Revised nuclear decommissioning fund schedule approved

Plain-English summary

A utility requested a revised schedule of ruling amounts for its qualified nuclear decommissioning fund after a regulator reduced the decommissioning costs included in the utility's cost of service. The plant had been retired, and the regulatory settlement would end further collections for the fund after spent fuel entered dry storage. The IRS concluded that the proposed revised schedule met section 468A and approved it for the regulator's jurisdiction. Approval depended on the represented facts remaining unchanged, and specified later events or passage of ten tax years would require another review request. Deductions for fund payments remain limited to the lesser of the applicable decommissioning costs or ruling amount.

Ruling snapshot

• Question: Did the utility's revised schedule of qualified nuclear decommissioning fund ruling amounts satisfy section 468A?
• Outcome: Approved, subject to the stated facts and future review requirements
• Key authorities: IRC § 468A; Treas. Reg. § 1.468A-3

Full text (IRS public release)

INTERNAL REVENUE SERVICE

Number: 200108016
Release Date: 2/23/2001
Index No.: 468A-04.02
CC:PSI:6 PLR-106368-00

November 20, 2000

Re: Revised Schedule of Ruling Amounts

Legend:

Taxpayer =

Parent =

Plant =

Location =

Commission A =
Commission B =

District =

Application =

Decision =

Dear
:

This letter responds to the request, dated March 15, 2000, submitted on behalf of Taxpayer by its authorized representative, for a revised schedule of ruling amounts in accordance with section 1.468A-3(i)(1)(iii) of the Income Tax Regulations. Commission A decreased the amount of decommissioning costs included in Taxpayer’s cost of service. Taxpayer was previously granted a revised schedule of ruling amounts on
. Information was submitted pursuant to section 1.468A-3(h)(2).

We understand the facts as presented by Taxpayer to be as follows:

Taxpayer files a consolidated Federal income tax return with
its parent. Taxpayer owns a percent interest as a tenant in common in the Plant, which is situated in Location. Taxpayer is under the audit jurisdiction of the District Director of District. Taxpayer is under the jurisdiction of Commission A and Commission B; however, percent of the recovery of Plant’s
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decommissioning costs is allocated to the jurisdiction of Commission A, and therefore this request for a revised schedule of ruling amounts applies only to Commission A. The plant was
permanently retired from service on
, and
decommissioning of the unit was begun in .

Taxpayer entered into a settlement agreement, Application, with parties objecting to on behalf of ratepayers to terms previously proposed by the Taxpayer. This settlement agreement was approved by Commission in Decision. Decision requires that the Taxpayer cease collecting operation and maintenance expenses for Plant after the spent fuel is removed and placed into dry storage, and states that no further collections for Plant for contribution to the nuclear decommissioning fund (“Fund”) are authorized.

In the private letter ruling dated
, the
Service granted a schedule of ruling amounts that included an amount of $ for Taxpayer’s taxable year. In accordance with the terms of the settlement agreement, Taxpayer proposes to amend the ruling amount for to include only that portion of the ruling amount that corresponds to the portion of Taxpayer’s taxable year prior to the effective date of the Order. Consequently, Taxpayer requests a revised ruling amount of
$ for , and $ for all years thereafter.

There are no proceedings pending before Commission A or B 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 Internal Revenue 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 tax year to the lesser of the amount of nuclear decommissioning costs allocable to the fund that is included in the taxpayer's cost of service for ratemaking purposes for the tax year or the ruling amount applicable to this year.

Section 468A(d)(l) 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 tax year is defined under section 468A(d)(2) as the amount which the Secretary determines to be necessary to fund that portion of -3-

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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 tax year if the payment is made on account of this tax year within 2 1/2 months after the close of the tax year.

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

Section 1.468A-3(a)(l) of the regulations provides that, in general, a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that, over the tax 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) bases the schedule of ruling amounts 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 -4-

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taxpayer’s income under section 88 of the Code and the regulations thereunder. 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 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 tax year.

