PLR 200112007: Revised nuclear decommissioning fund schedule approved

Plain-English summary

A utility sought a revised schedule of deductible payments to a nuclear plant decommissioning fund under IRC § 468A. The plant had remained inoperative after an accident, and its decommissioning costs were to be recovered through a charge paid by utility customers. The request concerned one of two rate regulators; a prior ruling had already approved amounts for the other regulator. The IRS approved the proposed schedule, presented alongside the previously approved amounts, based on the utility's representations. The approval is limited to the fund and depends on the facts remaining as represented.

Ruling snapshot

• Question: Does the utility's proposed revised decommissioning fund schedule satisfy IRC § 468A?
• Outcome: Approved, subject to the stated facts and future revision requirements.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1 through 1.468A-3.

Full text (IRS public release)

INTERNAL REVENUE SERVICE

Number: 200112007
Release Date: 3/23/2001
Index No.: 468A.04-02

CC:PSI:6--PLR-106276-00

December 13, 2000

Re:

Taxpayer =

Parent =

Plant =

Location =

Commission A =

Commission B =

District =

State =

Statute =

Dear :

This letter responds to the request submitted on behalf of
Taxpayer, dated
, for a revised schedule of ruling
amounts in accordance with section 1.468A-3(i) of the Income Tax Regulations. 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 directly owns a percent undivided interest in the Plant, which is situated in Location. The method for decommissioning the Plant is the prompt dismantlement and removal method. Taxpayer is subject to the jurisdiction of -2-
PLR-106276-00

Commission A and Commission B. However, this ruling request applies only to Commission A. Taxpayer is under the audit jurisdiction of the District Director of District.

For Commission A, the estimated cost of decommissioning the
Plant is $
and this amount escalated at
percent annually results in a cumulative future estimated cost of $ .

In
, State enacted Statute, which provides
for deregulation of rates for retail sales of electric generation
in State beginning
. Statute permits nuclear
plant decommissioning costs to be recovered by Taxpayer through a nonbypassable competitive transition charge (“CTC”) paid by all of Taxpayer’s customers. Commission A and the owners of Plant,
in a settlement agreement dated
, provided for
$ of decommissioning costs for the Plant to be recovered annually through the CTC in taxable years .

The funding period extends from
. Due to an accident in , the Plant was removed from Taxpayer's rate base and has remained inoperative since that time. Therefore, the level funding limitation period is not applicable to Commission A's jurisdictional portion of the nuclear decommissioning fund (“Fund”). The after-tax rate of return to be earned by the assets of the Fund is assumed to be percent.

The qualifying percentage for Commission A was calculated pursuant to section 1.468A-3(d)(4) of the regulations. The estimated period for which the fund will be in effect begins on
and ends on
, for a period of
years. The estimated useful life of the Plant began on
and ends on
, for a period of
years. Therefore, the qualifying percentage is percent.

There are no proceedings pending before Commissions A or B that would may result in an increase or decrease in the amount of decommissioning costs to be included in Taxpayer's cost of service.

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.
-3-
PLR-106276-00

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 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 -4-
PLR-106276-00

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. 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 -5-
PLR-106276-00

decommissioning such plant multiplied by the taxpayer’s qualifying interest in the plant.

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-
PLR-106276-00

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.

We have examined the representations and data submitted by the Company 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. 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 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.

3. Commissions A and B have 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 regulations.

4. The Taxpayer has proposed schedules of ruling amounts which meets the requirements of section 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 Commissions A and B 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 for that jurisdiction.

5. Taxpayer has determined under section 1.468A-3(d)(4) of the regulations that the qualifying percentage for Commission A is percent.

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 cost of service amount applicable to the Fund or the -7-
PLR-106276-00
ruling amount applicable to the Fund, as set forth under section 1.468A-2(b)(1) of the regulations.

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
FOR COMMISSIONS A and B
1
TAX YEARS

YEAR A B TOTAL

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

1
The ruling amounts for Commission B were approved in a prior schedule of ruling amounts. These ruling amounts are to continue through 2013. For purposes of the mandatory review required under section 1.468A-3(i)(1) of the regulations, the date of that prior ruling shall govern the review period for the jurisdiction of Commission B.
-8-
PLR-106276-00

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 the power of attorney on file with this office the original of this letter is being sent to one of Taxpayer’s authorized representatives and a copy is being sent to Taxpayer. 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)