Action Plan Requirements",

known as "NUREG-0737", to prevent similar accidents at.other

nuclear plants.

One of the regulatory guidelines2s that resulted

from the TMI a.ccident was the requirement that nuclear plants

monitor'coolant inventory.

FPL's nuclear plants were designed

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

a result, FPL installed reactor vessel level monitoring

instrumentation.

On July 18, 1.986, 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 041to

Assess Plant and Environs Conditions During and

Following an Accident, issued by the lHlC and dated May 1983.

- 19 letter detailing,modifications to FPL's próposed changes.

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.

date on the ER is November 1, 1985.

The earliest

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 véssel

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.

Raceway Protection System

A "raceway" is a system of metal conduits or trays that is

used to transport electric cables from one place to ano'ther

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 Mrl 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 thóse years.

- 20 (Nov. 19, 1980), contains general and specific redluirements for+

protecting electfic 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 Augus't 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 Auguht 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 1.986 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 wasv 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 decreabe the amount authorized to

$263,722..With respect to the installation of the raceway protection

systém, 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.

Spent Fuel Rack Systems

FPL's use of nuclear fuel to generate electricity requires

it to repl,ace 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 wa 541te=act),

the Federal

Government was required, in e 576change

for fees paid by electric

utilities, to handle the disposal and permanent storaye of.spent

or u^sed 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 pérsons 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 sys.tem 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 as.semblies.

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.

series of revisions.

This BI also underwent a

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."

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

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."3°

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.

3° Mr. Bible testified that, according to the document, n.o

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.

Area Radiation Monitorina 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

mo.nitoring."

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.

section of the BI labeled "purpose and- necessity" states:

" 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

egúipment is obsolete. The replacement of the

equipment is a Nuclear Regulatory Commission (NRC)

Requirement to,meet the recommendat.ions 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

regulres 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 engi'neering 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.

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 c

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 purchabe order"to Stearns Catalytic)

authorizing $663, 975 to 'provide labor and materiåls for - the

transfer upgrade modification of 'I'urkey Point Units 3 and 4.,

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

042

$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.

Environmental Property

As a utility company, FPL is subject to environmental

regulations by Þederal, State, and local governmental agencles,

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

Guard, and the Florida Depa-rtment of Environmental Protection.

Environmental regulations applicable to FPL relate to several

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

plants.

The purpose of envirdnmental regulati'ons, as applicable

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

distributes elèctricity in1 a mannër that will protect human

health and the environment.

Wastewater Neùtralization Treatment System

A wastewater neutralization treatment system treats the

wastewater.coming from th.e mineralizer regenerate.

The

mineralizer water i's ultrapure water that is placed into the

boiler to generate the steam, which ultimately drives the

generator to create electricity.

corrosivity.

Wastewater is ha.zardous for

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."

The TOPs were .issued

pursuant to the Resource Conservation Recovery Act.

On May 7, 198.5, 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"."

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 *.* *

règulations.

[Florida statute] and in accordance" with EPA

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

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.

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, des'ign, 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:

90 days to submit a groundwater monitoring plan:

(1)

(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 wäste

treatment facility would not meet federal and state

statutory requïresents.

* * *

ER No. 9956, processed on December 5, 1988, authori 576ed

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

lihers at the Port Everglades'plant.

A section of the ER labeled

"purpose and necessity" étates:

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 reportïng 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. 3068" authorized 'the purchase and

installation of a pH meter fo'r the neutralizatio'n tank at FPL's

Fort Myers fossil plant.

ER No. 8831, processed on September 6,

1985, authorized $19,440 to "Construct in pl·ace a concrete block

retention wall around' the Water.Treatment Plant neutralization

basin" at the Turkey Point fossil plant.

Because of the quality'of the copy in the record, neither

the date nor the. amount can be determined.

Mr. Butts testifi.ed 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.

PCB'Transformers

Polychlorinated biphenyls (PCBs) are a hydrocarbon that has

been chlorinated.

PCBs have been idehtified by environmental

regulators as a potentia,1 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, process1ng, 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.

rule, inter alia:

(1) "P'rohibits the use of PCB Transformers and

PCB-filled electromagnets

greater)

The PCB

(with a PCB concentration of 500 ppm or

* * * 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."

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

M Mr. Butts testified that a PCB leak was a "reportable

event" to the EPA.

- 35 to be completed ïn 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"" at FPL's power

plants."

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

authorized $341,396 to "replace Pressurizer He.ater P.C.B. oil

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

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."

With respect to the replacement of PCB, transformers,

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

Although not all of these ER's contain the exact.quoted

language, they each contain similar language.

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.

Sïmulator and Trainino Buildinos

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

management and enforcement conferences concerning Turkey Point.4°

In February 1984, FPL presented a performance enhancement program

for Turkèy Point to the NRC."

