PLR 200406037: Revised nuclear decommissioning fund schedule approved

Plain-English summary

A utility requested a revised schedule of ruling amounts for its nuclear decommissioning fund after a regulator reduced the costs recoverable from customers and changed the expected rate base period for a plant. The request covered the portions of the plant regulated by two commissions, with one portion limited to a specified period, and omitted the portion regulated by a third commission. The IRS found that the utility had a qualifying interest and that the submitted schedule met § 468A's requirements. It approved the revised schedule, subject to the stated facts remaining unchanged. Deductions for fund payments remain limited to the lesser of the allowed decommissioning costs or the applicable ruling amount.

Ruling snapshot

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

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200406037
Washington, DC 20224
Release Date: 2/06/2004
Index Number: 468A.04-02
Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:6-PLR-118367-03
Date:
October 29, 2003

In re: Revised Schedule of Ruling Amounts

LEGEND:

Taxpayer =

Plant =
Parent =

Director =

Location =
State 1 =
State 2 =
Commission 1 =
Commission 2 =
Commission 3 =
Method =
Order =
a = b = c = d = e = f = g = h = i = j = k =

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l = m = n = o = p = q =

Dear

This letter responds to your request, dated , for a schedule of ruling amounts under 1.468A-3(i) of the Income Tax Regulations for the Taxpayer's nuclear decommissioning fund ("Fund") with respect to Plant. You have requested this schedule because one of the Commissions having jurisdiction over Taxpayer’s operations has reduced the amount that can be collected for nuclear decommissioning costs with respect to the Plant and has changed the estimated date that the Plant will no longer be included in rate base. The required information for the schedule of ruling amounts was submitted on behalf of the Taxpayer pursuant to section 1.468A-3(h)(2).

The Taxpayer has represented the following facts and information relating to the ruling request:

Taxpayer is a wholly-owned subsidiary of Parent. Parent files a consolidated tax return for itself and its subsidiaries, including Taxpayer, under the audit jurisdiction of the Director. The Plant is situated in Location, and serves retail and wholesale customers in State 1 and State 2. The collection of decommissioning costs for the Plant with respect to Taxpayer’s a percent interest in the Plant is subject to the regulatory jurisdiction of Commission 1 (b percent), Commission 2 (c percent), and Commission 3 (d percent). Prior to e, Taxpayer owned only f percent of Plant, and all three Commissions determine regulatory cost of service based upon an ownership of f percent of Plant. The operating license for the Plant is scheduled to expire on g. The method for decommissioning the Plant is the Method.

The rates and assumptions pertaining to Commission 1 have not changed since the schedule of ruling amounts approved in our prior review dated h. In determining the decommissioning costs for Taxpayer’s interest in the Plant, Commission 1 used an estimated base cost of i and a variable assumed after-tax rate of return to be earned on the assets of the Fund. This base cost escalated annually results in a future decommissioning cost of j. For ratemaking purposes, Commission 1 considers Taxpayer’s share of these costs to be f percent. Taxpayer represents that Commission 1 used a level funding limitation period and a funding period extending k.

Taxpayer has instituted a proceeding before Commission 1 requesting an increase in the annual amount that Taxpayer recovers from customers within its jurisdiction for nuclear decommissioning costs. This proceeding is still pending.

In determining the decommissioning costs for Taxpayer’s interest in the Plant, Commission 2 used an estimated base cost of l and a variable assumed after-tax rate

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of return to be earned on the assets of the Fund. This base cost escalated annually results in a future decommissioning cost of m. For ratemaking purposes, Commission 1 considers Taxpayer’s share of these costs to be f percent. Taxpayer represents that, with respect to Commission 2, for the period through n the level funding limitation period and the funding period extend k, but for subsequent years the level funding limitation period and the funding period extend o.

In Order, Commission 2 reduced to zero the amount of decommissioning costs included in cost of service for years after n. Consequently, Taxpayer is requesting a schedule of ruling amounts only for the period ending n with regard to the portion of the Plant that is subject to the regulatory jurisdiction of Commission 2. In addition, Taxpayer is not requesting a schedule of ruling amounts with respect to the portion of the Plant that is subject to the regulatory jurisdiction of Commission 3.

The estimated period for which the Fund will be in effect and the estimated useful life of the Plant are p. Therefore, the qualifying percentage is for purposes of both Commission 1 and Commission 2 is q 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 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

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"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 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 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.

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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.

Section 1.468A-6(e)(2) provides rules for the determination of a schedule of ruling amounts for a transferee of a nuclear power plant.

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 will be treated as an eligible taxpayer under section 1.468A-1(b)(1) of the regulations.

2. Commission 1 and Commission 2 have 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 for the period covered by this letter ruling.

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 q 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.

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APPROVED SCHEDULE OF RULING AMOUNTS

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.

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 section 468A of the Code. 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.

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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. We are also sending a copy of this letter ruling to the Director. 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,

Peter C. Friedman
PETER C. FRIEDMAN
Senior Technician Reviewer, Branch 6
Office of Associate Chief Counsel
Passthroughs and Special Industries

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