PLR 200543022: IRS approves a revised nuclear decommissioning fund payment schedule

Plain-English summary

An electric utility requested a revised schedule of deductible payments to its nuclear plant decommissioning fund. Three public utility commissions set decommissioning costs included in the utility's rates, so the utility calculated a separate amount for each commission and added them for each year. Based on the utility's representations, the IRS approved the proposed schedule under section 468A. The utility may adjust the commission shares if its operations shift among jurisdictions, but may not increase a year's total without a revised schedule. The approval depends on the stated facts; specified later changes require another request. The IRS release redacts the schedule's payment amounts.

Ruling snapshot

• Question: Does the utility's proposed revised schedule meet the requirements for payments to its nuclear decommissioning fund?
• Outcome: Approved, subject to the stated limits and later revision requirements.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-2(b), 1.468A-3, 1.468A-8(b)(7)(ii).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200543022
Third Party Communication: None
Release Date: 10/28/2005
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
PLR-114473-05
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Date:
July 14, 2005

In re: Revised Schedule of Ruling Amounts
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Legend:

Taxpayer = ----------------------------------------------
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Parent = -----------------------------------------------------
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Plant = --------------------------------------------------
State X = ----------
State Y = ------------
Location = --------------------------
Commission A = --------------------------------------------------- Commission B = ----------------------------------------------------- Commission C = -------------------------------------------------
Method = ----------------------------------------------------------
Order A = ------------------------------------------------------------------------------------------
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Order B = -----------------------------------------------------------------------------------------
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Order C = ------------------------------------------------------------------------------------------
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a = ------------------
b = -----

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c = --------------------------
d = --------
e = --------
f = --------
g = --------------------------------------
h = ----
i = ----
j = ----------------------------------------
k = --------------------------------
l = ----------------------------------------
m = ----------------------------------------
n = --------
o = --------------------------------------
p = ----
q = ----
r = --------------------------------------
s = --------------------------------------
t = ----------------------------------------
u = ----------------------------------------
v = ----------------------------------------
w = ---------

Dear ------------

This letter responds to the request of Taxpayer, dated March 14, 2005, for a revised schedule of ruling amounts for Plant pursuant to section 1.468A-3(i)(1)(i) of the Income Tax Regulations. Taxpayer is required to request a revised schedule of ruling amounts on or before the deemed payment deadline date for the tenth taxable year that begins after the taxable year in which the prior schedule was received. Taxpayer was previously granted a schedule of ruling amounts on a. Information was submitted pursuant to section 1.468A-3(h)(2).

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

Taxpayer is an investor-owned electric utility incorporated in State X and serving customers in State X and State Y. Taxpayer is owned by Parent, with whom it files a consolidated return on a calendar year basis using the accrual method of accounting.

The Plant is situated in Location. The collection of decommissioning costs for the Plant with respect to Taxpayer=s b percent interest in the Plant is subject to the regulatory jurisdiction of Commission A, Commission B, and Commission C. The operating license for the Plant is scheduled to expire on c. The method for decommissioning the Plant is the Method, the cost of which is based on a site-specific decommissioning study.

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The regulatory percentages for Commission A, Commission B, and Commission C are d percent, e percent, and f percent, respectively.

Commission A, Commission B, and Commission C have determined the amount of decommissioning costs for the Plant to be included in Taxpayer's cost of service for ratemaking purposes. There are no proceedings pending before the Commissions that would may result in an increase or decrease in the amount of decommissioning costs to be included in Taxpayer's cost of service, and no orders increasing or decreasing the amount of decommissioning costs included in cost of service have been issued by the Commissions since the Company received the prior schedule.

COMMISSION A

In determining the decommissioning costs for the Plant in Order A, Commission A used an estimated base cost of g. Commission A escalated section 50.75(c) costs annually at a rate of h percent for four years, then at i percent for the remaining period, and escalated section 50.54(bb) costs at h percent, to determine a future decommissioning cost of j.

