PLR 200122030: Revised nuclear decommissioning fund schedule approved

Plain-English summary

A utility requested a revised schedule of annual amounts for its nuclear decommissioning fund after its public utility commission changed the estimated date when the plant would leave the rate base. The utility later transferred the plant to affiliated entities, limiting the period covered by the requested schedule. Based on the submitted facts, the IRS found that the utility held a qualifying interest, that the commission allowed decommissioning costs in the utility's cost of service, and that the utility calculated its share and qualifying percentage under the regulations. It approved the proposed schedule under IRC § 468A, subject to the stated facts, ownership and payment limits, and later review requirements.

Ruling snapshot

• Question: Does the utility's revised nuclear decommissioning fund schedule satisfy IRC § 468A after the change in the plant's rate base period?
• Outcome: Approved
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1, 1.468A-2, 1.468A-3, and 1.468A-7

Full text (IRS public release)

INTERNAL REVENUE SERVICE

Number: 200122030
Release Date: 6/1/2001
Index No.: 468A.04-02

CC:PSI:6 PLR-106006-00

February 28, 2001

Re: Revised Schedule of Ruling Amounts

Taxpayer =

Parent =

Plant
=

Location =

Commission =

Director =

State
=

Law
=

Report =

Dear :

This letter responds to your request dated March 13, 2000, and subsequent submissions, submitted by your authorized legal representative on behalf of the Taxpayer. The request is for a revised schedule of ruling amounts under section 1.468A-3(i) of the Income Tax Regulations for the Taxpayer’s nuclear decommissioning fund ("Fund") under the jurisdiction of Commission and has been filed because the Commission has adjusted the estimated date on which Plant will no longer be included in rate base. The Taxpayer was previously granted a revised
schedule of ruling amounts on
. The required
information for the schedule of ruling amounts was submitted on behalf of the Taxpayer pursuant to section 1.468A-3(h)(2).

We understand the facts as submitted by Taxpayer to be as follows:
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Taxpayer is a wholly owned subsidiary of Parent, which files
a consolidated Federal income tax return with its affiliated companies, including Taxpayer. Taxpayer owns a percent as a tenant in common in the Plant, which is situated in Location. Taxpayer is subject to the jurisdiction of the Commission. Taxpayer is under the audit jurisdiction of the Director. The operating license of the Plant expires on . The method for decommissioning the Plant is prompt removal/dismantling.

On
, the Governor of State signed the Law,
which mandates rate reductions for ratepayers in State and provides for open access to electric energy suppliers. The Law permits Commission to approve restructuring plans submitted by electric utilities within State so long as the plans are consistent with the goals of the Law. Under Report, issued and
adopted by Commission on
, Taxpayer was required to
file a petition for rate unbundling that includes a per unit charge to separately collect for nuclear decommissioning and
other costs. On
, Taxpayer filed its response. On
, Taxpayer filed a stipulation with Commission requesting that the per unit charge be set at the level of costs included in rates as of the effective date of Law, and that the per unit charge remain at that level throughout a year
transition period beginning
, and ending
. Commission subsequently approved the stipulation.

The Taxpayer transferred the electric generation portion of its business, including Plant, to affiliated entities on . Accordingly, the requested schedule of ruling amounts is only for the year period from .

In determining the decommissioning costs for the Plant, the Commission used an estimated base cost of $ . This base cost escalated annually at a rate of percent results in a future decommissioning cost of $ .

Taxpayer represents that under the section 468A regulations the defined funding period and the defined level funding limitation period extend from . The estimated useful life of the Plant is and the estimated period for which the Fund
will be in effect is
. Therefore,
the qualifying percentage is percent. The assumed after- tax rate of return to be earned on the assets of the Fund is percent.

At the present time there are no proceedings before the -3-
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Commission 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(a) of the Internal Revenue Code provides that a taxpayer may elect to deduct the amount of payments made to a qualified decommissioning fund. However, section 468A(b) limits the amount paid into such fund for any taxable year to the lesser of the amount of nuclear decommissioning costs allocable to this fund which 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)(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 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 total nuclear power plant as the period for which the nuclear decommissioning 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 and is made within 2 ½ months after the close of the tax year. Additionally, a taxpayer that files for a schedule of ruling amounts and receives such schedule of ruling amounts after the 2 ½ month deadline for making a payment to a nuclear decommissioning fund, must make such payment to the fund within 30 days after the date that the taxpayer receives the schedule of ruling amounts for 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) of the regulations, is a taxpayer that has a "qualifying interest" in, among other things, a direct ownership interest, including an interest 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 -4-
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nuclear decommissioning fund during any tax year shall not exceed the lesser of (i) the cost of service amount applicable to the nuclear decommissioning fund for such tax year; or (ii) the ruling amount applicable to the nuclear decommissioning fund for such tax year. If the amount of cash payments made (or deemed made) to a nuclear decommissioning fund during any tax year exceeds the limitation of paragraph (b)(1), the excess is not deductible by the electing taxpayer. In addition, under section 1.468A-5(c) there are rules which provide that the Internal Revenue Service may disqualify a nuclear decommissioning fund if the amount of cash payments made (or deemed made) to a nuclear decommissioning fund during any tax year exceeds the limitation of paragraph (b)(1).

Section 1.468A-3(a)(1) 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) of the regulations provides that, to the extent consistent with the principles and provisions of this section, each schedule of ruling amounts shall be based on the reasonable assumptions and determinations used by the applicable public utility commission in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes. Under sections 1.468A-3(a)(3), the Internal Revenue Service shall 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)(1) of the regulations provides that, in general, the ruling amount for any tax year in the level funding limitation period shall not be less than the ruling amount for any earlier tax year. Under section 1.468A-3(b)(2), the level funding limitation period begins on the first day of the tax year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day 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)(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 -5-
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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. Under section 1.468A-3(d)(4), the qualifying percentage for any nuclear decommissioning fund is equal to a fraction, the numerator of which is the number of tax years in the estimated period for which the nuclear decommissioning fund is to be in effect and the denominator of which is the number of tax years in the estimated useful life of the applicable plant.

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)(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 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 the data submitted by the Taxpayer in relation to the requirements set forth in the Code and the regulations. Based solely upon 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) of the regulations.

2. The Commission has permitted 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.
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3. The Taxpayer has calculated its share of the total decommissioning costs under section 1.468A-3(d)(3) of the regulations.

4. The Taxpayer has determined that percent is the qualifying percentage as calculated under section 1.468A-3(d)(4) of the regulations.

Based on the above determinations, we conclude that the Taxpayer’s proposed schedule of ruling amounts with regard to the Commission satisfies the requirements of section 468A of the Code.

APPROVED SCHEDULE OF RULING AMOUNTS

YEAR

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. Payments made to such Fund can qualify only to the extent they are made while Taxpayer is the owner of the Plant and 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. In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your authorized representative. Pursuant to section 1.468A-7(a) -7-
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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)