PLR 200438019: Revised nuclear decommissioning schedule approved

Plain-English summary

An electric utility requested a revised schedule of amounts for its nuclear decommissioning fund. Five public utility commissions regulated its rates, and one had aligned the plant's estimated useful life with its operating license expiration. The IRS found that the utility had a qualifying ownership interest and that the proposed schedule used the commissions' approved decommissioning assumptions. It approved the schedule under section 468A on the stated facts. Deductible payments to the fund remain capped by the lesser of the applicable decommissioning cost amount or ruling amount, and changes in specified facts would require a further revision.

Ruling snapshot

• Question: Does the utility's proposed revised schedule satisfy the nuclear decommissioning fund rules?
• Outcome: Approved, subject to unchanged facts and future review requirements.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-2(b)(1), 1.468A-3, 1.468A-7(a).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200438019
Release Date: 9/17/04
Index Number: 468A.04-02, 468A.03-04

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Person To Contact:
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--------------------, ID No. -------------
Telephone Number:
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Refer Reply To:
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CC:PSI:6 – PLR-114851-04
Date:
May 18, 2004
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Re: --------------------------------------------------
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Taxpayer = -----------------------------------------------------------------------------------------
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Plant = ------------------------------------------------------------------
Location = -----------------------------
Industry = -----------------------------------------------------------------------------------
Director
Commission A = -------------------------------------------------- Commission B = ---------------------------------------------------------------------- Commission C = ------------------------------------------------------- Commission D = ------------------------------------------------------- Commission E = ----------------------------------------------------------------------

Dear -----------------:

This letter responds to the request of Taxpayer, dated March 8, 2004, for a revised schedule of ruling amounts pursuant to ' 1.468A-3(i) of the Income Tax Regulations. Information was submitted pursuant to ' 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 has a direct ownership interest of ----- percent in Plant, which is situated at Location. Taxpayer is under the audit jurisdiction of the Industry Director.

Plant's operating license expires on --------------------. 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

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----------percent, Commission D which covers ----------percent, and Commission E which covers ----------percent, for a total of 100 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 DECON method. There are no proceedings pending before any of the Commissions 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.

Commission A, in Docket No. -----------------------, effective ----------------------, and Docket No. -------------------------, effective ----------------------, authorized nuclear decommissioning costs to be included in cost of service for ratemaking purposes for the Plant. Commission A used $------------------(------- dollars) as the estimated base cost for decommissioning the Plant. Commission A then multiplied this base cost by the Commission A jurisdictional factor, and escalated at -------percent during the decommissioning period, resulting in an estimated future decommissioning cost of $----- -------------------(------- dollars). Commission A assumed that the assets of the Fund would earn an annual after-tax rate of return of -----percent. The tax and investment changes made to section 468A of the Internal Revenue Code made by section 1917 of the Energy Policy Act of 1992 were taken into consideration in setting these rates.

Decommissioning costs for the Plant are projected to be included by Commission A in Taxpayer’s cost of service through -------. The estimated year in which the Plant no longer will be included in Taxpayer’s rate base for ratemaking purposes is -------. The funding period and the level funding limitation period for the Plant extend through -------.

For Commission A, the estimated useful life of the Plant is --- years (------- through -------). The date the Plant began sustained and substantial generation of electricity for sale to customers is -------, and the date the Plant was first included by Commission A in Taxpayer’s rate base was -------. The estimated period for which the Fund will be in effect is --- years (------- through -------). Therefore, the qualifying percentage for the Fund is -------- percent.

In its recent orders, Commission A adjusted the ending date of the estimated useful life of the Plant to coincide with the expiration of the Plant’s operating license in -- -------. The estimated useful life of the Plant was not adjusted by Commission A before July 18, 1984.

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 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.

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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 ' 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 22 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 ' 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 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 ' 88 of the Code and the regulations thereunder. Each schedule of ruling

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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 permits 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 ' 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 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.

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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 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 ' 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 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(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

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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 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) 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 ' 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.

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Section 1.468A-7(a) of the regulations provides, in general, that an eligible taxpayer is allowed a deduction for the taxable year in which the taxpayer makes a cash payment (or is deemed to make a cash payment) to a nuclear decommissioning fund only if the taxpayer elects the application of section 468A. A separate election is required for each nuclear decommissioning fund and for each taxable year with respect to which payments are to be deducted under section 468A. In the case of an affiliated group of corporations that join in filing a consolidated return for a taxable year, the common parent must make a separate election on behalf of each member whose payments to a nuclear decommissioning fund during such taxable year are to be deducted under section 468A. The election under section 468A for any taxable year is irrevocable and must be made by attaching a statement ("Election Statement") and a copy of the schedule of ruling amounts provided pursuant to the rules of section 1.468A- 3 to the taxpayer's federal income tax return (or, in the case of an affiliated group of corporations that join in filing a consolidated return, the consolidated return) for such taxable year. The return to which the Election Statement and a copy of the schedule of ruling amounts is attached must be filed on or before the time prescribed by law (including extensions) for filing the return for the taxable year with respect to which payments are to be deducted under section 468A.

We have examined the representations and information submitted by the Taxpayer in relation to the requirements set forth in the ' 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 ' 1.468A-1(b) of the regulations.

2. Commissions A, B, C, D, and E 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 for Commission A is -------------------- -----------------------------------------------------------------------------percent.

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 Commissions A, B, C, D, and E and will result in a projected fund balance at the end of

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

7. Taxpayer, subject to the jurisdiction of five public utility commissions for ratemaking purposes, has calculated its share of the total decommissioning costs allocable to Commissions A, B, C, D, and E, as required by ' 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 ' 468A of the Code.

APPROVED SCHEDULE OF RULING AMOUNTS
TAXABLE YEARS ------- THROUGH -------
COMMISSIONS A, B, C, D, AND E1

YEAR COMM. A COMM. B COMM. C COMM. D COMM. E TOTAL

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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 ' 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

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The ruling amounts for Commissions B, C, D, and E were approved in a private letter ruling issued on --- ---------------------------. 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 the jurisdiction of Commissions B, C, D, and E.

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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 ' 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 amounts applicable to the Fund in the taxable year.

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 the power of attorney on file with this office, a copy of this letter is being sent to your authorized legal representatives. A copy of this letter ruling also is being sent to the Industry Director.

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 return for each taxable 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)

Enclosure: 6110 copy