PLR 201347009: IRS approves a revised nuclear decommissioning funding schedule and formula

Plain-English summary

A public utility asked the IRS to approve a mandatory revised schedule of ruling amounts for contributions to a nuclear decommissioning fund. The revision was prompted by a substantial change in the amount calculated under a previously approved formula and by the utility's plans to seek an extension of the plant's operating license. The IRS concluded that the utility was eligible, that its cost and funding assumptions were reasonable, and that the proposed schedule and formula satisfied section 468A and its regulations. It approved one stated amount for a year and formula-based amounts for later years, subject to future review if the license or other relevant circumstances change.

Ruling snapshot

• Question: Does the utility's revised nuclear decommissioning ruling-amount schedule and formula satisfy IRC § 468A and the related regulations?
• Outcome: Approved
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1 through 1.468A-3 and § 1.468A-7

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201347009
Release Date: 11/22/2013
Index Number: 468A.04-02

---------------------
Person To Contact:
----------------------------------------------- --------------------------- ID No. ----------------
--------------------------------
-----------------
-------------------------
Telephone Number:
-----------------------------
----------------------
Refer Reply To:
CC:PSI:B06 – PLR-111728-13
Date:
August 19, 2013
Re: Revised Schedule of Ruling Amounts

LEGEND:
Taxpayer = ---------------------------------------------------------
Parent = ---------------------------------------------------------
Plant = ---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
State = --------------
Location = -------------------------------------------------------------------
Method = ------------
Date 1 = ------------------
Date 2 = ----------------------------
Date 3 = ---------------------
Date 4 = -------------------
Date 5 = ------------------------
Date 6 = ----------------------
Date 7 = ----------------------
A = ------------
B = ----------
C = ------------------
D = --------------------
E = ----
F = ----
G = ----
H = ----------------
Commission A = --------------------------------------------------------------
Commission B = ------------------------------------------------------------------
Order = ---------------------------------------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------

PLR-111728-13
2

Year 6 = -------
Year 7 = -------
Fund = --------------------------------------------
Director = ---------------------------------------------------------------------------------
----------------------------------------------------------------------------------

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

This letter responds to your request, dated ----------------------, for a mandatory revised schedule of ruling amounts under § 468A(d) of the Internal Revenue Code and § 1.468A-3(f)(1)(ii)(A) of the Income Tax Regulations. Taxpayer was previously granted revised schedules of ruling amounts, most recently on ---------------------. This request is mandatory as a result of a substantial variation in the ruling amount determined under the formula approved by the prior revised schedule of ruling amounts. Supplemental information was submitted pursuant to § 1.468A-3(e)(2).

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

Taxpayer is a subsidiary which files as part of the consolidated Federal income tax return of Parent and is an investor-owned public utility incorporated in State. Taxpayer is engaged in the generation, transmission, purchase, distribution, and sale of electric energy in State. Taxpayer is the sole owner and operator of the Plant, which is situated at Location. The proposed method of decommissioning the Plant is Method.

The Plant’s amended operating license is scheduled to expire on Date 6.
Taxpayer intends to pursue a license extension for the Plant with the Nuclear Regulatory Commission (NRC) that would extend the operating license from Date 6 to Date 7. By letter of Date 4, Taxpayer advised the NRC of its intention to file an application in the second quarter of Year 5 for a license renewal of the Plant.

With respect to the decommissioning costs related to the Plant that are included in Taxpayer’s cost of service for ratemaking purposes, Taxpayer is subject to regulation by Commission A (A percent) and Commission B (B percent). Commission A, in Order effective Date 5, granted Taxpayer’s request to reduce the amount of its annual nuclear decommissioning contribution to the Fund pursuant to Taxpayer’s intention to request a license extension from the NRC. Commission A based its findings on a Decommissioning Cost Estimate dated Date 2 provided by Taxpayer that is based on the assumption that the Plant will receive an extension of the operating license.

The estimated cost of $C (Year 1 dollars) was used as a base cost for decommissioning the Plant. The estimated cost of decommissioning the Plant is $D

PLR-111728-13
3

(Year 2 dollars). It is estimated, if the license extension is granted, that substantial decommissioning costs will first be incurred in Year 6 and that decommissioning will be substantially complete at the end of Year 7. The methodology used to convert the Year 1 dollars to Year 2 dollars was by escalating the estimated costs at an inflation rate that ranged from E to F percent. The assumed after-tax rate of return to be earned by the amount collected for decommissioning is G percent.

