Revised nuclear decommissioning fund contribution schedule was approved

Plain-English summary

An electric utility requested a revised schedule of deductible contributions to a nuclear decommissioning reserve fund for its ownership share of a nuclear plant. Its proposed schedule used decommissioning cost, timing, inflation, investment return, and ownership assumptions reflected in an independent study and approved by a utility commission. The IRS found that the utility had a qualifying interest, used reasonable assumptions, and calculated its share of decommissioning costs consistently with section 468A and the regulations. The IRS approved the redacted annual ruling amounts and required later review if specified events occur or, otherwise, by the tenth taxable year after the schedule was received.

Ruling snapshot

• Question: Does the utility's proposed revised schedule of nuclear decommissioning fund ruling amounts satisfy section 468A?
• Outcome: approved, subject to the annual amounts and future review requirements stated in the ruling
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1, 1.468A-2, 1.468A-3, 1.468A-7

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201716022                                              Third Party Communication: None
Release Date: 4/21/2017                                        Date of Communication: Not Applicable
Index Number: 468A.04-02
                                                               Person To Contact:
----------------                                               -------------------------, ID No. -----------------
------------                                                   -----------------------------------------------------
----------------------------------------------                 Telephone Number:
---------------------------                                    --------------------
--------------------------------------                         Refer Reply To:
                                                               CC:PSI:B06
Re: Revised Schedule of Ruling Amounts                         PLR-127288-16
    ---------------------------------------------------        Date:
                                                               January 10, 2017

LEGEND:
Taxpayer                   =        ---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Parent                     =        -------------------------------------------------
State                      =        ---------
Plant                      =        ------------------------------------------------
Location                   =        -----------------------------
Commission A               =        ---------------------------------------------------------------------------------
Commission B               =        ------------------------------------------------------------
Order                      =        ---------------------------------------------------------------------------------
Independent Study =                 ---------------------------------------------------------------------------------
Method                     =        ----------
Date 1                     =        --------------------
Date 2                     =        -------------------------
Date 3                     =        -------------------
a                          =        ---
b                          =        -----
c                          =        ----------------
d                          =        ----------------
e                          =        ------------------
f                          =        ------------------
g                          =        ------
h                          =        ------
i                          =        ----
j                          =        -------------
k                          =        -------------
Year 1                     =        ------
Year 2                     =        ------
Year 3                     =        ------
Year 4                     =        ------
Year 5                     =        ------
PLR-127288-16                                             2

Year 6                     =        ------
Fund                       =        ----------------------------------------
Director                   =        ------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Dear ----------:

This letter responds to your request, dated August 15, 2016, 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 represents the facts and information relating to its request for a revised
schedule of ruling amounts as follows:

Taxpayer is a wholly-owned subsidiary of Parent, an investor-owned public utility
incorporated in State. Taxpayer is engaged in the production, transmission, and
distribution of electrical 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 the Director.

Taxpayer owns an a percent interest in the Plant. The Plant is situated at Location.
The Plant’s operating license 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. With respect to nuclear decommissioning costs of the Plant, the
operations of Taxpayer were allocated b percent to Commission A.

Commission A, in an Order filed Date 2, approved the Taxpayer’s estimated
decommissioning costs to be included in Taxpayer’s cost of service for ratemaking
purposes. The Order approves, and relies upon assumptions provided in, the
Independent Study, which have been incorporated into the cost of service by
Commission A. The proposed method of decommissioning the Plant is Method.

The total estimated cost of $c (in Year 1 dollars) was used as a base cost for
decommissioning the Plant. Taxpayer’s share of the total estimated cost of
decommissioning the Plant is $d (in Year 1 dollars). The total estimated future cost of
decommissioning the Plant is $e (in Year 3 - 6 dollars), with Taxpayer’s share being $f
(in Year 3 - 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. The methodology used to convert the Year 1 dollars to Year 3 - 6 dollars was
by escalating the estimated costs at an inflation rate of g percent to the year of
estimated expenditure. The average assumed after-tax rate of return to be earned by
the amount collected for decommissioning from ranges from h percent to i percent. The
funding period begins in the first taxable year in which a deductible payment was made
PLR-127288-16                                 3

to Fund and ends in the taxable year that includes the date the Plant will no longer be
included in Taxpayer’s rate base for ratemaking purposes.

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.
PLR-127288-16                                 4

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.
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
PLR-127288-16                                 5

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)(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
PLR-127288-16                                 6

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 the Independent Study that have been considered and
approved by Commission A. The 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 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

               Year                                     Ruling Amount
       Each Year, Years 3 - 4                                 $j
              Year 5                                          $k

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.
PLR-127288-16                                 7

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 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 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)