PLR 200345039: Utility receives revised nuclear decommissioning fund schedule

Plain-English summary

An electric utility that owned part of a nuclear plant requested a revised schedule of amounts it could pay into its nuclear decommissioning fund. The IRS concluded that the proposed schedule met § 468A's requirements, based on the utility's submitted figures and the cost assumptions used by its public utility commissions. The letter limits the approved amounts for one commission's jurisdiction to five years because changes in fund investment rules and tax rates could increase the fund's return. Payments eligible for the deduction remain limited to the lesser of the applicable decommissioning costs or ruling amount. The utility must request another review if specified facts change, and must seek a revised schedule by the stated deadline even if they do not.

Ruling snapshot

• Question: Does the revised schedule of nuclear decommissioning fund payments satisfy § 468A?
• Outcome: Approved, with a five-year limit for one commission's amounts and required future review.
• 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: 200345039
Washington, DC 20224
Release Date: 11/07/2003
Index Number: 468A.04-02
Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:6-PLR-120703-03
Date:
July 31, 2003

Re: Revised Schedule of Ruling Amounts

Taxpayer
=

State
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Parent
=

Company
=
Plant
=

Location
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Commission A
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Commission B
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Independent Engineer =
Fund
=

Dear :

This letter responds to the request of Taxpayer, dated March 12, 2003, for a revised schedule of ruling amounts pursuant to § 1.468A-3(i)(1)(iii)(A)(3) of the Income Tax Regulations. Information was submitted pursuant to § 1.468A-3(h)(2).

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

Taxpayer is an investor-owned electric utility incorporated and operating in State.
Taxpayer is a wholly-owned subsidiary of Parent. Taxpayer owns percent of Plant
as a tenant in common. Prior to
, Taxpayer was known as
Company.

Taxpayer is subject to the jurisdiction of Commission A which covers percent of the Taxpayer's total electric sales, and Commission B which covers percent. These
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percentages may fluctuate slightly from year to year. There are no pending proceedings before Commission A or Commission B that may result in an increase or decrease in the amount of decommissioning costs to be included in cost of service.

On
, Taxpayer entered into an offer of settlement with certain
of its customers that included decommissioning expenses of $ per year. The offer of settlement adopted the annual decommissioning cost amount for the Plant as found by Commission A in Docket No. . Commission A's Final Order in Docket No. , in turn, adopted the decommissioning costs as set forth in the Motion and Stipulation.

On
, Commission B issued an order in Docket No.
approving the Offer of Settlement on an interim basis. On ,
Commission B issued an order in Docket No. approving the Offer of Settlement. That order determined the amount of decommissioning costs for the Plant, beginning with the taxable year, to be included in cost of service for ratemaking purposes, as defined by § 1.468A-2(b)(2). Commission B has not reviewed Taxpayer's decommissioning costs to be included in cost of service for ratemaking purposes since
, or the date that Taxpayer's prior schedule of ruling amounts for Commission B was issued by the Internal Revenue Service. The amount of decommissioning costs for the Plant that Commission B included in cost of service in
Docket No. is $ per year for through . In determining these
amounts, Commission B relied upon the report prepared by Independent Engineer in .

The assumptions, estimates and other factors used by Commission B in Docket to determine the amount of decommissioning costs with respect to the
Plant are as follows: (1) the proposed method of decommissioning is the prompt removal/dismantlement method; (2) the estimated year in which substantial decommissioning costs will first be incurred is ; (3) the estimated year in which decommissioning of the Plant is expected to be substantially complete is ; (4) the total estimated cost for decommissioning Taxpayer's ownership interest in the Plant is $
( dollars); (5) the base ( ) cost for decommissioning the Plant was escalated at the rate of percent annually, resulting in an estimated future
decommissioning cost of $ ( through ); and (6) the average annual
after-tax rate of return assumed to be earned by amounts collected for decommissioning is percent.

Under the ratemaking assumptions used to determine the last (and only) electric service rates that were established and approved by Commission B in Docket No. prior to the filing of this request, the Plant will no longer be included in rate base at the end of . Moreover, under the ratemaking assumptions used to determine the first (and only) electric service rates that were established and approved
by Commission B in Docket No.
prior to the filing of this request, the
Plant will no longer be included in rate base at the end of .

