PLR 200033022: revised nuclear decommissioning fund schedule approved for five years

Plain-English summary

A taxpayer owning an undivided interest in a nuclear power plant requested a revised schedule of ruling amounts for its nuclear decommissioning fund. The request reflected decommissioning costs included in the taxpayer's regulated cost of service and assumptions used by several commissions and an agency. The IRS concluded that the taxpayer was eligible, the commissions had authorized the relevant costs, and the proposed schedule met the requirements of section 468A and its regulations. It approved a revised schedule for the commissions and agency for five years, with approval contingent on unchanged facts and with payments limited to the Fund and the applicable decommissioning cost or ruling amount.

Ruling snapshot

• Question: Does the taxpayer's proposed revised schedule of ruling amounts for its nuclear decommissioning fund satisfy section 468A requirements?
• Outcome: Approved. The revised schedule for Commissions A, B, C, and the Agency is approved for five years, subject to the stated conditions and limits.
• Key authorities: IRC §§ 468A, 468A(b), 468A(d), 468A(e), 468A(g), and 88; Treas. Reg. §§ 1.468A-1, 1.468A-2(b)(1), 1.468A-3, 1.468A-7(a), and 1.468A-8(b)(7).

Full text (IRS public release)

INTERNAL REVENUE SERVICE

Number: 200033022
Release Date: 8/18/2000
Index No.: 468A.01-00

                                            CC:DOM:P&SI:6 PLR-100157-00

                                            May 17, 2000

Re: Revised Schedule of Ruling Amounts

Taxpayer               =

Plant                  =
Location               =
Commission A           =
Commission B           =
Commission C            =
Agency                 =
City                   =
Municipalities          =
Corporation A          =
Corporation B          =
District               =
Fund                   =

Dear

   This letter responds to the request of the Taxpayer, dated December 21, 1999.
The Taxpayer is requesting a revised schedule of ruling amounts pursuant to section
1.468A-3(i)(2) of the Income Tax Regulations as the prior schedule of ruling amounts
continued only through calendar year          The Taxpayer was previously granted a
revised schedule of ruling amounts on August 10, 1994. Information was submitted
pursuant to section 1.468A-3(h)(2).

   The Taxpayer has represented the facts to be as follows:

    The Taxpayer owns a                  undivided interest in the Plant, which is situated
in Location. The Plant began commercial operation in            The Taxpayer’s nuclear
decommissioning costs are included in its cost of service for ratemaking purposes and
are subject to the jurisdiction of Commission A,                ; Commission B,

        ; Commission C,                 and Agency              for a total of
          These figures may vary from year to year. Commission C’s jurisdictional
percentage consists of Corporation B,                City and Municipalities,
        ; and Corporation A,              The Taxpayer has a contractual agreement
to sell electric energy to the Agency. Commission C approved this agreement prior to
                                           -2-

its consummation. As in the previous ruling, the Agency is treated as if it is another
jurisdiction. Decommissioning costs included in the cost of service for sales to the
Agency are based upon the estimate used by Commission C in establishing
decommissioning costs included in cost of service for purposes of Commission C’s
ratemaking. The operating license for the Plant is scheduled to expire on

   Commission A, in                            included               for
decommissioning costs in the Taxpayer’s cost of service for ratemaking purposes. In
determining the decommissioning costs for the Plant, Commission A used an estimated
cost of                             as a base cost. This estimated base cost escalated
at          annually to the year in which decommissioning costs will be incurred
              results in an estimated future decommissioning cost of
                       This estimated future cost of decommissioning the Plant
discounted at             annually from                results in an estimated future
decommissioning cost of                                 The estimated cost of
decommissioning the Plant is based on the entombment with              delayed
dismantling method.

   The estimated cost of decommissioning the Plant, as approved by Commission B in
                                            is based on the equivalent testimony and
identical site-specific decommissioning study that was used by Commission A in its
ratemaking proceedings. Pursuant to
Commission B included decommissioning costs of                 in Taxpayer’s cost of
service for ratemaking purposes.

