IRS approves a revised nuclear decommissioning fund schedule based on a per-kilowatt formula

Plain-English summary

The owner of a nuclear power plant sets aside money each year in a special
reserve fund to pay for eventually decommissioning (safely retiring) the plant.
Section 468A lets the owner deduct those contributions, but only up to a
yearly cap called the "ruling amount" that the IRS must approve so the fund is
neither underfunded nor filled faster than needed. Because the plant had been
transferred to this taxpayer in an internal restructuring, the taxpayer was
required to request a revised schedule of ruling amounts, and it asked to set
those amounts with a formula (tied to kilowatt-hours and kilowatts sold across
several service categories) rather than fixed dollar figures. The IRS reviewed
the assumptions, which came from independent studies adopted by the state
utility commission, found them reasonable and consistent with the section 468A
regulations, and approved the formula and the revised schedule. This matters
because it lets an unregulated plant owner keep funding its decommissioning
reserve on a deductible basis using a flexible, usage-based formula, while the
IRS expressly declined to opine on whether the underlying studies meet industry
standards or whether the plant transfer itself qualified under the transfer
regulation.

Ruling snapshot

• Question: Should the IRS approve a revised schedule of ruling amounts, set by a per-kilowatt formula, for a transferred nuclear power plant's decommissioning fund under section 468A?
• Outcome: approved (formula and revised schedule of ruling amounts approved)
• Key authorities: IRC § 468A(b), (d); Treas. Reg. §§ 1.468A-1, 1.468A-3(a), 1.468A-6(e)(2)(ii)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201848006 Third Party Communication: None
Release Date: 11/30/2018 Date of Communication: Not Applicable
Index Number: 468A.04-02
Person To Contact:
-------------------- ---------------------------, ID No. -------------
------------------------------------------------------------ Telephone Number:
------------ ----------------------
------------------------------------ Refer Reply To:
------------------------ CC:PSI:B6
-------------------------- PLR-108867-18
Date: August 29, 2018
Re: Revised Schedule of Ruling Amounts

LEGEND:
Taxpayer =-----------------------------------------------------
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Subsidiary = ----------------------------
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Company = --------------------------------------------------
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Parent = ------------------------------------
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Plant = ------------------------------------------------------------------------
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Electric Company = ----------------------------------------------------
State = ---------
Director = ------------------------------------------------
Location = -------------------------
Commission = ----------------------------------------------------------
Order = -------------------------------------------
Independent Study 1 = -----------------------------------------------------------------------
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Independent Study 2 = -----------------------------------------------------------------------
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Method = ------------
Fund = --------------------------------------------
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Date 1 = -------------------
Date 2 = --------------------------
Service A = ---------------------------
Service B = ------------------------------------------------------------------------
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PLR-108867-18 2

Service C = ------------------------------------------------------------------------
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Service D = -----------------------
Service E = ----------------------------------------------------
Service F = -----------------------------------------------------------------------
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Service G = -----------------------------------------------------------------------
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Service H = ------------------------------
a = --------
b = --------
c = ------------------
d = ------
e = --------------------
f = ------------
g = ------------
h = ------------
i = ------------
j = ------
k = ------
l = ------
m = ------
n = ------
o = ------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Year 6 = -------
Year 7 = -------

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

   This letter responds to your request, dated March 15, 2018, for a mandatory

revised schedule of ruling amounts under § 1.468A-6(e)(2)(ii) of the Income Tax
Regulations. Company was previously granted revised schedules of ruling amounts
with respect to the Plant, most recently on Date 1. Taxpayer submitted supplemental
information by letter dated May 4, 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 is a single-member limited liability company disregarded as separate

from its owner, Subsidiary, for federal income tax purposes. Parent is the common
PLR-108867-18 3

parent of an affiliated group of corporations, including Subsidiary, that file a
consolidated federal income tax return on a calendar-year basis using the accrual
method of accounting. Taxpayer is engaged in the generation and sale of electric
energy in State.

   As part of an internal restructuring in Year 3, Company transferred ownership of

the Plant, which is situated at Location, to Taxpayer. Consequently, Taxpayer is the
sole owner of the Plant. The proposed method of decommissioning the Plant is
Method.

   Although Taxpayer is not a regulated utility, Taxpayer has a decommissioning

funds collection agent agreement with Electric Company, and Electric Company is
subject to the rate-of-return ratemaking jurisdiction of Commission. The cost of
decommissioning the Plant is included in Electric Company’s cost of service by
Commission. Pursuant to its agreement with Taxpayer, Electric Company collects an
amount intended to fund the cost of decommissioning the Plant that Electric Company
must pay over to Taxpayer. Taxpayer deposits these amounts into the Fund maintained
by Taxpayer with respect to the Plant.

