SECTION 2. BACKGROUND

Revenue Procedure 2002–49, 2002–2 C.B. 172, provides a safe-harbor regarding the treatment of legislatively authorized transactions entered into by investorowned electric utilities to recover transition costs resulting from the restructuring of the electric utility industry and the institution of a competitive marketplace. Some States enacted legislation to allow the recovery of these transition costs through a non-bypassable surcharge to customers within a utility’s historic service area.

Utilities continue to operate in wholly or partially regulated environments and

maintain exclusive distribution networks for customers in their historic service areas. Rates charged for these operations are determined by local authorities to allow for the recovery of costs and an appropriate return on capital. Some States have enacted legislation that allows utilities to recover certain specified costs through a surcharge based on consumption by customers within the utilities’ historic service areas and also authorizes securitization of the surcharge. These statutes are unique to regulated utilities. Accordingly, the tax treatment allowed by this revenue procedure for these transactions is peculiar to this situation. See Revenue Procedure 2005–61, page 507, this Bulletin, which adds certain related issues to areas in which rulings or determination letters will not be issued.