   In                           , Commission C included decommissioning costs of
         in Taxpayer’s cost of service for ratemaking purposes for Corporation A.

    In                              Commission C approved an agreement between
Taxpayer and The Agency that provides for decommissioning costs for Taxpayer’s
interest in the Plant included in Taxpayer’s cost of service for ratemaking purposes
based on the same assumptions as those used by Commission C in
                                                Thus, the estimated cost of
decommissioning the Plant for the Agency is based on the identical NRC minimum
financial amounts used by Commission C. The amount of decommissioning cost to be
included in Taxpayer’s cost of service for ratemaking purposes is

   In
regarding the City and Municipalities, Commission C included in Taxpayer’s cost of
service the total amount of             The decommissioning costs are based upon the
minimum financial assurance amounts as prescribed by the Nuclear Regulatory
Commission (NRC) guidelines in 10 C.F.R. §50.33. As of                     the
minimum financial assurance amount was computed to be                     Pursuant to
NRC guidelines, this amount was increased to
Due to its generic nature, this base cost for decommissioning the Plant was not
premised on any particular method of decommissioning. The current base cost for
decommissioning the Plant,                    was escalated at           annually to the
estimated year in which decommissioning costs will be incurred
                                           -3-

Under the Entombment with            delayed dismantling method, the
decommissioning costs will earn interest for over          before actual dismantling
occurs. Therefore, the estimated future dismantling cost was discounted by
annually from               resulting in an estimated future decommissioning cost of

   In                         Commission C approved an agreement between
Taxpayer and Corporation B that provides for decommissioning costs in the amount of
           to be included in Taxpayer’s cost of service for ratemaking purposes upon
the same assumptions as those used by Commission C in


   The estimated date on which the Plant will no longer be included in Taxpayer’s rate
base for ratemaking purposes, as determined under the ratemaking assumptions that
were used to determine the latest rates approved by the Commissions is
However, the date was          in the first ratemaking proceedings before the
Commissions in which the Plant was included in Taxpayer’s rate base. The estimated
useful life of the Plant was not adjusted by the Commissions before July 18, 1984.

    For all the Commissions, the funding period and level funding limitation period for
the Plant extends from                         Pursuant to Taxpayer’s previous election
under the special transition rules of section 1.468A-8(b)(7)(i) and (ii) of the regulations,
the estimated useful life of the Plant for the Commissions is
        The Plant began sustained and substantial generation of electricity for sale to its
customers in        which was the date the Plant was included in Taxpayer’s rate base.
The estimated period for which the Fund will be in effect for the Commissions is
                               Therefore, Taxpayer has calculated its qualifying
percentage for each of the Commissions to be                  The assumed after-tax rate
of return to be earned by the assets of the Fund is

    Neither Commissions A, B, C, or the Agency have taken into account the provisions
of the Energy Policy Act of 1992.

    Taxpayer has filed an
              with Commission A on                      which will decrease the amount
of decommissioning costs that are proposed to be included in Taxpayer’s cost of
service. Taxpayer filed an
                     with Commission B in                 which would decrease the
amount of decommissioning costs that are proposed to be included in Taxpayer’s cost
of service. To date, neither Commission A or Commission B has issued a response to
the Applications filed by Taxpayer. Taxpayer has no proceedings pending before
Commission C that may result in an increase or decrease in the amount of
decommissioning costs for the Plant to be included in Taxpayer’s cost of service for
ratemaking purposes.

   Section 468A of the Code provides that a taxpayer may elect to deduct the amount
of payments made to a qualified nuclear decommissioning fund. However, section
468A(b) limits the amount paid into the fund for any taxable year to the lesser of the
amount of nuclear decommissioning costs allocable to the fund that is included in the
                                            -4-

taxpayer’s cost of service for ratemaking purposes for the taxable year or the ruling
amount applicable to that year.