   Commission, in Order effective Date 2, modified the amount of decommissioning

costs to be included in Electric Company’s cost of service and that will be collected by
Electric Company on Taxpayer’s behalf. The Order relies on assumptions provided in
Independent Study 1 and Independent Study 2.

    Based on the assumptions adopted by Commission in Order, it is estimated that

the Fund assets will earn an after-tax rate of return between a percent and b percent for
Year 2 through Year 7. The estimated cost of $c (Year 1 dollars) was used as a base
cost for decommissioning the Plant. This base cost for decommissioning the Plant was
escalated at a rate of d percent annually to the year the costs are incurred, resulting in
total estimated future decommissioning costs for the Plant of approximately $e (Year 6
to Year 7 dollars). It is estimated that substantial decommissioning costs will first be
incurred in Year 6 and that decommissioning will be substantially complete at the end of
Year 7.

   Taxpayer requests 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 proposes to use the following formula to determine the ruling
amount (Formula):

[(A X A1) + (B X B1) + (C X C1) + (D X D1) + (E X E1) + (F X F1) + (G X G1) + (H X H1)] X
K = RA
PLR-108867-18 4

Where:
A = kWh – Service A
A1 = per kWh rate (currently $f)
B = kWh – Service B
B1 = per kWh rate (currently $g)
C = kWh – Service C
C1 = per kWh rate (currently $h)
D = kWh – Service D
D1 = per kWh rate (currently $i)
E = Distribution System billing kW – Service E
E1 = per kW rate (currently $j)
F = Distribution System billing kW – Service F
F1 = per kW rate (currently $k)
G = Distribution System billing kW – Service G
G1 = per kW rate (currently $l)
H = Distribution System billing kW – Service H
H1 = per kW rate (currently $m)
K = allocation percentage to Plant (currently n%)
RA = Ruling Amount

    If the Formula results in a negative number, the ruling amount will be assumed

to be zero.

  Using the Formula results in a ruling amount of $o for Year 4.

   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
PLR-108867-18 5

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.
PLR-108867-18 6

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(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).
PLR-108867-18 7

   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)(ii)(A) requires any
taxpayer that has obtained a formula or method for determining a schedule of ruling
amounts for any taxable year to file a request for a revised schedule on or before the
earlier of the deemed payment deadline for the fifth taxable year that begins after its
taxable year in which the most recent formula or method was approved or the deemed
payment deadline for the first taxable year that begins after a taxable year in which
there is a substantial variation in the ruling amount determined under the most recent
formula or method. Additionally, § 1.468A-3(f)(1)(ii)(B) provides that any taxpayer that
has determined its ruling amount for any taxable year under a formula prescribed by
§ 1.468A–6 (which prescribes ruling amounts for the taxable year in which there is a
disposition of a qualifying interest in a nuclear power plant) must file a request for a
revised schedule of ruling amounts on or before the deemed payment deadline for its
first taxable year that begins after the disposition.

   Section 1.468A-6 generally provides rules for the transfer of an interest in a

nuclear power plant (and transfer of the qualified fund) where after the transfer the
transferee is an eligible taxpayer. Section 1.468A-6(e)(2)(ii) provides that a transferee
of a qualifying interest in a nuclear power plant must file a request for a revised
schedule of ruling amounts with respect to that interest on or before the deemed
payment deadline for the first taxable year of the transferee beginning after the
disposition. See § 1.468A-3(f)(1)(ii)(B). If the transferee does not timely file such a
PLR-108867-18 8

request, the transferee’s ruling amount with respect to that interest for the affected year
or years will be zero, unless the Service waives the application of § 1.468A-6(e)(2)(ii)
upon a showing of good cause for the delay.

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

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

  3. Pursuant to § 1.468A-3(a)(4), Taxpayer has demonstrated that by following
     the assumptions contained in Independent Study 1 and Independent Study 2
     that Taxpayer has represented are a standard type of study used in the
     industry and that were approved by Commission, the proposed schedule of
     ruling amounts is based on reasonable assumptions and is consistent with
     the principles of § 468A and the regulations thereunder.

  4. Pursuant to § 1.468A-3(a)(5), we approve the Formula for determining the
     schedule of ruling amounts (rather than a schedule specifying a dollar amount
     for each taxable year) that is consistent with the principles and provisions of
     § 468A and the regulations thereunder and that is based on reasonable
     assumptions.

  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

               Year                                     Ruling Amount
              Year 4                                          $o
          Year 5 – 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,
PLR-108867-18 9

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, pursuant to § 1.468A-3(f)(1)(ii), Taxpayer must file a
request for a revised schedule of ruling amounts on or before the deemed payment
deadline of the fifth 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 Independent Study 1 or the
Independent Study 2 conforms to industry standards and practices. In addition, we
make no determination as to whether Company’s transfer of the Plant to Taxpayer
satisfies § 1.468A-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 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)