Part of the performance

enhancement prbgram 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 1.990

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:

4° 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 tike.

" 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."

divided in two phases.

The budget item was

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.

estimated at $2,800,000."

These costs are

This BI 543 was revised in March 1984

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

million.

This revis1on envisioned training centers as p.art of

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

42 BI No. 543 only dealt with phase I.

In late

- -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 cont ol 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.

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 o.f 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

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 Póint] 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.

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

cen·tral 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 prepared1the "Energy Management Plan for

the '80s" (the plan) .and submitted it to the FPSC."

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

" 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.

management and energy conservation programs designed to meet the

FPSC mandated goals.""

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."

FPL ubed 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)."

An FPL purchase order incorporated into the LMS

contract acted as' A.B. Chance's authority to "furnish the Phase I

For example, the FPSC's Sept. 17, 1980, o.rder 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%".

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 gg.·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.

* * * °1

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

hardware, software, etc."

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.

*.* *

" 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.

etc."

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:

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

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

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

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 t.ransponders, communication equ.ipment

for substations, test equipment, and computer hardware and

software.

The budget item states th,at 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 Prooram 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

inc.rease 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.

Ch.ance in l'988; 1989, and 1990, FPL·instal-led transponders with a

total cosi'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."

With respect to the' installation of the LMS, petitioner

incurred capitalized costs (tax basis) of $362,837, .315,156,624,

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

1989, and 1990 taxable years, respect-ively.

St. Lucie Backfit Construction

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

2 was operational in 1983.

items:

(1)

There are two categories of backfit

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.

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 -

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.I"1

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.

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

státed 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 de ign 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. 64,75.

;The report of construction action stated that

construction work star.ted on May 1, 1984."

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/earl.y 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 present,1y installed system

does not satisfy the requirements of the [NRC). 042 This

has caused an extensive effort in research and

development of this specialty system. This research

has identified the need to:

Install an additionál

sonar head and a.surface detection system. These

additional requirements have made it necessary to fund

and perform these modifications.4"1

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.

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, datedrNovember 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."

February 8,

A revision to ER No. 6195 was processed on

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.

Mr. Paduano testifïed 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.6°

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 instrumënt air systems are not capable

of suppling [sic) the total plant needs for instrument

6° 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.addit.ional 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, t e 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 constructi'on began on Óctober 26, 1985.

According to another report of construction action, construction.

stopped to await a consÊruction 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

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 (taxi basis). of

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

service in the 1988, 1 89, and 1990 taxable years, respectively.

St. John's River Power Park (SJRPP)

The Jacksonville Electric Authority (JEA) and FPL entered

into an agreement, dat~ed 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.

include:

The major components of the SJRPP

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

elec.trïcal 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).

SJRPP's conveyor s*ystem serves both Units 1 and 2.

the SJRPP work on both Units 1 and 2.

The

Employees of

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 ins.trument 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 faci,lities, and Unit 2 were placed in service,

certain consËruÊtion completfon work remained, including "wrap

up" work and "enhancements and deficiencies" work.

"Wrap up"

work included predominantl.y 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 defi:ned 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.6?

The same building' contains the generators for

Units 1 and 2. ' Both units use them 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

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.

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

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.

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 part.ies 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.

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:

" The excepted contract contained the following language:

This Agreement, Executed the 11* 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

.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 t.o 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.I")

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

the total amount expended on the SJRPP was $703,407,644."

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

obligation was $140,681,529.

Apparently a retention account was

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

" 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.

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."

" As Mr. Reid testified:

Retention is monies withheld from the contractors

invoice pending overall óompletion, 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 $5,569,907.6

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

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

1986, $23,964,311 was expended on the SJRPP.

During January

This amount paid in

January 1986, covered contract work performed during November and

December of 1985.'°

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 millión.

According to the revlslon, 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.

° 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.

No. 14.8 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.

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.,

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

In early ·

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," was initiated "to

specifically cover the project costs (excluding the JEA and FPL

owner's costs) beyond June 30, 1988.""

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 rev-ised 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

" 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.

" Mr. Reid testified that the "wrap up" work authorized in

ER No. 4110 was within the original"design of the SJRPP.

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.

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.

The Southern Company Contracts

On October 18, 1979, FRL 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

purchâse, sell,- and exchange power.

Before 1979, FPL did not

have any interconnections with the Southern companies.

042

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."

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.

agreement continued until May 31,

The power

1995, "or such extended period

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

Also, on Febr,uary 19,.1981, the Southern companies and FPL

entered into amendment. No. 1 to the interchange contract.

The Southern companies were required to construct a 230kV 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,

were:

1985.

The contemplated facilities

(i). A 500-kV transmission line from its Duval substation

- 69 -

to its Ri'áe s'ubstation continuing to its Poinsett substation;

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

substaÊion 'to îts' Poinsett ' substdt ioh; 'and. (iii) a· 500-kV

transmí ssìõff line f rom'lts1Poinsètt- sûbstation r to- its Martin

plant.

