PLR 200718008: Nuclear decommissioning fund receives limited review waiver

Plain-English summary

A utility’s commission extended the period for collecting nuclear plant decommissioning costs from customers, triggering a required IRS review of the fund’s scheduled contribution amounts. The utility requested a waiver. The IRS exercised its discretion to waive the review requirement for tax years after a redacted year, provided the utility made no further contributions to its decommissioning fund. It allowed one contribution for a redacted year by that year’s deemed payment deadline under an earlier schedule of ruling amounts.

Ruling snapshot

• Question: Could the utility avoid a mandatory review of its nuclear decommissioning fund contribution schedule?
• Outcome: Approved as a limited waiver, conditioned on no further fund contributions.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-3(a)(5), 1.468A-3(i)(1)(v).

Full text (IRS public release)

PLR-118176-06
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200718008
Third Party Communication: None
Release Date: 5/4/2007
Date of Communication: Not Applicable
Index Number: 468A.01-00
Person To Contact:
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----------------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
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CC:PSI:B06
PLR-118176-06
Date:
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February 06, 2007

LEGEND:

Taxpayer = -----------------------------------------
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Plant = -----------------------------------------
Parent = ------------------------------------
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Director = ---------------------------------------------------------------------------------
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Location = ----------------------
Commission = --------------------------------------------------
State = ------------
Order = -------------------------------------------------------------------
Fund = -------------------------------------------

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

This letter responds to your request, dated March 14, 2006, for a waiver, pursuant to § 1.468A-3(a)(5), of a mandatory review of Taxpayer’s schedule of ruling amounts. Taxpayer has been previously granted revised schedules of ruling amounts, most recently on -----------------------. 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, incorporated under the laws of State, is wholly owned by Parent.
Parent files a consolidated return that includes Taxpayer. Taxpayer is the sole owner and operator of the Plant.

The Plant is situated at Location. Plant=s operating license expires on

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---------------------, but Taxpayer has applied for an extension of that operating license for a 20-year period. Taxpayer is subject to the jurisdiction of Commission, which has authorized decommissioning costs to be included in Taxpayer’s cost of service for ratemaking purposes, as described in our letter dated -----------------------. In Order, Commission extended the collection period of those decommissioning costs thru ---------
--------------------------, while ordering that Taxpayer should -----------------------------------------
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------. After receiving ----
------------------------, it is contemplated that Commission will evaluate what amounts are needed for decommissioning the Plant in the future.

When Commission extended the period in which it allowed collection of decommissioning costs from ratepayers, that triggered the mandatory review of decommissioning amounts under § 1.468A-3(i)(1)(v). Taxpayer has requested that the Service waive this mandatory review under § 1.468A-3(a)(5).

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 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 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,"

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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.

Section 1.468A-3(a)(5) provides that the Service may, in its discretion, provide a schedule of ruling amounts determined on a different basis than the rules set forth generally in § 1.468A-3(a) thru (g) if the taxpayer demonstrates the need for such special treatment and sets forth an alternative basis for the schedule, and the Service determines that the special treatment is consistent with the purpose of section 468A.

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

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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 commission at the time the plant was first included in the taxpayer's rate base); and

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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.

Section 1.468A-3(i)(1)(iii)(A) provides that a taxpayer is required to request a revised schedule of ruling amounts if 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 increases the proposed period over which the decommissioning costs of that plant will be included in the cost of service for ratemaking purposes.

Section 1.468A-3(i)(1)(v) provides that a taxpayer must file any request for a revised schedule of ruling amounts required by § 1.468A-3(i)(1) in accordance with the rules in § 1.468A-3(h). That section further requires that, if the required request for a revised schedule of ruling amounts is not filed with the Service by the date provided in §§ 1.468A-3(i)(1)(i), (ii), or (iv), then the taxpayer’s ruling amount for the first taxable year to which the revised schedule of ruling amounts would have applied, as well as for all subsequent years, shall be zero unless the Service provides otherwise in the revised schedule of ruling amounts.

PLR-118176-06
Pursuant to § 1.468A-3(a)(5), we exercise our discretion to waive the application of § 1.468A-3(i)(1)(v) to tax years subsequent to ------- so long as no further contributions are made to Taxpayer’s Fund. Taxpayer is permitted to make its --------- contribution, by the deemed payment deadline for that year, in accordance with the schedule of ruling amounts issued to the Taxpayer and dated -----------------------.

Except as specifically determined above, no opinion is expressed or implied concerning the Federal income tax consequences of the transaction described above.

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. We are also sending a copy of this letter ruling to the Director.

Sincerely,

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