    Section 468A(d)(1) of the Code provides that no deduction shall be allowed for any
payment to the nuclear decommissioning fund unless the taxpayer requests and
receives from the Secretary a schedule of ruling amounts. The "ruling amount" for any
taxable year is defined under section 468A(d)(2) as the amount which the Secretary
determines to be necessary to fund that portion of nuclear decommissioning costs
which bears the same ratio to the nuclear power plant as the period for which the fund
is in effect bears to the estimated useful life of the plant. This term is further defined to
include the amount necessary to prevent excessive funding of nuclear
decommissioning costs or funding of these costs at a rate more rapid than level
funding, taking into account such discount rates as the Secretary deems appropriate.

   Section 468A(g) of the Code provides that a taxpayer shall be deemed to have
made a payment to the nuclear decommissioning fund on the last day of the taxable
year if the payment is made on account of the taxable year within 2 1/2 months after the
close of the taxable year.

    Section 1.468A-1(a) of the regulations provides, in part, that an eligible taxpayer
may elect to deduct nuclear decommissioning costs under section 468A of the Code.
 An "eligible taxpayer," as defined under section 1.468A-1(b)(1), is a taxpayer that has a
qualifying interest in a nuclear power plant. As defined under section 1.468A-1(b)(2), a
"qualifying interest" is, among other things, a direct ownership interest, including an
interest held as a tenant in common or joint tenant.

   Section 1.468A-2(b)(1) of the regulations provides, in part, that the maximum
amount of cash payments made (or deemed made) to a nuclear decommissioning fund
during any taxable year shall not exceed the lesser of (i) the cost of service amount
applicable to the nuclear decommissioning fund for such taxable year; (ii) or the ruling
amount applicable to the nuclear decommissioning fund for such taxable year.

    Section 1.468A-3(a)(1) of the regulations generally provides, in part, that a schedule
of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual
payments that, over the taxable years remaining in the "funding period" as of the date
the schedule first applies, will result in a projected balance of the nuclear
decommissioning fund as of the last day of the funding period equal to (and in no event
more than) the "amount of decommissioning costs allocable to the fund."

   Section 1.468A-3(a)(2) of the regulations provides that, to the extent consistent with
the principles and provisions of section 1.468A-3, each schedule of ruling amounts shall
be based on the reasonable assumptions and determinations used by the applicable
public utility commission(s) in establishing or approving the amount of decommissioning
costs to be included in the cost of service for ratemaking purposes, taking into account
amounts that are otherwise required to be included in the taxpayer’s income under
section 88 of the Code and the regulations thereunder. Thus, for example, each
schedule of ruling amounts shall be based on the public utility commission’s reasonable
assumptions concerning (i) the after-tax rate of return to be earned by the amounts
                                           -5-

collected for decommissioning; (ii) the total estimated cost of decommissioning the
nuclear power plant; and (iii) the frequency of contributions to the nuclear
decommissioning fund for a taxable year.

   Under section 1.468A-3(a)(3) of the regulations, the Internal Revenue Service shall
provide a schedule of ruling amounts that is identical to the schedule proposed by the
taxpayer, but no such schedule shall be provided unless the taxpayer’s proposed
schedule is consistent with the principles and provisions of section 1.468A-3.

    Section 1.468A-3(b)(1) of the regulations provides that the ruling amount, specified
in a schedule of ruling amounts, for any taxable year in the level funding limitation
period shall not be less than the ruling amount specified in such schedule for any earlier
taxable year. Under section 1.468A-3(b)(2)(i) and (ii), the level funding limitation period
begins on the first day of the first taxable year for which a deductible payment is made
to the nuclear decommissioning fund and ends on the last day of the taxable year that
includes the estimated date on which the nuclear power plant will no longer be included
in the taxpayer’s rate base for ratemaking purposes.