Taxpayer made the following assumptions and estimates to determine the proposed revised schedule of ruling amounts: (1) the level funding limitation period extends from to ; (2) the funding period extends from to ; (3) the
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assumed after-tax rate of return to be earned by assets of the fund is
percent; (4) the fair market value of the Commission B-jurisdictional assets of the Fund as of
, was $ ; (5) the expected earnings of the Commission B- jurisdictional assets of the Fund over the period , through
, is $ ; (6) the amount of Taxpayer's percent share of
decommissioning costs allocable to the Fund pursuant to § 1.468A-3(d) is $ (escalated to the year incurred); (7) the Commission B-jurisdictional amount of decommissioning costs allocable to the Fund is $ ; (8) the total estimated future cost for decommissioning Taxpayer's ownership interest in the Plant is $ ( dollars); (9) the qualifying percentage pursuant to § 1.468A-3(d)(4)(i) is percent; (10) the estimated period for which the decommissioning fund is to be in effect
is years ( through ); and (11) the estimated useful life of the Plant is
years ( through ).

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, § 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 § 468A of the Code. An "eligible taxpayer", as defined under § 1.468A-1(b)(1), is a taxpayer that has a qualifying interest in a nuclear power plant. As defined under § 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
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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 § 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 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)(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 § 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 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
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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)(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(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(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 §§ 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 § 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 § 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.
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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)(i) of the regulations provides that any taxpayer that has obtained a schedule of ruling amounts must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline for the 10th taxable year that begins after the taxable year in which the most recent schedule of ruling amounts was received. The first taxable year to which the revised schedule of ruling applies shall be the 10th taxable year that begins after the taxable year in which the most recent schedule of ruling amounts was received.

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: (1) 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 (a) increases the proposed period over which decommissioning costs of such nuclear power plant will be included in cost of service for ratemaking purposes, (b) adjusts the estimated date on which such nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes, or (c) reduces the amount of decommissioning costs to be included in cost of service for any taxable year; (2) 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; and (3) in the case of a taxpayer that determines its schedule or ruling amounts under a formula or method obtained under § 1.468A-3(a)(4), the item increased, adjusted, or reduced is a fixed (rather than a variable) element of that formula or method.

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 § 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.

Sections 1917(a) and (c)(1) of the Energy Policy Act of 1992 (the "Act") eliminated, for taxable years beginning after December 31, 1992, the investment
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restrictions contained in § 468A(e)(4)(C). Sections 1917(b) and (c)(2) of the Act revised
§ 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 § 1.468A-1(b) of the regulations.

2. 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 § 1.468A-3(g) of the regulations.

3. The Taxpayer, as one the owners of the Plant, has calculated its share of the decommissioning costs under § 1.468A-3(d)(3) of the regulations.

4. The Taxpayer, subject to the jurisdiction of two or more public utility commissions for ratemaking purposes, has calculated the total decommissioning costs allocable to Commission A and Commission B, as required by § 1.468A-3(f)(2) of the regulations.

5. The Taxpayer has proposed a schedule of ruling amounts which meets the requirements of §§ 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.

6. Pursuant to § 1.468A-3(d)(4) of the regulations Taxpayer has determined that percent is the qualifying percentage.

7. 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 § 1.468A-2(b)(1) of the regulations.

Based on the above determinations, we conclude that the Taxpayer's proposed
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schedule of ruling amounts satisfies the requirements of § 468A of the Code.

APPROVED SCHEDULE OF RULING AMOUNTS
TAX YEARS THROUGH
COMMISSIONS A1 AND B

             YEAR                       A                         B                          TOTAL

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
, governs the review period for the Commission A ruling amounts.
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The approved schedule of ruling amounts for Commission B is being limited to a five-year period as a result of the statutory changes made by the 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 Act, by Commission B (which based its determinations as to the approved after-tax rate of return on restricted investments and a higher tax rate). This increased after-tax rate of return would, over the life of the Fund, result in a balance in the Fund on the last day of the funding period that would exceed the amount of decommissioning costs allocable to the Fund. In order to prevent the excess accumulation in the Fund this schedule of ruling amounts is limited to a five year period for Commission B. Approval of a revised schedule of ruling amounts may be approved after a determination by the applicable public utility commissions 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 § 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 § 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 6110(k)(3) of the Code provides it may not be used or cited as precedent.

Pursuant to § 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
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return for each tax year in which the Taxpayer claims a deduction for payments made to the Fund.

Pursuant to the power of attorney on file with this office a copy of this letter is being sent to your authorized representatives. A copy of this letter is also being sent to the Industry Director, Natural Resources (LM:NRC).

Sincerely yours,

PETER FRIEDMAN
Senior Technician Reviewer, Branch 6
Office of Associate Chief Counsel
(Passthroughs and Special Industries)

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