PLR 200701006: Utility’s revised nuclear-decommissioning contribution schedule approved

Plain-English summary

A utility with an ownership interest in a nuclear plant sought a revised funding schedule after two regulators reduced decommissioning costs included in electric rates. The IRS approved the proposed section 468A schedule based on the represented cost estimates, funding period, and regulatory assumptions. Contributions remain limited to the lesser applicable cost-of-service or ruling amount under the rules discussed. A third regulator’s amounts were reproduced only to calculate totals and were not specifically reviewed. Changes in circumstances require renewed review, and absent such changes a revised schedule must be requested by the stated tenth-year deadline. Because the schedule’s period began before 2006, the ruling applies pre-2006 law and remains subject to modification by later implementing regulations. The public release redacts the schedule’s figures and years.

Ruling snapshot

• Question: Does the utility’s revised schedule satisfy section 468A after reduced regulatory cost recovery?
• Outcome: Approved, subject to contribution limits, periodic review, unchanged assumptions, and future regulations.
• 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: 200701006
Third Party Communication: None
Release Date: 1/5/2007
Date of Communication: Not Applicable

Index Number: 468A.04-02
Person To Contact:
---------------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
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CC:PSI:B06
------------------------------------------- PLR-117585-06

Date:
September 29, 2006

Re: Revised Schedule of Ruling Amounts
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Taxpayer = -------------------------------------------------------------------------------------------
------------------------
Plant = ----------------------------------------------
Location = ------------------------------
Commission = -----------------------------------------------
A
Commission
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B
Commission
-----------------------------------------------------
C
Station
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Fund
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Dear -------------:

This letter responds to the Taxpayer=s request, filed March 29, 2006, as modified by submission dated May 19, 2006, for a revised schedule of ruling amounts in accordance with section 1.468A-3(i)(1) of the Income Tax Regulations relating to the Plant's nuclear decommissioning fund (AFund@). Taxpayer was previously granted a schedule of ruling amounts on ---------------------------. The request for a revised schedule of ruling amounts is the result of Commissions A and B reducing the amount of decommissioning costs to be included in cost of service. Information for the schedule of ruling amounts was submitted on behalf of the Taxpayer pursuant to section 1.468A- 3(h)(2).

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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 in Location.

Plant’s renewed operating license is set to expire on -------------------------.
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 -------percent, for a total of ----------percent. The total is slightly above ---
----- percent due to the fact that each Commission determines its jurisdictional percentage at a different point in time. These percentages may vary slightly from year to year. A portion of Taxpayer’s wholesale operations consist of sales to the joint owners of Station. The rates charged for supplemental sales to the joint owners are set through contractual agreements which were approved by Commission C. Taxpayer maintains its records as prescribed by Commission C. (------percent of Taxpayer’s total electric sales from sales to the joint owners of Station and -------percent of Taxpayer’s total electric sales from other customers). The estimated base cost for decommissioning Plant is based on an independent study and is premised on the prompt removal/dismantling method.

In ----------------------------------, Commission A included decommissioning costs for Taxpayer’s Plant in Taxpayer’s cost of service for ratemaking purposes in the annual amount of $-------------. In determining the amount of decommissioning costs, Commission A determined the total estimated base cost of decommissioning Taxpayer’s interest in Plant to be $----------------(-------) dollars. The base cost for decommissioning Plant was escalated at the rate of -----percent annually to -------, resulting in an estimated future decommissioning cost of $------------------(------- dollars).

Commission B, in ----------------------------included decommissioning costs for Taxpayer’s Plant in Taxpayer’s cost of service for ratemaking purposes in the annual amount of $-----------.

Commission C included decommissioning costs for Taxpayer’s Plant in Taxpayer’s cost of service for ratemaking purposes in the annual amount of $---------.

The funding period of Plant extends from ------- to -------, and the “level funding limitation period” for Plant extends from ------- through ------. The estimated period for which the Fund will be in effect is --- years (------- through -------). The assumed after tax rate of return expected to be earned by the assets of the Fund is -----percent. Taxpayer has calculated its qualifying percentage to be --------percent.

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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, former ' 468A(b) limited 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.

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."

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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 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.

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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.

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

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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 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.

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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.

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 section 1.468A-1(b) of the regulations.

2. Commissions A, B, and C have determined 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.

3. Taxpayer has determined that pursuant to section 1.468A-3(d)(4) of the regulations, the qualifying percentage is --------percent.

4. Taxpayer has proposed a schedule of ruling amounts which meets the requirements of sections 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 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.

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

6. Taxpayer, subject to the jurisdiction of three public utility commissions for ratemaking purposes, has calculated its share of the total decommissioning costs allocable to Commissions A, B, and C, as required by section 1.468A-3(f)(2) of the regulations.

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

APPROVED SCHEDULE OF RULING AMOUNTS
TAXABLE YEARS ------- THROUGH -------
COMMISSIONS A, B, AND C1

COMM. C
YEAR COMM.A COMM.B ------------ COMM. C-------- TOTAL

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1
Amounts for Commission C are not specifically reviewed herein and are merely reprinted to arrive at the amount for the total annual ruling amount. For purposes of the review and revision under section 1.468A-3(i) of the regulations, the date of the schedule of ruling amounts approved by the Service on ----------------------------, governs the review period for the Commission C ruling amounts.

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COMM. C
YEAR COMM.A COMM.B ------------ COMM. C-------- 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 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. 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 10th tax year following the close of the tax year in which the most recent schedule of rulings 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.

Effective January 1, 2006, amendments were made to § 468A by the Energy Tax Incentives Act of 2005, Pub. L. 109-58, 119 Stat. 594. Regulations based on these amendments are being developed but have not yet been proposed. Because the period to which the schedule of ruling amounts above relates began prior to the effective date of these amendments, the discussion above is based on the law in effect prior to January 1, 2006. However, this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter ruling. See section 11.04 of Rev. Proc. 2006-1, 2006-1 I.R.B. 1,

49. However, when the criteria in section 11.05 of Rev. Proc. 2006-1, 2006-1 I.R.B. 49
    are satisfied, a ruling is not revoked or modified retroactively except in rare or unusual circumstances.

    The ruling is directed only the taxpayer who requested it. Section 6110(k)(3) of
    the Code provides it may not be used or cited as precedent.

    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

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return for each tax year in which the Taxpayer claims a deduction for payments made to the Fund.

In accordance with the powers of attorney, a copy of this letter ruling is being sent to your authorized representatives. A copy of this letter ruling also is being sent to the appropriate Industry Director.

Sincerely yours,

PETER C. FRIEDMAN

PETER C. FRIEDMAN
Senior Technician Reviewer, Branch 6
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)