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

Section 1.468A-3(b)(l) of the regulations provides that the ruling amount, specified in a schedule of ruling amounts, for any tax year in the level funding limitation period shall not be less than the ruling amount specified in such schedule for any earlier tax year. Under section 1.468A-3(b)(2), the level funding limitation period begins on the first day of the first tax year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the tax 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(d)(l) 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) of the regulations provides that, in general, 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 such plant multiplied by the taxpayer’s qualifying interest in the plant.
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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 tax year is the sum of the ruling amounts for such tax year determined under the separate schedules of ruling amounts.

Section 1.468A-3(g) of the regulations provides that the Internal Revenue 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 has determined the amount of decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes and 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(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: increases the proposed period over which the decommissioning costs of the nuclear power plant will be included in cost of service for ratemaking purposes; 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 reduces the amount of decommissioning costs to be included in cost of service for any tax year; and (B) the taxpayer’s most recent request for a schedule of ruling amounts did not provide notice to the Service of such action by any public utility commission.

Section 1.468A-3(i)(2) of the regulations provides that any taxpayer that has previously obtained a schedule of ruling -6-

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amounts 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). The Internal Revenue Service shall not provide a revised schedule of ruling amounts applicable to a tax year in response to a request for a schedule of ruling amounts that is filed after the deemed deadline date for such tax year.

Rev. Proc. 92-54, describes the date that a nuclear power plant begins commercial operations for purposes of section 1.468A-3(d)(4) of the regulations. For state regulatory purposes, commercial operations generally begins on the date that a nuclear power plant begins sustained and substantial generation of electricity for sale to its customers, but there is often a reasonable delay between that date and the date the plant is placed in rate base for ratemaking purposes. In those instances in which the delay is reasonable, defining the commercial operations date as the date the plant is placed in rate base for ratemaking purposes helps insure that a taxpayer is not prevented from deducting its proper share of decommissioning costs under section 468A. If the public utility commission places a nuclear power plant in a taxpayer’s rate base within a reasonable period of time after the date the plant begins sustained and substantial generation of electricity for sale to its customers, the date of inclusion in rate base will be deemed to be the commercial operations date for purposes of section 1.468A-3(d). A reasonable period of time is one that ends on the last day of the second calendar year after the calendar year in which the nuclear power plant begins sustained and substantial generation of electricity for sale to its customers. This revenue procedure applies to any taxpayer that submits an initial or revised request for a schedule of ruling amounts pursuant to section 468A of the Code.

We have examined the representations and data submitted by the Taxpayer in relation to the requirements set forth in the Code and the regulations. Based solely on these representations of the facts, we reach the following conclusions:

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

2. Commission A has determined the amount of 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 -7-

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regulations.

3. The Taxpayer, as one of the owners of the Plant, has calculated its share of the total decommissioning costs under section 1.468A-3(d)(3) of the regulations.

4. The Taxpayer, subject to the jurisdiction of two public utility commissions for ratemaking purposes, has calculated its share of the total decommissioning costs allocable to Commission A, as required by section 1.468A-3(f)(2) of the regulations.

5. 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 Commission A 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.

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

7. Since the Plant was declared to be in commercial operation in and was included in Taxpayer’s rate base in , which is within the time limit imposed by section 5.01 of Rev. Proc. 92-54, the qualifying percentage under section 1.468A-3(d)(4) of the regulations is calculated to be percent.

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.

APPROVED SCHEDULE OF RULING AMOUNTS
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COMMISSION A

YEAR
AMOUNT

$

$
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 the current 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. Generally, the Taxpayer is required to file such a request on or before the deemed payment deadline date for the first tax year in which the rates reflecting such action became effective. When no such event occurs, the Taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the 10th tax year following the close of the tax year in which the most recent schedule of ruling amounts was received.

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 earlier, payments made to such Fund can qualify only to the extent that they do not exceed the lesser of the decommissioning costs applicable to such Fund or the ruling amounts applicable to this Fund in the tax year.

This ruling is directed only to the taxpayer who requested it. Section 6ll0(k)(3) of the Code provides it may not be used or cited as precedent.

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 tax year in which the Taxpayer claims a deduction for payments made to the Fund.

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