Approves a revised schedule of ruling amounts for a nuclear decommissioning fund under § 468A

Plain-English summary

A state public utility that owns and operates a nuclear power plant (now shut down and slated for decommissioning) asked the IRS to approve a revised schedule of "ruling amounts" for its qualified nuclear decommissioning fund under section 468A. Section 468A lets a utility deduct money it sets aside in a reserve fund to pay the future cost of dismantling a nuclear plant, but only up to an IRS-approved annual "ruling amount." That cap is meant to fully fund the total decommissioning cost over the plant's life without letting the utility over-fund or front-load the deductions. Here a state commission had already set the decommissioning costs to include in the utility's rates, relying on a cost study, and the utility built its proposed schedule on the same assumptions the commission used. The IRS concluded the utility met its burden of showing the schedule rests on reasonable assumptions and is consistent with section 468A, that it is an eligible taxpayer with a qualifying ownership interest in the plant, and that it correctly calculated its share of total decommissioning costs. The IRS therefore approved the revised schedule, setting a fixed annual ruling amount for a defined range of years. Contributions are capped at that ruling amount, and the utility must request another review if certain events occur or at least by the tenth year.

Ruling snapshot

• Question: Should the IRS approve the utility's proposed revised schedule of ruling amounts for its nuclear decommissioning fund under section 468A?
• Outcome: Approved (revised schedule of ruling amounts granted)
• Key authorities: IRC § 468A(d)(3); Treas. Reg. §§ 1.468A-3(a)(4), 1.468A-3(f)(2), 1.468A-1(b)(1), 1.468A-2(b)(1)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201843003
Release Date: 10/26/2018
Index Number: 468A.04-02

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact: [redacted], ID No. [redacted]
Telephone Number: [redacted]
Refer Reply To: CC:PSI:B06
PLR-109401-18

Date: July 23, 2018

Re: [redacted]

LEGEND:
Taxpayer = [redacted]
Parent = [redacted]
Plant = [redacted]
State = [redacted]
Location = [redacted]
Method = [redacted]
Commission A = [redacted]
Commission B = [redacted]
Order = [redacted]
Study = [redacted]
Date 1 = [redacted]
Date 2 = [redacted]
Date 3 = [redacted]
Date 4 = [redacted]
Date 5 = [redacted]
a = [redacted]
b = [redacted]
c = [redacted]
d = [redacted]
e = [redacted]
f = [redacted]
Year 1 = [redacted]
Year 2 = [redacted]
Year 3 = [redacted]
Year 4 = [redacted]
Year 5 = [redacted]
Year 6 = [redacted]
Year 7 = [redacted]
Fund = [redacted]
Director = [redacted]

Dear [redacted]:

This letter responds to your request, dated March 14, 2018, for an elective revised schedule of ruling amounts under § 468A(d)(3) of the Internal Revenue Code 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 4. Taxpayer submitted supplemental information by letter dated May 21, 2018 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, a State corporation, is a public utility company 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 income tax return with its Parent on a calendar year basis using the accrual method of accounting.

Taxpayer is the sole owner and operator of the Plant, which is situated at Location. The Plant was declared commercially operable on Date 1 and initially had an expected service life of a years. The Plant was shut down on Date 2. On Date 3, Taxpayer announced its decision to decommission the Plant. With respect to the decommissioning costs related to the Plant that are included in the Taxpayer's cost of service for ratemaking purposes, Taxpayer is subject to regulation by Commission A and Commission B.

Commission A, in Order issued Date 5, established the amount of decommissioning costs to be included in Taxpayer's cost of service for ratemaking purposes for Year 4 through Year 6. The Order relies upon assumptions provided in the Study. The method of decommissioning the Plant is Method.

The remaining estimated cost of $b (Year 2 dollars) was used as a base cost for decommissioning the Plant. This estimated cost of decommissioning the Plant in future dollars is $c (Year 3 through Year 7 dollars). Substantial decommissioning costs were first incurred in Year 1 and it is estimated that decommissioning will be substantially complete at the end of Year 6. The methodology used to convert the Year 2 dollars to Year 3 through 7 dollars was by escalating the estimated costs at various rates to the year of estimated expenditure. The assumed after-tax rate of return to be earned by the amount in the Fund ranges from d percent to e percent for Year 4 through Year 7.

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. 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 (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. Section 1.468A-3(c)(2)(i)(A) provides that except as provided in § 1.468A-3(c)(2)(ii), the last day of the estimated useful life of a nuclear power plant that has been included in rate base for ratemaking purposes in any ratemaking proceeding that established rates for a period before January 1, 2006, is the date used in the first such ratemaking proceeding as the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes. Section 1.468A-3(c)(2)(ii) provides that if it can be established that the estimated useful life of the nuclear power plant will end on a date other than the date determined under § 1.468A-3(c)(2)(i), the taxpayer may use such other date as the last day of the estimated useful life but is not required to do so. If the last day of the estimated useful life was determined under § 1.468A-3(c)(2)(i)(A) of this section and the most recent ratemaking proceeding used an alternative date as the estimated date on which the nuclear power plant will no longer be included [in] rate base, the most recent ratemaking proceeding will generally be treated as establishing such alternative date as the last day of the estimated useful life.

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)(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 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 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 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 Taxpayer's proposed schedule of ruling amounts satisfies the requirements of § 468A. We have approved the following revised schedule of ruling amounts.

APPROVED SCHEDULE OF RULING AMOUNTS

Years: Each Year, Year 4 - Year 6
Ruling Amount: $f

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. Specifically, no determination is made whether the Study conforms to industry standards and practices.

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 & Special Industries)

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