PLR 200702001: Unregulated plant owner receives decommissioning schedule tied to utility collections

Plain-English summary

An unregulated nuclear plant owner sought a revised section 468A decommissioning contribution schedule after a corporate restructuring. A related regulated electric company collected approved customer charges and was required to remit them to the owner’s qualified fund. The IRS approved the redacted schedule and a 100 percent qualifying percentage based on equal estimated fund and plant-life periods. The owner’s eligibility continued only while the commission authorized the electric company to collect the costs and required payment to the owner. Fund payments remained limited to the lesser of the applicable decommissioning costs and ruling amounts, and changed assumptions or specified events could require revision. The ruling applied pre-2006 law because the funding period began earlier and warned that forthcoming regulations could modify inconsistent conclusions.

Ruling snapshot

• Question: Can the unregulated owner obtain a revised decommissioning schedule using the related utility’s mandatory collections and remittances?
• Outcome: Approved: redacted revised schedule and 100 percent qualifying percentage, with ongoing collection and remittance conditions.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1(b)(1), 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: 200702001
Third Party Communication: None
Release Date: 1/12/2007
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-100105-06
Date:
September 29, 2006

Legend:

Taxpayer = ------------------------------------------
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Plant = ---------------------------------------------------------------------------------
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State = --------
Location = -------------------------------------------
Holding Company = -------------------------------------
Parent = -----------------------
Intermediate = ------------------------------------
Electric Company = ------------------------------------------
Date One = ------------------------
Date Two = ----------------------
Date Three = --------------------------
Commission = ------------------------------------------
Final Order = ------------------------------------------------
Updated Order = ---------------------------------------------
Method = ----------------------
a = -----
b = --------------------------------------
c = ------
d = -------
e = ---------------------
f = --------------------------------
g = ---
h = ------------------
i = ------------------------------------------------------
j = ------------------------------------------------------
k = ------------------------------------------------------
l = ---------------
m = ------------------
PLR-100105-06
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Dear ----------------:

This letter responds to your request, on behalf of Taxpayer, dated December 21, 2005, 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 Date One. 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:

Plant is situated in Location, in State. On Date Two, Holding Company, a wholly- owned subsidiary of Parent, transferred its electric generation assets to certain wholly- owned limited liability companies and limited partnerships in a corporate restructuring. As part of this restructuring, all ownership interests in the Plant were transferred to Taxpayer, after which Taxpayer owned a percent of the Plant.

Taxpayer is a limited partnership organized under the laws of State, and is indirectly owned through limited liability companies by Intermediate. For Federal income tax purposes, Taxpayer and these limited liability companies are treated as disregarded entities. Intermediate, a wholly-owned subsidiary of Holding Company, is treated as a partnership for Federal income tax purposes. All of the members of Intermediate are members of the affiliated group of which Parent is the common parent.

Taxpayer is principally engaged in the generation and sale of electric energy in State. Intermediate files a partnership Federal income tax return that includes the activities of Taxpayer. The return is filed on a calendar year basis using the accrual method of accounting.

On Date Three, in connection with the above-discussed corporate restructuring, Taxpayer received a private letter ruling from the IRS in which the IRS concluded that (1) Taxpayer is an "eligible taxpayer" under section 1.468A-1(b) and an "electing taxpayer" under section 1.468A-2, and (2) the transfer of the Plant to Taxpayer is a transaction that satisfies the requirements of section 1.468A-6.

Although Taxpayer is not a regulated utility, Electric Company, a subsidiary of Holding Company, is subject to the rate-of-return ratemaking jurisdiction of Commission, and the cost of decommissioning Plant is included in Electric Company's cost of service by Commission. Beginning Date Two, in accordance with Commission's Final Order, and as updated in Updated Order, Electric Company collects an amount intended to fund the cost of decommissioning the Plant through its Commission-approved tariff, which is a non-bypassable charge upon Electric Company's retail customers. Pursuant to the Final Order, and Holding Company's Business Separation Plan as approved by Commission, all decommissioning amounts collected by Electric Company must be paid over to Taxpayer. Taxpayer deposits these amounts into the qualified nuclear
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decommissioning fund maintained by Taxpayer with respect to the Plant. The non- bypassable charge is a per kilowatt hour charge determined on the basis of a formula.

An estimated cost of b was used as the base cost for decommissioning the Plant.
This base cost was escalated at c percent annually to the year that decomissioning is expected to begin (d), resulting in an estimated future decommissioning cost of e. The base cost of decommissioning the Plant is based on the use of the Method.

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

The fair market value of the assets of the qualified nuclear decommissioning fund as of the first day of the first taxable year to which the schedule of ruling amounts will apply is h. The assumed after tax rate of return is i, j, k, and thereafter, l. The dollar amount expected to be earned by the assets of the fund (based on the after-tax rate of return applicable to the fund and assuming contributions are limited to the cost of service collections) over the period that begins on the first day of the first taxable year to which the schedule of ruling amounts will apply and ends the last day of the funding period is approximately m.

Section 468A provides that a taxpayer may elect to deduct the amount of payments made to a qualified decommissioning fund. However, former § 468A(b) limited 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 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
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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-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.

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.
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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 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
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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. The Taxpayer has a qualifying interest in the Plant and will be treated as an eligible taxpayer under section 1.468A-1(b)(1) of the regulations only during such period as Electric Company is authorized by Commission to collect decommissioning costs from customers and is obligated to pay the amounts collected to Taxpayer.

2. The Commission has permitted the amount of decommissioning costs to be included in the Electric Company's cost of service for ratemaking purposes as required by section 1.468A-3(g) of the regulations for the period covered by this letter ruling.

3. Taxpayer has determined that, pursuant to § 1.468A-3(d)(4) of the regulations, the qualifying percentage is 100 percent.

4. 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.
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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.

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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
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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.

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 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. 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)