PLR 200137057: Revised nuclear decommissioning fund payment schedule approved

Plain-English summary

An electric utility that co-owned a nuclear plant asked the IRS to approve a revised schedule of annual payments to its nuclear decommissioning fund. Several regulators had approved decommissioning costs for the utility's rates, and the utility used their assumptions to calculate its share of the costs. The IRS found that the proposed schedule met § 468A's requirements and approved it based on the stated facts and assumptions. Deductible payments remain limited to the smaller of the decommissioning costs included in rates or the annual ruling amount. The IRS expressed no opinion on the utility's planned separation of its generation assets from its transmission and distribution assets.

Ruling snapshot

• Question: Could the utility use its proposed revised schedule of ruling amounts for payments to its nuclear decommissioning fund?
• Outcome: Approved, subject to the facts and assumptions in the ruling.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-2(b), 1.468A-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200137057
Washington, DC 20224
Release Date: 9/14/2001
Index Number: 468A.04-02
Person to Contact:
468A.03-04
Telephone Number:

Refer Reply To:
CC:PSI:6
PLR-103044-01
Date:
June 13, 2001

Re: Request for a Revised Schedule of Ruling Amounts

Taxpayer
=

Parent
=

Plant
=
Location
=
Commission A =
Commission B =
Commission C =
Municipalities =
Director
=
Fund
=

Dear
:

This letter responds to the request of Taxpayer, dated December 29, 2000, 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 September 30, 1996. Information for the schedule of ruling amounts was submitted on behalf of the Taxpayer pursuant to section 1.468A-3(h)(2).

Taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts as follows:

Taxpayer is under the audit jurisdiction of the Director. Taxpayer is a principal
subsidiary of Parent. Taxpayer has a direct ownership interest of percent, as a tenant-in-common with other electric utility companies, in Plant, which is situated at Location. Plant’s operating license expires in .
 -2-
PLR-103044-01

Taxpayer is planning to separate its generation assets from its transmission and distribution assets by establishing a new company to which the generation assets will be transferred. Taxpayer will retain its transmission and distribution assets and operations and will distribute the stock of the new company to Parent. Therefore, Taxpayer’s request for a revised schedule of ruling amounts extends through , the year by which Taxpayer expects to have transferred its generating assets.

Taxpayer is subject to the jurisdiction of Commission A which covers percent of the Taxpayer's total electric sales, Commission B which covers
percent, Commission C which covers
percent, and Municipalities which
covers percent, for a total of percent. These percentages may vary slightly from year to year. The estimated base cost for decommissioning the Plant is based on an independent study and is premised on the prompt removal and dismantlement method.

Commission B, in Docket No.
, effective
, authorized nuclear decommissioning costs to be included in the Taxpayer's cost
of service for ratemaking purposes for the Plant in the amount of and estimated an after-tax rate of return on assets of percent. Commission also determined the total estimated cost of decommissioning the Plant to be
. This base cost escalated using an estimated inflation rate of percent results in an estimated future decommissioning cost of . The tax and investment changes made to section 468A of the Internal Revenue Code by section 1917 of the Energy Policy Act of 1992 were not taken into consideration when estimating these costs.

   Commission C, in Docket No.                  , effective             ,

authorized nuclear decommissioning costs to be included in the Taxpayer's cost of service for ratemaking purposes for the Plant in the amount of and estimated an after-tax rate of return on assets of percent. Commission C also determined the total estimated cost of decommissioning the Plant to be . This base cost escalated using an estimated inflation rate of percent results in an estimated future decommissioning cost of . The tax and investment changes made to section 468A of the Internal Revenue Code by section 1917 of the Energy Policy Act of 1992 were not taken into consideration when estimating these costs.

Municipalities, in an agreement effective , authorized nuclear
decommissioning costs to be included in the Taxpayer's cost of service for ratemaking purposes for the Plant in the amount of and estimated an after-tax rate of return on assets of percent. Commission also determined the total estimated
cost of decommissioning the Plant to be
. This base cost
escalated using an estimated inflation rate of percent results in an estimated
future decommissioning cost of
. The tax and investment
changes made to section 468A of the Internal Revenue Code by section 1917 of the
 -3-
PLR-103044-01

Energy Policy Act of 1992 were not taken into account when estimating these costs.

Amounts for Commission A are not specifically reviewed herein. There are no proceedings pending before either Commission A, Commission B, or Commission C 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. There are, however, proceedings pending before Municipalities 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.

The funding period for the Plant extends from and the level
funding limitation period for the Plant extends from The estimated period for which the Fund will be in effect is . The
estimated useful life of the Plant is
. Thus, the Taxpayer
has calculated its qualifying percentage to be percent.

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 taxable 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 taxable year or the ruling amount applicable to that 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 taxable 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 taxable year if the payment is made on account of the taxable year within 2½ months after the close of the taxable 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.
 -4-
PLR-103044-01

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 taxable year shall not exceed the lesser of (i) the cost of service amount applicable to the nuclear decommissioning fund for such taxable year; or (ii) the ruling amount applicable to the nuclear decommissioning fund for such taxable year.