    Section 1.468A-3(c)(1)(i) and (ii) of the regulations provides that the funding period
for a nuclear decommissioning fund is the period that begins on the first day of the first
taxable year for which a deductible payment is made (or deemed to be made) to such
nuclear decommissioning fund and ends the later of the last day of the taxable year that
includes the estimated date on which decommissioning costs of the nuclear power plant
to which the nuclear decommissioning fund relates will no longer be included in the
taxpayer’s cost of service for ratemaking purposes; or the last day of the taxable year
that includes the estimated date on which the nuclear power plant to which the nuclear
decommissioning fund relates will no longer be included in the taxpayer’s rate base for
ratemaking purposes.

   Section 1.468A-3(d)(1) of the regulations provides that the amount of
decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer’s
share of the total estimated cost of decommissioning the nuclear power plant multiplied
by the qualifying percentage.

   Section 1.468A-3(d)(2)(i) of the regulations provides, in part, that the total estimated
cost of decommissioning a nuclear power plant is the reasonably estimated cost of
decommissioning used by the applicable public utility commission in establishing or
approving the amount of these costs, to be included in cost of service for ratemaking
purposes.

    Section 1.468A-3(d)(3) of the regulations provides that a taxpayer’s share of the total
estimated cost of decommissioning a nuclear power plant equals the total estimated
cost of decommissioning the plant multiplied by the taxpayer’s qualifying interest
in the plant.

    Section 1.468A-3(d)(4)(i) of the regulations provides that the qualifying percentage
for any nuclear decommissioning fund is equal to the fraction, the numerator of which is
the number of taxable years in the estimated period for which the nuclear
                                           -6-

decommissioning fund is to be in effect and the denominator of which is the number of
taxable years in the estimated useful life of the applicable nuclear power plant.

    Under the special elective transition rule of section 1.468A-8(b)(7)(i) of the
regulations, for purposes of section 1.468A-3(d)(4)(ii), the estimated period for which a
nuclear decommissioning fund is to be in effect begins on the later of the first day of the
taxable year that includes the date that the nuclear power plant began commercial
operations; or the first day of the taxable year that includes July 18, 1984. Under the
special elective transition rule of section 1.468A-8(b)(7)(ii), for purposes of section
1.468A-3(d)(4)(ii) and (iii), the estimated period for which the nuclear decommissioning
fund is to be in effect and the estimated useful life of the nuclear plant both end on the
earlier of the last day of the taxable year in which it is estimated that decommissioning
will begin; or the last day of the taxable year that includes the expiration date of the
Nuclear Regulatory Commission operating license as in effect on July 18, 1984, without
regard to any extensions or amendments thereto.

   Section 1.468A-3(e)(3) of the regulations provides that, for purposes of section
1.468A-3(d)(4)(ii) and (iii), the estimated date on which the nuclear power plant to which
the nuclear decommissioning fund relates will no longer be included in the taxpayer’s
rate base for ratemaking purposes is determined under the ratemaking assumptions
used by the applicable public utility commission in establishing or approving rates
during the first ratemaking proceeding in which the nuclear power plant was included in
the taxpayer’s rate base.

     Section 1.468A-3(f)(1) of the regulations provides that if two or more public utility
commissions establish or approve rates for electric energy generated by a single
nuclear power plant, then the schedule of ruling amounts shall be separately
determined pursuant to the rules of sections 1.468A-3(a) through (e) for each public
utility commission that has determined the amount of decommissioning costs to be
included in the cost of service for ratemaking purposes for this plant. Under section
1.468A-3(f)(2), this separate determination shall be based on the reasonable
assumptions and determinations used by the relevant public utility commission and
shall take into account only that portion of the total estimated cost of decommissioning
that is properly allocable to the ratepayer whose rates are established or approved by
the public utility commission. According to section 1.468A-3(f)(3), the ruling amounts
for any taxable year is the sum of the ruling amounts for such taxable year determined
under the separate schedules of ruling amounts.

    Section 1.468A-3(g) of the regulations provides that the Service shall not provide a
taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund
unless the public utility commission that establishes or approves the rates for electric
energy generated by the plant to which the nuclear decommissioning fund relates has
(1) determined the amount of decommissioning costs to be included in the taxpayer’s
cost of service for ratemaking purposes; and (2) has disclosed the after-tax rate of
return and any other assumptions and determinations used in establishing or
approving the amount.

