PLR 201147007: IRS approves a revised nuclear decommissioning reserve schedule

Plain-English summary

A nuclear power plant owner asked the IRS to approve a revised schedule of amounts it could contribute to a nuclear decommissioning reserve fund. The IRS concluded that the owner was an eligible taxpayer, that its proposed schedule used reasonable assumptions, and that the schedule satisfied the requirements of IRC § 468A and the related regulations. The approval was based on the taxpayer's representations, including cost and rate assumptions supported by an independent study and state utility commission determinations. The approval was contingent on the facts remaining unchanged, and future events may require a review or revised schedule.

Ruling snapshot

• Question: Does the taxpayer's proposed revised schedule of nuclear decommissioning reserve ruling amounts satisfy IRC § 468A and its regulations?
• Outcome: Approved, subject to the stated facts and future review requirements.
• Key authorities: IRC §§ 468A and 6110; Treas. Reg. §§ 1.468A-1, 1.468A-2, and 1.468A-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201147007
Third Party Communication: None
Release Date: 11/25/2011
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:
CC:PSI:B6
PLR-107204-11
Date:
July 13, 2011

Re: Revised Schedule of Ruling Amounts
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LEGEND:
Taxpayer = ------------------------------------- (EIN: ----------------)
Parent = ---------------------------------- (EIN: ----------------)
Plant = -----------------------------------------------
Location = --------------------------------
Date 1 = ------------------
Date 2 = ------------------
Date 3 = ------------------
Date 4 = -------------------------
Date 5 = ------------------
Date 6 = -----------------------
Date 7 = --------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Independent Study = --------------------------------------------------------------------------------
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------------------------------------------------------------------
Method = -----------
Commission A = -----------------------------------------------------------
Commission B = ---------------------------------------------------------------------------------
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Commission C = ----------------------------------------------------------------
Commission D = -------------------------------------------------------------------
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a = -----------

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b = -----------
c = ---------
d = ---------
e = ----
f = ----
x = -----------------
y = -------------------
A = --------------
B = --------------
C = -----------
D = ---------
E = ---------------
Order 1 = -------------------------------------------
Order 2 = ----------------------------------------------------------------------
Order 3 = ---------------------------------------------
Fund = -------------------------------------------
Director = -------------------------------------------------

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

This letter responds to your request, dated ------------------------, for a schedule of ruling amounts pursuant to section 468A(d) of the Internal Revenue Code and § 1.468A-3 of the Income Tax Regulations. Information was submitted pursuant to § 1.468A-3(e)(2). As the result of a recent adjustment to its decommissioning collections Taxpayer now requests an elective review of the most recent revised schedule of ruling amounts pursuant to § 1.468A-3(f)(2).

Taxpayer represents the facts and information relating to its request for a schedule of deduction amounts and a schedule of ruling amounts as follows:

Taxpayer, a subsidiary of Parent, is included in a consolidated return filed by Parent. Taxpayer is the sole owner and operator of Plant.

Plant is situated at Location. Plant’s amended operating license is scheduled to expire on Date 1. The estimated base cost for decommissioning Plant is based on an Independent Study and the proposed method of decommissioning Plant is Method.

Taxpayer is subject to the jurisdiction of Commission A, Commission B, Commission C, and Commission D. The jurisdictional percentages for these commissions are a, b, c, and d, respectively.

Commission A’s determinations of decommissioning costs have been increased since the last review by the Service issued on Date 2. On Date 3, Taxpayer filed a copy of the Independent Study with Commission A. Accordingly, on Date 4, Commission A issued Order 1, which authorized Taxpayer to include an increase in decommissioning

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costs in cost of service for ratemaking purposes. As a result, Taxpayer requests an elective review of its schedule of ruling amounts for Plant pursuant to § 1.468A-3(f)(2).

On Date 5, Taxpayer filed a copy of the Independent Study with Commission B.
Accordingly, on Date 6, Commission B issued Order 2, which authorized Taxpayer to include an increase in decommissioning costs in cost of service for ratemaking purposes. As a result, Taxpayer requests an elective review of its schedule of ruling amounts for Plant pursuant to § 1.468A-3(f)(2).

Commission C has also authorized Taxpayer to include decommissioning costs for Plant in Taxpayer’s costs of service. On Date 7, Commission C issued Order 3, which authorized Taxpayer to include an increase in decommissioning costs in cost of service for ratemaking purposes. As a result, Taxpayer requests an elective review of its schedule of ruling amounts for Plant pursuant to § 1.468A-3(f)(2).

Commission D has also authorized Taxpayer to include decommissioning costs for Plant in the formula rates charged to Commission D owners and other customers. Taxpayer’s request for a revised schedule of ruling amounts includes an increase in decommissioning costs for these rates. As a result, Taxpayer requests an elective review of its schedule of ruling amounts for Plant pursuant to § 1.468A-3(f)(2).

Based primarily on the assumptions provided by the Independent Study, and adopted by Commission A, and by Commission B, it is estimated that Fund assets will earn an average after-tax rate of return of e percent for Year 1 through Year 2. Commission A and Commission B approved rates for Taxpayer containing a decommissioning cost component based upon an estimated cost of $x (in Year 3 dollars) as a base cost for decommissioning Plant. This base cost for decommissioning was escalated at f percent, resulting in total estimated future decommissioning costs for Plant, of approximately $y (in Year 2 dollars).