Taxpayer represents that under the section 468A regulations the defined level funding limitation period and the defined funding period extends k. Pursuant to the taxpayer's previous election under the special transition rule of section 1.468A- 8(b)(7)(ii), the estimated period for which the Fund will be in effect is l and the estimated useful life of the Plant is m. Therefore, the qualifying percentage is n percent.

COMMISSION B

In determining the decommissioning costs for the Plant in Order B, Commission B used an estimated base cost of o. Commission B escalated these costs annually at a rate of p percent for four years, then at q percent for the remaining period, to determine a future decommissioning cost of r.

Taxpayer represents that under the section 468A regulations the defined level funding limitation period and the defined funding period extends k. Pursuant to the taxpayer's previous election under the special transition rule of section 1.468A- 8(b)(7)(ii), the estimated period for which the Fund will be in effect is l and the estimated useful life of the Plant is m. Therefore, the qualifying percentage is n percent.

COMMISSION C

In determining the decommissioning costs for the Plant in Order C, Commission C used an estimated base cost of s. Commission C escalated section 50.75(c) costs annually at a rate of h percent for four years, then at i percent for the remaining period, and escalated section 50.54(bb) costs at h percent, to determine a future decommissioning cost of t.

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Taxpayer represents that under the section 468A regulations the defined level funding limitation period and the defined funding period extends k. Pursuant to the taxpayer's previous election under the special transition rule of section 1.468A- 8(b)(7)(ii), the estimated period for which the Fund will be in effect is u and the estimated useful life of the Plant is v. Therefore, the qualifying percentage is w 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 1/2 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 1/2 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 "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

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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(c)(1(i) and (ii) of the regulations provide 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 is deemed to be made) to such nuclear decommissioning fund and ends the later of the last day of the taxable year that includes the estimated date on which the 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 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.

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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, in part, that 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) of the regulations provides that 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(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 sections 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 section 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 section 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 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) of the regulations enumerates the information required to be submitted by a taxpayer in order to receive a ruling amount for any taxable year.

Section 1.468A-3(i)(1) of the regulations provides that any taxpayer that has obtained a schedule of ruling amounts pursuant to section 1.468-3(h) must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline date 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 amounts 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)(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.

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 is, therefore, an eligible taxpayer under sections 1.468A-1(b)(1) and (2) of the regulations.

2. Commission A, Commission B, and Commission C have permitted an amount for 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.

3. The Taxpayer has calculated the total decommissioning costs under section 1.468A-3(d) of the regulations.

4. The Taxpayer previously elected the special transition rule of section 1.468A-8(b)(7()ii) of the regulations. Thus, the Taxpayer has determined that, under section 1.468A-3(d)(4) of the regulations, n percent is the qualifying percentage for Commission A and Commission B, and w percent is the qualifying percentage for Commission C.

5. The taxpayer is proposing a total ruling amount for each taxable year that is the sum of the separate amounts from the commissions.

6. The Taxpayer has proposed a schedule of ruling amounts that meets the requirements of sections 1.468A-3(a)(1) and (2) of the regulations. The

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annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by the Commissions 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.

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.

APPROVED SCHEDULE OF RULING AMOUNTS
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YEAR COMMISSION A COMMISSION B COMMISSION C TOTAL

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Under the provisions of section 1.468A-3(a)(5) of the regulations, we authorize Taxpayer to adjust the jurisdictional components of the total annual ruling amounts solely to account for interjurisdictional shifts in the percentage of the Taxpayer's operations subject to the Commissions. However, the Taxpayer is not authorized to increase the total annual ruling amount for any taxable year without requesting a revised 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 this 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 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 section 468A of the Code. Payments made to such Fund can qualify only to the extent that they do not exceed the

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lesser of the decommissioning costs applicable to such Fund or the ruling amounts applicable to this Fund in the tax 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.

In accordance with the power of attorney on file with this office, copies of this letter are being sent to your authorized representatives. We are also sending a copy of this letter ruling to the Industry Director, Natural Resources and Construction (LM:NRC). 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 taxable year in which the Taxpayer claims a deduction for payments made to the Fund.

The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

Sincerely,

Peter C. Friedman
Senior Technician Reviewer, Branch 6
(Passthroughs & Special Industries)