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 taxable 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 each schedule of ruling amounts shall be based 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 taxable year.

Section 1.468A-3(a)(3) of the regulations requires the Internal Revenue Service to provide a schedule of ruling amounts that is 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 the ruling amount, specified in a schedule of ruling amounts, for any taxable year in the level funding limitation period shall not be less than the ruling amount specified in such schedule for any earlier taxable year. Under section 1.468A-3(b)(2), the level funding limitation period begins on the first day of the first taxable year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable 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(c)(1) of the regulations provides that the funding period for a nuclear decommissioning fund is the period that begins on the first day of the first taxable year for which a deductible payment is made (or deemed to be made) to such nuclear decommissioning fund and ends the later of (i) the last day of the taxable year that includes the estimated date on which decommissioning costs of the nuclear power -5-
PLR-103044-01

plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer’s cost of service for ratemaking purposes; or (ii) the last day of the taxable year that includes the estimated date on which the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer’s rate base for ratemaking purposes.

Section 1.468A-3(d)(1) 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 the plant multiplied by the taxpayer’s qualifying interest in the plant.

Section 1.468A-3(d)(4)(i) of the regulations provides that the qualifying percentage for any nuclear decommissioning fund is equal to the fraction, the numerator of which is the number of taxable 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 taxable years in the estimated useful life of the applicable nuclear power plant.

Section 1.468A-3(d)(4)(ii) of the regulations provides that the estimated period for which a nuclear decommissioning fund is to be in effect begins on the later of (1) the first day of the first taxable year for which a deductible payment is made to the nuclear decommissioning fund (or deemed made); or (2) the first day of the taxable year that includes the date that the nuclear power plant begins commercial operations (as determined by the applicable public utility commission at the time the plant was first included in the taxpayer’s rate base); and ends on the last day of the taxable 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. According to section 1.468A-3(e)(3), the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer’s rate base.

Section 1.468A-3(d)(4)(iii) of the regulations provides that the estimated useful life of a nuclear power plant begins on the first day of the taxable year that includes the -6-
PLR-103044-01

date that the plant begins commercial operations (as determined by the applicable public utility commission at the time the plant was first included in the taxpayer’s rate base); and ends on the last day of the taxable 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. According to section 1.468A-3(e)(3), the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer’s rate base.

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 taxable year is the sum of the ruling amounts for such taxable 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 to which the nuclear decommissioning fund relates 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(h)(2) of the regulations enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling amount for any taxable year.

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: (1) increases the proposed period over which decommissioning costs of the nuclear power plant will be included in cost of service for ratemaking purposes; (2) 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 (3) -7-
PLR-103044-01

reduces the amount of decommissioning costs to be included in cost of service for any taxable 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 the 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 provide a revised schedule of ruling amounts applicable to a taxable year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable year.

Sections 1917(a) and (c)(1) of the Energy Act of 1992 eliminated, for taxable years beginning after December 31, 1992, the investment restrictions contained in section 468A(e)(4)(C) of the Code. Sections 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 information submitted by the Taxpayer in relation to the requirements set forth in the section 468A of the Code and the regulations thereunder. 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, B, and C, and Municipalities 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.

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

4. Taxpayer has determined that pursuant to section 1.468A-3(d)(4) of the regulations, the qualifying percentage is percent.

5. 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 Commissions A, B, and C, and Municipalities, 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.
 -8-
PLR-103044-01

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

7. Taxpayer, subject to the jurisdiction of three public utility commissions for ratemaking purposes, has calculated its share of the total decommissioning costs allocable to Commissions A , B and C, and Municipalities, as required by section 1.468A-3(f)(2) 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
TAXABLE YEARS
COMMISSIONS A, B, AND C, AND MUNICIPALITIES

  YEAR COMM. A1        COMM. B       COMM. C       MUN.          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 this 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 taxable 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 tenth taxable 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 above, payments made to the Fund can qualify only to the extent that they do not exceed the lesser of the decommissioning costs applicable to the Fund or the ruling

1
Amounts for Commission A are not specifically reviewed herein and are merely reprinted to arrive at the amount for the total annual ruling amount. For purposes of the review and revision under section 1.468A-3(i) of the regulations, the date of the schedule of ruling amounts approved by the Service on September 30, 1996, governs the review period for the Commission A ruling amounts.
 -9-
PLR-103044-01

amounts applicable to the Fund in the taxable year.

Except as specified above, no opinion is made, express or implied, regarding other Federal income tax consequences of the facts presented. More specifically, no opinion is expressed regarding the impact of Taxpayer’s plan relating to the separation of its generation assets from its transmission and distribution assets.

This letter ruling is directed only to the Taxpayer who requested it. Section 6110(k)(3) of the Code provides that this ruling 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 taxable year in which the Taxpayer claims a deduction for payments made to the Fund.

In accordance with the power of attorney, a copy of this letter ruling is being sent to your authorized representatives. A copy of this letter ruling also is being sent to the Director.

Sincerely yours,
PETER C. FRIEDMAN
Senior Technician Reviewer, Branch 6
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosure:
6110 copy