Section 468A(a), as amended by the Energy Tax Incentives Act of 2005 (the Act), Pub. L. 109-58, 119 Stat. 594, allows an electing taxpayer to deduct payments made to a nuclear decommissioning reserve fund. Section 468A(b) limits the amount that may be paid into the nuclear decommissioning fund in any year to the ruling amount applicable to that 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 the total nuclear decommissioning cost of that nuclear power plant over 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.

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Section 468A(h) 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 2½ months after the close of the tax year. This section applies to payments made pursuant to either a schedule of ruling amounts or a schedule of deduction amounts.
Section 1.468A-1(a) 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) of the regulations, is a taxpayer that has a "qualifying interest" in any portion of a nuclear power plant. A qualifying interest is, 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 ruling amount applicable to the nuclear decommissioning fund for such taxable year. The limitation on the amount of cash payments for purposes of § 1.468A-2(b)(1) does not apply to any “special transfer” permitted under § 1.468A-8.

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 reasonable assumptions concerning the after-tax rate of return to be earned by the amounts collected for decommissioning, the total estimated cost of decommissioning the nuclear plant, and the frequency of contributions to a nuclear decommissioning fund for a taxable year. 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)(4) provides that the taxpayer bears the burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the regulations and that it is based on reasonable assumptions. That section also provides additional guidance regarding how the Service will determine whether a proposed schedule of ruling amounts is based on reasonable assumptions. For example, if a public utility commission established or approved the currently applicable rates for the furnishing or sale by the taxpayer of electricity from the plant, the taxpayer can generally satisfy this burden of proof by demonstrating that the schedule of ruling amounts is calculated using the assumptions used by the public utility commission in its most recent order. In addition, a taxpayer that owns an interest in a

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deregulated nuclear plant may submit assumptions used by a public utility commission that formerly had regulatory jurisdiction over the plant as support for the assumptions used in calculating the taxpayer’s proposed schedule of ruling amounts, with the understanding that the assumptions used by the public utility commission may be given less weight if they are out of date or were developed in a proceeding for a different taxpayer. The use of other industry standards, such as the assumptions underlying the taxpayer’s most recent financial assurance filing with the NRC, are described by the regulations as an alternative means of demonstrating that the taxpayer has calculated its proposed schedule of ruling amounts on a reasonable basis. Section 1.468A-3(a)(4) further provides that consistency with financial accounting statements is not sufficient, in the absence of other supporting evidence, to meet the taxpayer’s burden of proof.

Section 1.468A-3(b)(1) provides that, in general, the ruling amount for any tax year in the funding period shall not be less than the ruling amount for any earlier tax year. Under § 1.468A-3(c)(1), the funding 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 of the taxable year that includes the last day of the estimated useful life of the nuclear power plant to which the fund relates.

Section 1.468A-3(c)(2) provides rules for determining the estimated useful life of a nuclear plant for purposes of § 468A. In general, under § 1.468A-3(c)(2)(i)(A), if the plant was included in rate base for ratemaking purposes for a period prior to January 1, 2006, the date used in the first such ratemaking proceeding as the estimated date on which the nuclear plant will no longer be included in the taxpayer’s rate base is the end of the estimated useful life of the nuclear plant. Section 1.468A-3(c)(2)(i)(B) provides that, if the nuclear plant is not described in § 1.468A-3(c)(2)(i)(A), the last day of the estimated useful life of the nuclear plant is determined as of the date the plant is placed in service. Under § 1.468A-3(c)(2)(i)(C), any reasonable method may be used in determining the estimated useful life of a nuclear power plant that is not described in § 1.468A-3(c)(2)(i)(A).

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. 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.

Section 1.468A-3(e)(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(f)(1) requires a taxpayer that has obtained a schedule of ruling amounts pursuant to § 1.468A-3(e) to file a request for a revised schedule of ruling amounts on or before the deemed payment deadline date for the 10th taxable year that

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begins after the taxable year in which the most recent schedule of ruling amounts was received. If the taxpayer calculated its most recent schedule of ruling amounts on any basis other than an order issued by a public utility commission, the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline date for the 5th taxable year that begins after the taxable year in which the most recent schedule of ruling amounts was received.

Section 1.468A-3(f)(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(e). 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 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. Pursuant to § 1.468A-3(a)(4), Taxpayer has demonstrated that, by following the reasonable assumptions and determinations provided by the Independent Study, and used by Commission A and Commission B, the proposed schedule of ruling amounts is consistent with the principles of § 468A and the regulations thereunder and that such schedule is based on reasonable assumptions.

2. Taxpayer has a qualifying interest in Plant and is, therefore, an eligible taxpayer under § 1.468A-1(b)(1) of the regulations.

3. Taxpayer, as owner of Plant, has calculated the total decommissioning costs under § 1.468A-3(d)(3) of the regulations.

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 provided by the Independent Study, which Taxpayer has represented is a standard type used in the industry, and used by Commission A and Commission B, 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 tax year is restricted to the ruling amount applicable to the Fund, as set forth under § 1.468A-2(b)(1) of the regulations.

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Based solely on the determinations above, we conclude that Taxpayer’s proposed schedule of ruling amounts satisfies the requirements of § 468A of the Code.
APPROVED SCHEDULE OF RULING AMOUNTS

  Year        Commission A   Commission B      Commission C     Commission D       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 § 1.468A-3(f)(1) occur in future years, Taxpayer must request a review and revision of the schedule of ruling amounts. Generally, 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, 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.

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 sending a copy of this letter ruling to the Director and Taxpayer’s authorized representatives. Pursuant to § 1.468A-7(a), a copy of this letter must be attached (with the required Election Statement) to Taxpayer's federal income tax return for each tax year in which Taxpayer claims a deduction for payments made to the Fund.

Sincerely,

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