   Section 1.468A-3(h)(2) of the regulations enumerates the information required to be
                                            -7-

submitted by a taxpayer in order to receive a ruling amount for any taxable year.

     Section 1.468A-3(i)(1)(iii) of the regulations provides that a taxpayer is required to
request a revised schedule of ruling amounts for a nuclear decommissioning fund if (A)
any public utility commission that establishes or approves rates for the furnishing or
sale of electric energy generated by a nuclear power plant to which the nuclear
decommissioning fund relates (1) increases the proposed period over which
decommissioning costs of the nuclear power plant will be included in cost of service for
ratemaking purposes; (2) adjusts the estimated date on which the nuclear power plant
will no longer be included in the taxpayer’s rate base for ratemaking purposes; or (3)
reduces the amount of decommissioning costs to be included in cost of service for any
taxable year; and (B) the taxpayer’s most recent request for a schedule of ruling
amounts did not provide notice to the Service of the action by the public
utility commission.

   Section 1.468A-3(i)(2) of the regulations provides that any taxpayer that has
obtained a schedule of ruling amounts pursuant to section 1.468A-3(h) can request a
revised schedule of ruling amounts. Such a request must be made in accordance with
the rules of section 1.468A-3(h); thus, the Service shall not provide a revised ruling
amount applicable to a taxable year in response to a request for a schedule of ruling
amounts that is filed after the deemed payment deadline date for such taxable year.

    Section 1.468A-7(a) of the regulations provides, in general, that an eligible taxpayer
is allowed a deduction for the taxable year in which the taxpayer makes a cash
payment (or is deemed to make a cash payment) to a nuclear decommissioning fund
only if the taxpayer elects the application of section 468A. A separate election is
required for each nuclear decommissioning fund and for each taxable year with respect
to which payments are to be deducted under section 468A. In the case of an affiliated
group of corporations that join in filing a consolidated return for a taxable year, the
common parent must make a separate election on behalf of each member whose
payments to a nuclear decommissioning fund during such taxable year are to be
deducted under section 468A. The election under section 468A for any taxable year is
irrevocable and must be made by attaching a statement ("Election Statement") and a
copy of the schedule of ruling amounts provided pursuant to the rules of section
1.468A-3 to the taxpayer’s federal income tax return (or, in the case of an affiliated
group of corporations that join in filing a consolidated return, the consolidated return) for
such taxable year. The return to which the Election Statement and a copy of the
schedule of ruling amounts is attached must be filed on or before the time prescribed by
law (including extensions) for filing the return for the taxable year with respect to which
payments are to be deducted under section 468A.

   Section 1917(a) and (c)(1) of the Energy Policy Act of 1992 eliminated, for taxable
years beginning after December 31, 1992, the investment restrictions contained in
section 468A(e)(4)(C) of the Code. Section 1917(b) and (c)(2) of the Energy Act
revised section 468A(e)(2) by lowering the tax rate applicable to a nuclear
decommissioning fund for taxable years beginning after December 31, 1993.

   We have examined the representations and information submitted by the Taxpayer
                                           -8-

in relation to the requirements set forth in the section 468A of the Code and the
regulations thereunder. Based solely on these representations, we reach the
following conclusions:

    1. The Taxpayer has a qualifying interest in the Plant and is, therefore, an
      eligible taxpayer under section 1.468A-1(b)(1) and (2) of the regulations.

    2. The Commissions have authorized decommissioning costs to be included
      in the Taxpayer’s cost of service for ratemaking purposes as required by
      section 1.468A-3(g) of the regulations.

