Revised nuclear decommissioning fund schedule approved

Plain-English summary

A wholly owned utility affiliate requested a mandatory revised schedule of ruling amounts for its qualified nuclear decommissioning fund. The taxpayer owned the nuclear plant, while a regulated affiliate collected commission-approved charges from retail customers and paid them to the taxpayer for deposit into the fund. The request followed changes to the plant's operating assumptions and relied on two independent decommissioning studies also used by the state commission. The IRS found that the taxpayer had a qualifying ownership interest, used reasonable assumptions, and properly calculated its share of decommissioning costs. It approved the proposed annual ruling amounts, while declining to decide whether every cost item in the studies qualified as a nuclear decommissioning cost.

Ruling snapshot

• Question: Did the taxpayer's proposed revised annual funding limits satisfy section 468A after changes to the plant's operating and decommissioning assumptions?
• Outcome: Approved.
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1, 1.468A-2, 1.468A-3, 1.468A-7, and 1.468A-8.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201644011 Third Party Communication: None
Release Date: 10/28/2016 Date of Communication: Not Applicable
Index Number: 468A.04-02
Person To Contact:
------------------ -------------------------, ID No. -----------------
------------------------------------------------------------ -----------------------------------------------------
----------- Telephone Number:
--------------------------------------- --------------------
------------------------ Refer Reply To:
------------------------------------- CC:PSI:B06
PLR-106811-16
Re: ------------------------------------------------------ Date:
July 26, 2016
LEGEND:
Taxpayer = -----------------------------------------------------------------------------
Parent = -----------------------------------------------------------------------------
State = --------
Director = -----------------------------------------------
Electric Company = ---------------------------------------------------
Plant = -----------------------------------------------------------------------------
Location = -------------------------------------------------
Commission = ---------------------------------------------------------
Order = ------------------------------------------
Independent Study 1 = -----------------------------------------------------------------------------
----------------
Independent Study 2 = -----------------------------------------------------------------------------
---------------
Method = -----------
Date 1 = ---------------------------
Date 2 = ------------------------
a = -------
b = -------
c = ----------------
d = ------
e = -------------------
f = -------------
g = ---------------
h = -------------
Year 1 = ------
Year 2 = ------
Year 3 = ------
Year 4 = ------
PLR-106811-16 2

Year 5 = ------
Year 6 = ------
Fund = ------------------------------------------

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

This letter responds to your request, dated February 26, 2016, for a mandatory revised
schedule of ruling amounts under § 468A(d)(1) of the Internal Revenue Code (Code)
and § 1.468A-3(f)(1)(i) of the Income Tax Regulations. Taxpayer was previously
granted revised schedules of ruling amounts, most recently on Date 1.

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

Taxpayer is a limited liability company that is indirectly and wholly-owned by Parent.
Taxpayer is incorporated in and engaged in the generation and sale of electric energy in
State. Taxpayer files a consolidated federal income tax return with its Parent on a
calendar-year basis using the accrual method of accounting. Taxpayer is under the
audit jurisdiction of Director.

Although Taxpayer is not a regulated utility, Electric Company, an affiliate of Taxpayer,
is subject to the rate-of-return ratemaking jurisdiction of Commission, and the cost of
decommissioning Plant is included in Electric Company’s cost of service by
Commission. Electric Company collects an amount intended to fund the cost of
decommissioning the Plant through its Commission-approved tariff, which is a non-
bypassable charge upon Electric Company’s retail customers that must be paid over to
Taxpayer. Taxpayer deposits these amounts into the qualified nuclear
decommissioning fund maintained by Taxpayer with respect to the Plant.

Taxpayer is the sole owner of the Plant, which is situated at Location. The Plant’s
operating license expires in Year 5. 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.

Commission, in Order effective Date 2, modified the amount of decommissioning costs
to be included in Taxpayer’s cost of service for ratemaking purposes. The Order relies
upon assumptions provided in Independent Study 1 and Independent Study 2. The
proposed method of decommissioning the Plant is Method.

Based on the assumptions adopted by Commission in Order, it is estimated that Fund
assets will earn an after-tax rate of return between a percent and b percent for Year 1
through Year 6. 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
PLR-106811-16 3

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 approximately $e (in Year 5 to Year 6 dollars). It is estimated that substantial
decommissioning costs will first be incurred in Year 5 and that decommissioning will be
substantially complete at the end of Year 6.

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.
PLR-106811-16 4

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.

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.
PLR-106811-16 5

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.

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
PLR-106811-16 6

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 an interest in 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 Independent Study 1 and Independent Study 2 that Taxpayer
has represented is a standard type study used in the industry. In addition, the same
underlying assumptions were used by Commission 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.

               APPROVED SCHEDULE OF RULING AMOUNTS

             Years                                      Commission

PLR-106811-16 7

             Year 2                                           $f
           Years 3 - 4                                        $g
             Year 5                                           $h

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
representatives. 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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