Revised decommissioning schedule approved after rate reduction

Plain-English summary

A public utility requested a revised schedule of contributions to its nuclear decommissioning fund after its regulator reduced the decommissioning costs included in rates. The reduction meant that prior contributions exceeded the revised amounts, and the utility intended to withdraw the excess and related earnings within the regulatory deadline. The IRS found that the proposed schedule used reasonable assumptions from an industry-standard study and the regulator's order. It approved the revised annual ruling amounts and required later revisions if specified events occurred.

Ruling snapshot

• Question: Did the utility's revised schedule of nuclear decommissioning fund contributions satisfy IRC § 468A after regulated costs were reduced?
• Outcome: Approved
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1 through 1.468A-5

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201550020 Third Party Communication: None
Release Date: 12/11/2015 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:
CC:PSI:B06
PLR-109686-15
Re: ------------------------------------------------ Date:
September 02, 2015

LEGEND:
Taxpayer = ---------------------------------------------
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Parent = -------------------------
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State = ------------
Industry Director = --------------------------------------------------------------------------------------
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Plant = -------------------------------------------------------------
Location = ------------------------------
Commission A = --------------------------------------------------
Commission B = -----------------------------------------------------
Order = --------------------------
Independent Study = --------------------------------------------------------------------
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Method = ----------
Date 1 = -----------------
Date 2 = --------------------------
Date 3 = ------------------------
a = ------
b = ------
c = -------------------
d = ------
e = -------------------
f = --
Year 1 = ------
Year 2 = ------
Year 3 = ------
Year 4 = ------
Year 5 = ------
Fund = ------------------------------------------
PLR-109686-15 2

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

   This letter responds to your request, dated March 13, 2015, for an elective

revised schedule of ruling amounts under § 468A(d)(1) of the Internal Revenue Code
and § 1.468A-3(f)(2) of the Income Tax Regulations. Taxpayer was previously granted
revised schedules of ruling amounts, most recently on Date 1. Taxpayer submitted
supplemental information by letters dated August 19, 2015 and August 21, 2015,
pursuant to § 1.468A-3(e)(1)(vii).

  Taxpayer represents the facts and information relating to its request for a revised

schedule of ruling amounts as follows:

    Taxpayer, a State corporation, is a public utility operating in State. Taxpayer

engages in electricity and natural gas distribution, electricity generation, procurement
and transmission, and natural gas procurement, transportation and storage. Taxpayer
files a consolidated federal income tax return with its Parent on a calendar year basis
using the accrual method of accounting and is under the audit jurisdiction of the Industry
Director.

   Taxpayer is the sole owner of the Plant. The Plant is situated at Location. The

Plant’s operating license was extended by the Nuclear Regulatory Commission and
expires on Date 3. With respect to the decommissioning costs related to the Plant
which are included in the Taxpayer’s cost of service for ratemaking purposes, the
Taxpayer is subject to regulation by Commission A and Commission B.

   Commission A, in Order issued Date 2, reduced the amount of decommissioning

costs to be included in Taxpayer’s cost of service for ratemaking purposes for Year 2
through Year 3. Accordingly, Taxpayer has contributed amounts to the Fund for the
Plant that are now excess contributions pursuant to § 1.468A-5(c)(2). Taxpayer intends
to withdraw those excess contributions, along with any earnings attributable to those
excess contributions, from the fund on or before the date that is 30 days after the date
that Taxpayer receives the ruling amount for such taxable year.

   The Order relies upon assumptions provided in the Independent Study. The

proposed method of decommissioning the Plant is Method. Based on the assumptions
adopted by Commission A in Order, it is estimated that Fund assets will earn an
average after-tax rate of return that ranges from a percent to b percent for Year 2
through Year 5. Commission approved rates for Taxpayer containing a
decommissioning cost component based upon an estimated cost of $c (in Year 1
dollars) as a base cost for decommissioning the Plant. This base cost for
decommissioning the Plant was escalated at the rate of d percent annually to the year
that costs are incurred, resulting in total estimated future decommissioning costs for the
Plant of $e (in Year 4 through Year 5 dollars). It is estimated that substantial
PLR-109686-15 3

decommissioning costs will first be incurred in Year 4 and that decommissioning will be
substantially complete at the end of Year 5.

   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
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
PLR-109686-15 4

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.

   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
PLR-109686-15 5

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.

  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.
PLR-109686-15 6

   Section 1.468A-3(g)(3) provides that, if a taxpayer makes and deducts a

payment or transfer to a qualified fund based on a proposed ruling request that exceeds
the actual ruling amount, the taxpayer must withdraw the excess contribution and the
earnings on the excess contribution and file an amended return reflecting the deduction
specified in the ruling.

    Section 1.468A-5(c)(2) provides that a nuclear decommissioning fund will not be

disqualified under paragraph (c)(1) of that section by reason of an excess contribution
or the withdrawal of an excess contribution if the withdrawal is performed before the
later of the date the tax return is due for the taxable year to which the contribution
relates or 30 days after the date the taxpayer receives the ruling amount.

   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 its 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 an Independent Study that Taxpayer has
     represented is a standard type study used in the industry. In addition, the
     same underlying assumptions were used by Commission A in Order 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 the 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.
PLR-109686-15 7

                   APPROVED SCHEDULE OF RULING AMOUNTS

           Years                                        Commission
  Each Year, Year 2 - Year 4                               $f

   If any of the events described in § 1.468A-3(f)(1) 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
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. In particular, while we have approved the proposed schedule of ruling amounts
based on cost estimates contained in Independent Study, we make no ruling, express
or implied, whether any particular item contained in that study constitutes a nuclear
decommissioning cost within the meaning of § 1.468A-1(b)(6).

   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 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)

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