Taxpayer, in prior schedules of ruling amounts dated Date 1, and Date 3, was granted permission to use a formula, pursuant to § 1.468A-3(a)(5), to determine its schedule of ruling amounts. The ruling amount for each year of the period is determined on or before the deemed payment date for the year. Expressed mathematically, Taxpayer uses the following formula to determine the ruling amount (“Formula”):

( { [ (a x b) x 0.01] x c } + d ) - e

Where:
a = Total kwh sales subject to nuclear decommissioning (ND) surcharge b = Multiplied by the Commission A average ND surcharge expressed as cents/kWh multiplied by .01 (to convert to $1) c = Multiplied by the percentage of the Total Surcharge allocated to nuclear decommissioning and Low-Level Radwaste Disposal d = Plus FERC ND Deposits e = Minus Low-Level Radwaste Deposits

If the Formula should result in a negative number, the ruling amount will be assumed to be zero.

Using the Formula results in the following calculation for Year 3 :

--------------------------------------------------------------------------------------------------------------------
------------------------

If Taxpayer does not request an extension of the Plant’s operating license by the end of Year 5, Taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline for that taxable year. Similarly, if Taxpayer requests and is denied an extension of the Plant’s operating license, Taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline for the first taxable year that begins after the taxable year in which the request is denied. If Taxpayer requests and is granted an extension of the Plant’s operating license, pursuant to § 468A(d)(1), Taxpayer must file a request for a revised schedule of

PLR-111728-13
4

ruling amounts on or before the deemed payment deadline for the taxable year that includes the date on which the operating license is renewed.

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. Prior to the changes made by the Act, the deduction was limited to the lesser of the amount included in the utility’s cost of service for ratemaking purposes or the ruling amount. Generally, as a result, only regulated utilities could take advantage of § 468A. The Act amendment of § 468A eliminated the cost-of-service limitation. Accordingly, decommissioning costs of an unregulated nuclear power plant may now be funded by deductible contributions to a qualified nuclear decommissioning fund.

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.

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

PLR-111728-13
5

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 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.

PLR-111728-13
6

Section 1.468A-3(a)(5) provides that the Service will approve, at the request of the taxpayer, a formula or method for determining a schedule of ruling amounts (rather than providing a schedule specifying a dollar amount for each taxable year) if the formula or method is consistent with the principles and provisions of this section and is based on reasonable assumptions. Section 1.468A-3(f)(1)(ii) further provides a special rule relating to the mandatory review of ruling amounts that are determined pursuant to a formula or method.

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) provides the rules regarding the manner of requesting a schedule of ruling amounts. Section 1.468A-3(e)(1)(v) provides that the Service will not provide or revise a ruling amount applicable to a taxable year in response to a request for a schedule of ruling amounts that is filed after the deemed payment date (as defined in § 1.468A-2(c)(1)) for such taxable year.

PLR-111728-13
7

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(e)(3) provides that the Service may prescribe administrative procedures that supplement the provisions of §§ 1.468A-3(e)(1) and (2). In addition, that section provides that the Service may, in its discretion, waive the requirements of §§ 1.468A-3(e)(1) and (2) under appropriate circumstances.

Section 1.468A-3(f)(1) describes the circumstances in which a taxpayer must request a revised schedule of ruling amounts. Section 1.468A-3(f)(1)(iv) requires that a taxpayer request a revised schedule of ruling amounts for the fund if the operating license of the nuclear plant to which the fund relates is extended. The request for the revised schedule of ruling amounts must be submitted on or before the deemed payment deadline for the taxable year that includes the date on which the license extension is granted.

Section 1.468A-3(f)(2) provides that any taxpayer that has previously obtained a schedule of ruling amounts may 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 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. Pursuant to § 1.468A-3(a)(4), Taxpayer has met its burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the Code and regulations and is based on reasonable assumptions.

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

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

4. The proposed schedule of ruling amounts was derived by following the assumptions contained in a Decommissioning Cost Estimate that Taxpayer has represented is a standard type study used in the industry. In addition, the

PLR-111728-13
8
same underlying assumptions were used by Commission A to calculate the amount of decommissioning costs to be included in Taxpayer’s cost of service for ratemaking purposes. Thus, Taxpayer has demonstrated, pursuant to § 1.468A-3(a)(4), that the proposed schedule of ruling amounts is based on reasonable assumptions and is consistent with the principles of § 468A and the regulations thereunder.

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.

Based solely on the determinations above, we conclude that Taxpayer’s proposed schedule of ruling amounts satisfies the requirements of § 468A of the Code. We have approved the following revised schedule of ruling amounts.

APPROVED SCHEDULE OF RULING AMOUNTS

Year
Commission A
Year 3
H
Year 4 – Year 6
To be determined from formula

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 this schedule of ruling amounts is received.

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

PLR-111728-13
9

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 your authorized representative. We are also sending a copy of this letter ruling to the Director. 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 yours,

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