PLR 200128009: Revised decommissioning fund schedule includes common facilities

Plain-English summary

A utility owned an interest in a nuclear plant and related common facilities. It sought a revised decommissioning fund schedule for one public utility commission after an earlier schedule expired. The IRS approved the schedule under IRC § 468A, showing amounts for that jurisdiction alongside amounts previously approved for another. The revised portion was limited to five years because the regulator had not accounted for statutory changes that could increase the fund's return and create excess funding. The utility represented that an additional plant interest acquired in an asset exchange was already fully funded and would not be funded from ratepayer collections.

Ruling snapshot

• Question: Does the revised decommissioning fund schedule meet the § 468A requirements?
• Outcome: Approved, with a five year limit on the revised Commission B portion.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-2, 1.468A-3.

Full text (IRS public release)

INTERNAL REVENUE SERVICE

Number: 200128009
Release Date: 7/13/2001
Index No.: 468A.04-02

CC:PSI:6 PLR-129462-00

April 04, 2001

Re: Revised Schedule of Ruling Amounts

Legend:
Taxpayer =

Parent =

Plant
=

Location =

Commission A =

Commission B =

Commission C =

State X =

Director =

Order A =

Order B =

Dear

This letter responds to the request, dated December 1, 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) of the Income Tax Regulations. Taxpayer was previously granted a revised schedule of ruling amounts for
Commission B on
. In a private letter ruling
dated
, the Service agreed to treat Taxpayer’s
request for a revised schedule of ruling amounts as timely filed. This revised schedule has been requested because the ten-year -2-
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effective period of the prior letter has expired. Information was submitted pursuant to section 1.468A-3(h)(2).

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

Taxpayer, as one of the owners of the Plant, has a interest as a tenant in common. In an asset exchange, Taxpayer received an additional percent ownership interest in the Plant. However, the decommissioning liability for this additional interest is fully funded, and Taxpayer will not collect any amounts from ratepayers for decommissioning liability relating to this additional interest. Taxpayer also holds an percent interest in certain common facilities relating to the operation of Plant and a second unit. Taxpayer has no ownership interest in the second unit. The Plant is situated in Location.

Taxpayer is under the jurisdiction of Commission A and Commission B; however, a portion of Taxpayer’s operations consists of sales of electricity to a public utility that is subject to the jurisdiction of Commission C. This request for a revised schedule of ruling amounts applies only to ruling amounts under the jurisdiction of Commission B. Taxpayer proposes to decommission the Plant using the prompt removal/dismantling method. Taxpayer is under the audit jurisdiction of Director.

In Order B, Commission B included annual decommission costs of $ in Taxpayer's cost of service for the years at issue for ratemaking purposes consistent with Commission A’s determination in Order A. Commission A used a base cost of for decommissioning the Taxpayer's
interest in the Plant and $
for
decommissioning the Taxpayer's interest in the common facilities. The portion of these figures attributable to the Commission B jurisdictional percentage ( percent) is $ and $ , respectively.

The funding period and the level funding limitation period
for the Plant extend from
The funding period
and the level funding limitation period for the common facilities
extend from
The estimated useful life of the
Plant is
he estimated period
for which the portion of the nuclear decommissioning fund (“Fund”) relating to the Plant will be in effect is Therefore, the qualifying percentage for the portion of the Fund relating to the Plant is -3-
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The estimated useful life of the common facilities is he estimated period for which the portion of the Fund relating to the common facilities will be in
effect is
Therefore, the
qualifying percentage for the portion of the Fund relating to the Plant is percent. The after-tax rate of return expected to be earned on the assets of the Fund is percent.

There are no proceedings before either commission that may result in an increase or decrease in the amount of decommissioning costs for the Plant 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 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 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 -4-
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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 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 -5-
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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.

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 -6-
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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 1917(a) and (c)(1) of the Energy Act 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 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. Commissions A and B have previously 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.
-7-
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3. The Taxpayer, as one of the owners of the Plant and the common facilities, has previously 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 previously calculated its share of the total decommissioning costs allocable to Commission A and Commission B, as required by section 1.468A-3(f)(2) of the regulations.

5. The Taxpayer has previously 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. The qualifying percentage under section 1.468A-3(d)(4) of the regulations is calculated to be

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
1

1
The ruling amounts for Commission A were approved in a prior schedule of ruling amounts. 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 -8-
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COMMISSIONS A AND B

YEAR A B TOTAL

With agreement of the Taxpayer, this revised schedule of ruling amounts is limited to a 5-year period for the schedule of ruling amounts for Commission B because of the commission has not taken into account the statutory changes made to section 468A of the Code by the Energy 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 Energy Act, by the commission. 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 Commission B 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 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

the jurisdiction of Commission A.
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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 a copy of 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 tax year in which the Taxpayer claims a deduction for payments made to the Fund.

Sincerely yours,
Peter C. Friedman
Senior Technician Reviewer
Branch 6
Office of Associate Chief Counsel
(Passthroughs and Special Industries)