PLR 200403088: Revised decommissioning fund schedule approved for a utility

Plain-English summary

A utility with a direct ownership interest in a nuclear plant requested a revised schedule of payments to its decommissioning fund. The IRS concluded that the schedule met section 468A's requirements, using the utility's share of estimated costs and the assumptions of the rate-setting bodies. The revised amounts for two jurisdictions were approved for five years because their estimates had not accounted for changes to the fund's tax rate and investment restrictions. Amounts for a third jurisdiction came from an earlier approved schedule. The utility must seek a revision if specified circumstances change, and deductions for fund payments remain subject to the annual statutory limit.

Ruling snapshot

• Question: May the utility use its proposed revised schedule of deductible decommissioning fund payments?
• Outcome: Approved, with a five-year limit for the portions tied to two jurisdictions.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-2, 1.468A-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200403088
Washington, DC 20224
Release Date: 1/16/2004
Index Number: 468A.04-02
Person to Contact:

Telephone Number:

Refer Reply To:
CC:DOM:P&SI:6 PLR-139132-03
Date:
October 7, 2003

Re: Revised Schedule of Ruling Amounts

LEGEND:

Taxpayer
=

Parent
=

Plant
=
Location
=
Method
=
Commission A =
Commission B =
Commission C =
Municipalities =

Fund
=

Dear
:

This letter responds to the request of Taxpayer, dated , submitted by your authorized representative for a revised schedule of ruling amounts pursuant to
§ 1.468A-3(i) of the Income Tax Regulations. Taxpayer was previously granted revised schedules of ruling amounts on , and . Information was submitted pursuant to § 1.468A-3(h)(2). That portion of the revised
schedule of ruling amounts dated
, concerning determinations by
Commission B and Municipalities extended only through . Taxpayer now seeks an extension of these ruling amounts for the period .
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Taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts as follows:

Taxpayer is a subsidiary of Parent. Taxpayer has a direct ownership interest in
the Plant of percent as a tenant in common. The Plant is situated at Location. Plant’s operating license expires in . The estimated base cost for decommissioning Plant is based on an independent study and the proposed method of decommissioning the Plant is Method.

Taxpayer is subject to the jurisdiction of Commission A, which covers percent of Taxpayer’s total electric sales; Commission B, which covers percent;
Commission C, which covers
; and Municipalities, which covers
percent, for a total of
percent.1 These percentages may vary slightly from
year to year.

Amounts for Commission A are not specifically reviewed herein; the schedule of ruling amounts approved by the Service on , governs the review period for the Commission A ruling amounts. These amounts are reproduced in the Approved Schedule of Ruling Amounts, below, in order to reflect the total annual ruling amount.

Commission B, in Docket No.
, effective
, authorized nuclear decommissioning costs to be included in the Taxpayer’s cost of service for ratemaking purposes for Plant in the amount of $ and estimated an after-tax rate of return on the assets of
percent. Commission B estimated the total cost on a system basis of decommissioning Plant to be $
in dollars, of which the Commission B portion is $ . Using an
inflation factor of percent, the total future cost of decommissioning Plant is
estimated to be $
in dollars, of which the Commission B portion is $
. The tax and investment changes made to § 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 Plant in the amount of $
and estimated an after-tax rate of return
on assets of percent. The Municipalities estimated the total cost on a system
basis of decommissioning Plant to be $ in dollars, of which the
Municipalities portion is $ . Using an inflation factor of percent, the total future cost of decommissioning Plant is estimated to be $ in dollars, of which the Municipalities portion is $ . The tax and investment

1
The Taxpayer is not requesting jurisdictional amounts with respect to Commission C.
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changes made to § 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.

   The funding period for the Plant extends from          through        and the level

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

There are no proceedings pending before Commission A, Commission B, or the Municipalities that may result in a change to the amount of decommissioning costs for the Plant to be included in the Taxpayer’s cost of service for ratemaking purposes. There is, however, a generic proceeding at Commission B related to nuclear decommissioning matters to which Taxpayer is a party. Commission B has neither established, nor indicated an intent to establish, a docket specifically addressing Taxpayer’s cost of service.

