PLR 200112026: Revised nuclear decommissioning payment schedule approved

Plain-English summary

A utility that owned a nuclear power plant requested a revised schedule of ruling amounts for payments to its qualified nuclear decommissioning fund. The request followed reductions in decommissioning costs included in the utility's regulated cost of service and the sale of the plant. The IRS approved the proposed schedule under IRC § 468A, including separate calculations for two public utility commissions and a combined annual amount. The approval was conditioned on unchanged facts, and payments for the year of sale had to be made by the sale date because the taxpayer was no longer an eligible taxpayer afterward.

Ruling snapshot

• Question: Does the utility's proposed revised schedule of nuclear decommissioning fund payments satisfy the section 468A requirements after the plant sale?
• Outcome: Approved: the proposed schedule of ruling amounts was approved subject to the stated conditions.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1, 1.468A-2, 1.468A-3, 1.468A-5, and 1.468A-7.

Full text (IRS public release)

INTERNAL REVENUE SERVICE

Number: 200112026
Release Date: 3/23/2001
Index No.: 468A.04-02
CC:PSI:6 PLR-106705-00

December 19, 2000

Re: Revised Schedule of Ruling Amounts

Taxpayer =
Parent =
Plant
=
Location =
Commission A =
Orders =
Commission B =
District =
Buyer
=

Dear
:

This letter responds to the request of Taxpayer, dated , submitted by its authorized representative, for a revised schedule of ruling amounts pursuant to section 1.468A- 3(i) of the Income Tax Regulations. Taxpayer is seeking this revised schedule of ruling amounts because compliance with earlier orders promulgated by a public utility commission having regulatory authority over Taxpayer has resulted in a reduction in the amount of amount of decommissioning costs being collected by Taxpayer, and because Taxpayer has sold the Plant. Information was submitted pursuant to section 1.468A-3(h)(2).

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

Taxpayer is a wholly-owned subsidiary of Parent, and for the
period covered by this private letter ruling was the sole owner of the Plant, which is situated in Location. Taxpayer is subject to the jurisdiction of Commission A, percent and Commission B, percent. Taxpayer’s proposed method of decommissioning is prompt removal/dismantlement. Taxpayer is under the audit jurisdiction of District.

Taxpayer sold the Plant to Buyer on
.
Accordingly, Taxpayer has requested a revised schedule of ruling amounts based on the reduced amount of decommissioning costs eligible for inclusion in Taxpayer’s cost of service, as calculated by Taxpayer pursuant to the Orders, and prorated for
 - 2 -
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the number of days of tax year during which Taxpayer owned the Plant. As part of the Sale, the qualified nuclear decommissioning fund was transferred to Buyer.

The cost of decommissioning the Plant has been estimated at
$
. This estimate escalated at
percent annually results in a future decommissioning cost of $ .

Taxpayer has calculated, pursuant to the Orders, that $ of decommissioning costs may be included in Taxpayer’s cost of service under the jurisdiction of Commission A for ratemaking purposes. Taxpayer has calculated that $ of decommissioning costs may be included in Taxpayer’s cost of service under the jurisdiction of Commission B for ratemaking purposes. For purposes of calculating these amounts for Commissions A and B the assumed after-tax rate of return to be earned by the assets of the nuclear decommissioning fund (“Fund”) is percent.

The funding period and the level funding limitation period
for Commission A extends from
. The funding
period and the level funding limitation period for Commission B
extends from
.

For Commission A, the estimated useful life of the Plant is and the estimated period for which
the Fund is to be in effect is
for a
qualifying percentage of percent. For Commission B, the estimated useful life of the Plant is and the estimated period for which the Fund is to be effect
is
for a qualifying percentage of
percent.

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 - 3 -
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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 ½ 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. If the amount of cash payments made (or deemed made) to the Fund during the tax year exceeds such limitation, the excess is not deductible by the electing taxpayer.

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 taxpayer's income - 4 -
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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)(5) of the regulations provides that the Service may, in its discretion, provide a schedule of ruling amounts that is determined on a basis other than the rules of paragraphs (a) through (g) if in connection with its request for a schedule of ruling amounts, the taxpayer explains the need for special treatment and sets forth an alternative basis for determining the schedule of ruling amounts and the Service determines that special treatment is consistent with section 468A of the Code.

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 -
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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 amount 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 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 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 - 6 -
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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.

Section 1.468A-5(c)(2)(ii) of the regulations defines an excess contribution as the amount by which cash payments made (or deemed made) to the Fund during any tax year exceed the payment limitation contained in section 468A(b) of the Code and section 1.468A-2. Section 1.468A-5(c)(2)(iii) provides that the income of the Fund attributable to an excess contribution is required to be included in the gross income of the Fund.

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. For the period in question, prior to the sale, 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. As required by section 1.468A-3(f)(3) of the regulations, the Taxpayer is proposing a total ruling amount for each year that is the sum of the separate amounts with respect to Commissions A and B.

3. Commissions A and B 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.

4. The Taxpayer has proposed a schedule 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. 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 cost applicable to the Fund or the ruling amount applicable - 7 - PLR-106705-00
to the Fund, as set forth under section 1.468A-2(b)(l) 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

       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.

The approved schedule of ruling amounts is relevant only to those payments made to the Fund. Since the taxpayer has sold the Plant and is no longer an “eligible taxpayer” after the sale, all payments to the Fund relating to the year of sale must be made on or before the date of sale. 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 6llO(k)(3) of the Code provides it may not be used or cited as precedent. In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your authorized 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 year in which the Taxpayer claims a deduction for payments to the Fund.

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