    3. The Taxpayer was eligible for, and previously elected, the special
      transition rule of section 1.468A-8(b)(7)(i) and (ii) of the regulations. Thus,
      the Taxpayer has determined that the qualifying percentages under
      section 1.468A-3(d)(4) for each of the Commissions and the Agency is

    4. The maximum amount of cash payments made (or deemed made) to the
      Fund during any taxable year is restricted to the lesser amount of the
      decommissioning cost applicable to the Fund or the ruling amount
      applicable to the Fund, as set forth under section 1.468A-2(b)(1) of the
      regulations.

    5. As required under section 1.468A-3(f)(3) of the regulations, the Taxpayer
      is proposing a total ruling amount for each taxable year that is the sum of
      the separate amounts for the Commissions and the Agency.

    6. The Taxpayer has proposed a schedule of ruling amounts which meets
      the requirements of sections 1.468A-3(a)(1) and (2) of the regulations.
      The annual payments specified in the proposed schedule of ruling
      amounts are based on the reasonable assumptions and determinations
      used by the Commissions and the Agency and will result in a projected
      fund balance at the end of the funding period equal to or less than the
      amount of decommissioning costs allocable to the Fund.

   Based on the above determinations, we conclude that the Taxpayer’s proposed
schedule of ruling amounts satisfies the requirements of section 468A of the Code.
The following schedule of ruling amounts is specifically approved for the Commissions.

             APPROVED REVISED SCHEDULE OF RULING AMOUNTS
                  FOR COMMISSIONS A, B, C, AND AGENCY
                    TAXABLE YEARS

    YEAR          A              B               C          AGENCY          TOTAL
                                           -9-


   With agreement of the Taxpayer, this revised schedule of ruling amounts is limited to
a 5-year period because of the statutory changes made by the Energy Policy Act of
1992 (Act). The elimination of the investment restrictions and the reduction of the tax
rate applicable to income earned by the Fund may result in a greater after-tax of return
than was estimated, prior to the enactment of the Act, by the Commissions. This
increased after-tax rate of return could, over the life of the Fund, result in a balance in
the Fund on the last day of the funding period that could exceed the amount of
decommissioning costs allocable to the Fund.

    Thus, in order to prevent the excess accumulation in the Fund, this schedule of
ruling amounts is being limited to a 5-year period. Approval of a revised schedule of
ruling amounts may be granted after a determination by the Commissions of an
after-tax rate of return that accounts for the reduced tax rate and unrestricted
investments.

    Approval of the schedule of ruling amounts is contingent on there being no change
in the facts and circumstances, known or assumed, at the time this ruling is issued. If
any of the events described in section 1.468A-3(i)(1)(iii) of the regulations occur in
future years, the Taxpayer must request a review and revision of the schedule
of ruling amounts. Under section 1.468A-3(i)(1)(iv), the Taxpayer is required to file
such a request on or before the deemed payment deadline date for the first taxable
year in which the rates reflecting such action became effective.

    The approved schedule of ruling amounts is relevant only to those payments made
to the Fund. Payments allocable to any funds other than the Fund cannot qualify for
purposes of the deduction under the provisions of section 468A of the Code. As stated
above, payments made to the Fund can qualify only to the extent that they do not
exceed the lesser of the decommissioning costs applicable to the Fund or the ruling
amounts applicable to the Fund in the taxable year.

   Except as specifically set forth above, no opinion is expressed concerning the
federal income tax consequences of the above described facts under any other
provision of the Code or regulations. This letter ruling is directed only to the taxpayer
who requested it. Section 6110(k)(3) of the Code provides that this ruling may not be
used or cited as precedent.

    In accordance with the power of attorney on file, a copy of this letter is being sent to
your authorized legal representatives. Pursuant to section 1.468A-7(a) of the
regulations, a copy of this letter must be attached (with the required Election Statement)
to the Taxpayer’s federal income tax return for each taxable year in which the Taxpayer
claims a deduction for payments made to the Fund.

                                          Sincerely yours,
                                          PETER C. FRIEDMAN
                                          Assistant to the Chief, Branch 6
                                          Office of the Assistant Chief Counsel
                                          (Passthroughs and Special Industries)