FPL covenaÊÚed Ì¯o -"use [its] bèst efforts consistent with

Prudérit Utility Practiães' to(comþlete' s'uch facilities by the time

such facilities'are needed·to purchas"e the increased unit power

capacity -on Janua y 1, 1985.

FPL~completed each of the

transmisÃion lines requirea undér thelamended power agreement by

January 1, 1985.

As of Septeinberl.1985, -FPL had developed a

transmission expansiòn. progräm for the yéars 1985 through 1990.

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

approximately;13 'inilesl of 240 kV line from the Corbett substation

to th 'RaÈch; substatioñ; extefid' the Orange River-Ranch 240-kV

linè into the Corbett substati'on;

reconductoh" the.240-kV line

from the Cedar substation to the Ranch substation;-install two

240-kV terniinals fbr

orbett 1

and upgradh the Òedar

- 70,terminal in the Ranch substation."

FPL r.evised this budget ·item

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

A 1983 BI No. 274. bud.geted $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."

It also states FPL's plan to construct a 500-kV

terminal at the Martin plant switchyard."

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 .

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

042

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.

BI No. 272 was originally authorized in 1983 for $23

million.

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."'8

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 Corbe.tt 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."

'8 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 230kV transmission breakers -at the St. Lucie plant.

On the basis of

a study by the systém 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 an'd 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.8°

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

8° Mr. Sanders testified that this expenditure was "an

integral part of the 500 KV transmi'ssion system thãt 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

asso.ciated 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."

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

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.

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.

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."

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 distributi'on 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 distributïon/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.

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, authòrized the expenditure of $240,928 to add a third 230kV 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

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 Andytown7substation.

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"."

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.", 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

Mr. Sanders testified that this BI was for the MelaleucaTrace section of the Andytown-Lauderdale line.

Mr. Sanders testified that "This is another section of

the Andytown-Lauderdale number four line, the Hiatus Springtree

section."

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

respectively.

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 proper'ty, 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.

- 81 distribution substation contains other necessary and related

electrical and structural components, including pull-off

structures, switches, bús' work,· feeders, voltage regulators,

equi'pment 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

lin]c fence enclose distribution and· t^ransmission 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.

three phases:

Finally, construction would begin, typically in

Site prep work .(clearing trees and vegetation on

the property); substatìon 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, 09.1, 517, . and $4, 413., 670 for equipment placed in

service in 1988,

1989, and 1990 taxable years, respectively.

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.

involved:

system;

The distribution planning process

(i) .Evaluation of load demands on the distribution

(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.". 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

" 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.

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.

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.9°

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 a.rea 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...)

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 électricity 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

9°(...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..

* * *

" Mr. Hernandez testified as follows:

And what does the special process require of

the developer?

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 * * *

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 1s

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:

At the time FPL issues the response letter,

is it possible to know exactly how much cable

and trench will be required?

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 jvfr. Hernandez testified that "The effective date is the

date that the project has permission to move ahead."

various DRI projects for which it claims ITC.s.

Because of the

large numbër 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

The Statutory Landscape

Before 1986, _section 38 (a)" 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

" 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.

" 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* 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",

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.

146.

(Vol. 2) 1,

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) Gèneral Effective Dates.--

(1) Section 201.-(A) In general.--Except as provid'ed in

this section, section 204, and section

251(d), the amendments made by section 201

shall apply to property placed im service

after December 31, [1985] 1996, 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 pggggggt to see. 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-17-1-9&6,

(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] Mareh-17-+996,

and

(ii) the construction or

reconstruction of such property began by

such date, or

facility if construction has commenced as of

[December 31, 1985) March-tr-1-946, pursuant

to a written specific plan and more than onehalf 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

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

(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,

pròvides:

SEC. 204. ADDI·TIONAL 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) Maüli 1,

+9%.

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. Kiellstrom, 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); Pavless Cashways, Inc. v.

Commissioner, 114 T.C. 72, 80 (2000).

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 rnot enter into any written supply contracts that

were binding on December 31, 1985."

Pursuant to TRA section 2.04 (a) (3), property qualifies for

relief ~from. the ITC repeal only when it is "readily identifiable

with' and necessary.to carry.out a wrïtten supply or serv.ice

contract,.* * * which was binding on" December 31, 1985.

also sec. 49(e) (1).

See

Many courts havè 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. 2002176.

As the Court of Appeals for the First Circuit exþlained:

"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 selfdefining."

16.

United States 'v. Commonwealth Eneray Sys., supra at

The conference report explains:

This transitional rule is applicable only where

the specifications and amount of the property are

readily ascertainable froà 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. LI), at II-60 (1986), 1986-3. C.B.

(Vol. 4) 1, 60.

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