Section 468A provides that a taxpayer may elect to deduct the amount of payments made to a qualified decommissioning fund. However, § 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) 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 § 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 decommissioning costs with respect to the 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) provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of a taxable year if the payment is made on account of such taxable year and is made within 2 ½ months after the close of the tax year.

Section 1.468A-1(a) provides that an eligible taxpayer may elect to deduct nuclear decommissioning costs under section 468A of the Code. An "eligible taxpayer," as defined under § 1.468A-1(b)(1) of the regulations, is a taxpayer that has a "qualifying interest" in, among other things, a direct ownership interest.
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Section 1.468A-1(b)(2)(ii) provides that the term "qualifying interest" means a leasehold interest in any portion of a nuclear power plant if: (A) The holder of the leasehold interest is subject to the jurisdiction of a public utility commission with respect to such portion of the nuclear power plant; (B)The holder of the leasehold interest is primarily liable under Federal or State law for decommissioning such portion of the nuclear power plant; and (C) No other person establishes a nuclear decommissioning fund with respect to such portion of the nuclear power plant.

Section 1.468A-2(b)(1) 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)(1) 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) 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 § 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 that section.

Section 1.468A-3(b)(1) provides that, in general, the 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 § 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 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)(1) 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) 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 -5-
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approving the amount of these costs to be included in cost of service for ratemaking purposes.

Section 1.468A-3(d)(3) 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 § 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(d)(4)(ii) 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 § 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) provides that the estimated useful life of a nuclear power plant begins on the first day of the taxable year that includes the 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 § 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(g) 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.
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Section 1.468A-3(h)(2) 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)(2) 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 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 after December 31, 1992, the investment restrictions contained in § 468A(e)(4)(C). Sections 1917(b) and (c)(2) of the Energy Act of 1992 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 information submitted by the Taxpayer in relation to the requirements set forth in § 468A and the regulations thereunder. Based solely upon 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)(1) of the regulations.

2. Commission A, Commission B, 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 § 1.468A-3(g) of the regulations.

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

4. Taxpayer has determined that, pursuant to § 1.468A-3(d)(4) of the regulations, the qualifying percentage is percent for Commission B
and
percent for Municipalities.

5. 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 Commission A, Commission B, 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.
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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 the Fund or the ruling applicable to the Fund, as set forth under § 1.468A-(2)(b)(1) of the regulations.

7. Taxpayer has calculated its share of the total decommissioning costs allocable to Commission A, Commission B, and Municipalities, as required by § 1.468A-(3)(f)(2) of the regulations.

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

APPROVED SCHEDULE OF RULING AMOUNTS FOR TAXABLE YEARS THROUGH - COMMISSION A, COMMISSION B, AND MUNICIPALITIES

YEAR COMM. A2 COMM. B MUNICIPALITIES TOTAL

2
Amounts for Commission A are not specifically reviewed herein and are merely reprinted to arrive at the amount for the total ruling amount. For purposes of the review and revision under § 1.468A-3(i), 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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With agreement of the Taxpayer, this revised schedule of ruling amounts is limited to a 5-year period for the portion of the schedule of ruling amounts for Commission B and Municipalities because those entities have 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 these entities. 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, except the amounts for Commission A, which took into account the amendments made by the Energy Act to section 468A of the Code. Approval of a revised schedule of ruling amounts may be granted after a determination by either Commission B or Municipalities 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) 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.

Except as specifically determined above, no opinion is expressed or implied concerning the Federal income tax consequences of the transaction described above.

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. Payments -9-
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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. In accordance with the power of attorney on file with this office, copies of this letter are being sent to your authorized representative. We are also sending a copy of this letter ruling to the Industry Director, Natural Resources and Construction (LM:NRC). Pursuant to § 1.468A-7(a), 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 the Associate Chief Counsel
(Passthroughs and Special Industries)

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