Opinion ID: 756738
Heading Depth: 2
Heading Rank: 1

Heading: The Nuclear Fuel Assemblies

Text: 4 NSP owns and operates a nuclear electric power plant in Prairie Island, Minnesota. The Prairie Island plant has two nuclear reactors housed in separate containment buildings, Prairie Island I and Prairie Island II. This case involves nuclear fuel assemblies that NSP purchased for Prairie Island I. Prairie Island I has a core composed of 121 individual fuel assemblies which must be replaced periodically. As a result, NSP operates Prairie Island I in ten to sixteen month cycles, shutting it down in between cycles for refueling and routine maintenance. These operating cycles are sequentially numbered. Hence, the first ten to sixteen months that Prairie Island I produced power is referred to as Cycle 1, the next ten to sixteen month period following refueling is referred to as Cycle 2, and so forth. Each fuel assembly generally lasts for three cycles before it must be removed and replaced. The removal and replacement of the fuel assemblies is staggered: that is, at the end of each operating cycle, NSP replaces the oldest-third of the reactor's fuel assemblies with new fuel assemblies. Thus, for each cycle the core is composed of one-third new fuel assemblies, and two-thirds partially-used fuel assemblies. This case involves fuel assemblies that NSP purchased for Cycle 11 and Cycle 12. 5 NSP schedules the shut downs well in advance, i.e., at least one year. The shut downs usually last anywhere from five to seven weeks. Once the reactor is shut down, the refueling process can begin. Briefly, it includes the following steps: new fuel assemblies are moved from the new fuel pit to the spent fuel pool; the reactor is cooled; the reactor head is removed; one-third of the spent (used) fuel assemblies are removed and stored in the spent fuel pool; the core is reconfigured using the remaining fuel assemblies according to a predetermined design; the new fuel assemblies are inserted into the core at specified locations; and the reactor head is replaced. Once this process and any needed maintenance are completed, the reactor is then ready to undergo startup physics testing. Startup physics testing verifies that the fuel assemblies, both new and old, are properly positioned in the core and that the core design meets certain technical specifications. Once everything is verified, the reactor returns to full operating status and a new cycle begins. 6 Between December 9 and 19, 1985, NSP received 40 new fuel assemblies from Westinghouse to be used in Cycle 11. The assemblies were fabricated according to detailed technical specifications provided to Westinghouse by NSP, and were delivered fully assembled. After NSP received the fuel assemblies, it stored them in the new fuel pit before moving them to the spent fuel pool. They were inserted into the reactor in the middle of March 1986, and the reactor reached full power on April 14, 1986. Because NSP viewed the fuel assemblies as placed in service in December 1985, NSP claimed both a depreciation allowance and an investment tax credit for them in 1985. 7 Between December 12 and December 22, 1986, NSP received 44 new fuel assemblies from Westinghouse for use in Cycle 12. Again, NSP initially stored the fuel assemblies in the new fuel pit, and later moved them to the spent fuel pool. They were inserted into the reactor between April 9 and April 19, 1987. The reactor reached full power on June 1, 1987. Just as it had done the preceding year, NSP claimed both a depreciation allowance and an investment tax credit for the assemblies in the year that it received them from Westinghouse, this time in 1986. 8 The IRS disallowed both the depreciation deductions and the investment tax credits for 1985 and 1986 that related to the nuclear fuel assemblies. Specifically, the IRS disallowed $2,061,819 of the total depreciation deduction and $1,446,891 of the investment tax credit for 1985, and $2,953,915 of the total depreciation deduction and $1,394,975 of the investment tax credit for 1986. NSP paid the additional tax and interest due, and timely filed claims with the IRS for a refund. After the IRS denied the claims, NSP commenced suit in the district court. There, the parties cross-moved for summary judgment. The district court referred the matter to a magistrate judge, who recommended granting summary judgment in favor of NSP on this issue. Specifically, the magistrate judge concluded that the fuel assemblies were placed in service when NSP acquired them from Westinghouse because at that point, the fuel assemblies were fully assembled, inspected, and ready to be inserted into the reactor core. After reviewing the magistrate judge's report and recommendations, the district court agreed and granted summary judgment in favor of NSP on this issue. See Northern States Power Co. v. United States, 952 F.Supp. 1346, 1347 (D.Minn.1997). The United States appeals. 9