PLR 200448005: Utility receives revised nuclear decommissioning fund schedule

Plain-English summary

A utility sought a revised IRS schedule for payments to a nuclear plant decommissioning fund for a period before it transferred its plant interest to a related company. The public utility commission had determined the decommissioning costs to be recovered in rates, and the utility calculated a qualifying percentage of 100 percent. Based on the submitted assumptions, the IRS approved the proposed schedule under Section 468A; the public release redacts its year and amount. Approval depended on the underlying facts remaining as represented. The utility would need another revision if specified changes occurred, and deductible payments could not exceed the applicable cost of service or ruling amount.

Ruling snapshot

• Question: Did the utility's proposed revised payment schedule meet the nuclear decommissioning fund rules?
• Outcome: Approved the revised schedule, subject to factual and annual payment limits.
• Key authorities: IRC § 468A; Treas. Reg. § 1.468A-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200448005
Third Party Communication: None
Release Date: 11/26/04
Date of Communication: Not Applicable
Index Number: 468A.04-02
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B06
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PLR-114195-04
Date:
August 18, 2004

Legend:

Taxpayer = ------------------------------------------------
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New Owner = -----------------------------------------------------
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Plant = ------------------------------------
Location = ----------------------------------
Method = ---------------------------------------------------------
Commission = ---------------------------------------------
Fund = -------------------------------------------
State = --------
Law = --------------------------------------------
Order = -----------
a = -----------------------
b =
c = -------------------
d = ---
e = --------
f = --
g = ----------------------
h = --------------------------
i =
j = -------------------------
k = --------------------------------------
l = ---
m = -------------------
n = --------------------------------------------------
o = --------------------------------------------------
p = ---------------------------------------
q = -------
r = -------
s = --------------------------------
t = ----------------------------------------
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Dear ------------

This letter responds to your request, on behalf of Taxpayer, dated March 5, 2004, for a revised schedule of ruling amounts pursuant to § 1.468A-3(i) of the Income Tax Regulations. A schedule of ruling amounts was previously issued with regard to the Plant on a. On b, ownership of Plant was transferred to New Owner in the context of a tax-free reorganization under § 351 of the Internal Revenue Code. New Owner has requested and received a schedule of ruling amounts for a period beginning with the year following the transfer of Plant. The Service ruled on the tax consequences of that transfer on Taxpayer, New Owner, and the Fund, by letter dated c. The Service also granted relief under section 301.9100-3 with respect to the filing of this request for private letter ruling. 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 is the common parent of an affiliated group of companies, including New Owner, that currently files a consolidated income tax return. Prior to the reorganization, Taxpayer was engaged in the generation of electricity in State and was under the regulatory jurisdiction of Commission. Prior to the reorganization, Taxpayer had a direct ownership interest in the Plant of d percent as a tenant in common. The Plant is situated at Location. Plant’s operating license expires on e. The estimated base cost for decommissioning Plant is based on an independent study and the proposed method of decommissioning the Plant is Method.

In f, State enacted Law requiring utility companies in State to separate their generation, transmission and distribution, and retail activities into three segments under either common or separate ownership. In addition, beginning on g, all retail electric customers were given the option of selecting a retail electric provider. Certain costs incurred or to be incurred by utility companies owning generation assets prior to the effective date of Law, including the costs of decommissioning nuclear power plants, were “stranded” by the effects of Law.1 Commission allows stranded nuclear decommissioning costs in generation assets to be recovered by means of a non- bypassable transmission and distribution charge imposed on all retail customers, regardless of their retail electric provider.

Pursuant to Law, Taxpayer's stranded costs in the generating assets, including those held by New Owner immediately after the restructuring, will be recovered through a special nonbypassable charge imposed upon regulated customers. While the mechanism for the recovery of remaining investment in Plant has not yet been

1
It is expected that market rates for generation of electricity after the effects of Law will be lower than conventional cost-of-service rates, rendering capital and nuclear decommissioning costs unrecoverable (or stranded) in a deregulated environment.
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determined, to the extent it will be recovered from regulated ratepayers, it is expected that it will be collected over a period not extending beyond the useful life of Plant.

With respect to the decommissioning costs for Taxpayer's interest in Plant, the amount of the costs previously authorized by the Commission to be collected (as discussed below) will continue to be collected as part of the nonbypassable charges during the period through h. Law subjects any decommissioning costs remaining after this period to cost of service rate regulation, and includes such costs as a nonbypassable charge imposed upon customers. As part of the restructuring of Taxpayer, all decommissioning amounts collected from regulated ratepayers must be paid to the division of New Owner that owns the Plant.

In Order, effective g, Commission authorized the annual collection of nuclear decommissioning costs related to Taxpayer’s interest in Plant in the amount of i for each of the taxable years j based on a site-specific decommissioning study. Commission estimated the base cost of decommissioning Taxpayer’s interest in Plant, using Method, as k. Using an escalation rate of l percent, Commission estimated the total future costs of decommissioning Taxpayer’s interest in Plant as m in future dollars. Commission estimated that the assets in the Fund would earn an average rate of n, o, and p. The estimated year in which Plant will no longer be included in the rate base (or for which decommissioning costs will no longer be recoverable through the non-bypassable charge) is q. The estimated year in which substantial decommissioning costs will first be incurred is r.

The funding period and the level funding limitation period for the Plant extend s.
The estimated period for which the Fund will be in effect and the estimated useful life of the Plant are each t. Thus, the Taxpayer has calculated its qualifying percentage to be 100 percent.

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
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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 1/2 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.

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.
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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 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
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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.

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.

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. Prior to the transfer of Plant to New Owner, 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 has 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.
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4. Taxpayer has determined that, pursuant to § 1.468A-3(d)(4) of the regulations, the qualifying percentage is 100 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 Commission, 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. 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, 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 YEAR---------

YEAR
RULING AMOUNT

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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 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
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for purposes of the deduction under the provisions of § 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.

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, a copy of this letter is being sent to the Taxpayer. 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)