Formula-based decommissioning schedule approved after license extension

Plain-English summary

An investor-owned electric utility requested mandatory review of its nuclear decommissioning fund schedule after the Nuclear Regulatory Commission extended its plant's operating license. The utility proposed continuing a formula based on electricity sales subject to a state commission's nuclear surcharge, using assumptions from an independent study that the commission had also used for ratemaking. The IRS found that the utility owned a qualifying interest, had calculated the decommissioning costs properly, and had supported reasonable assumptions. It approved a fixed redacted amount for the first schedule year and formula-determined amounts for the next three years. The utility must seek another revision upon a listed triggering event or, absent one, by the deadline for the fifth tax year after receiving this schedule. The IRS did not determine whether the independent study actually conformed to industry standards and practices.

Ruling snapshot

• Question: Does the revised, formula-based nuclear decommissioning fund schedule satisfy section 468A after the plant's license extension?
• Outcome: approved
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1, 1.468A-2, 1.468A-3

Full text (IRS public release)

Internal Revenue Service                                Department of the Treasury
                                                        Washington, DC 20224

Number: 201740009                                       Third Party Communication: None
Release Date: 10/6/2017                                 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-108721-17
    ------------------------------------------------------ Date:
    ------------------------                               July 10, 2017



LEGEND:
Taxpayer          = ---------------------------------------------------------
Parent            = ---------------------------------------------------------
Plant             = ------------------------------------------------------------------------
State             = --------------
Location          = -------------------------------------------------------------------
Method            = ------------
Commission A      = --------------------------------------------------------------
Commission B      = -----------------------------------------------------------------
Order             = ---------------------------------------------
Independent Study = --------------------------------------------------------------------
Date 1            = -----------------------
Date 2            = ----------------------
Date 3            = ---------------------------
Date 4            = ----------------------
A                 = -----
B                 = --
C                 = --------------------
D                 = --------------------
E                 = ----
F                 = ----
G                 = ----------------------
H                 = ----------
I                 = --------------
Year 1            = -------
Year 2            = -------
Year 3            = -------
Year 4            = -------
Year 5            = -------
Year 6            = -------
PLR-108721-17                                       2

Fund                 = --------------------------------------------
Director             = --------------------------------------------------------------------------------------
                     --------------------------------------------------------------------------------------

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

      This letter responds to your request, dated March 10, 2017, for a mandatory
review of a revised schedule of ruling amounts under § 468A(d) of the Internal Revenue
Code and § 1.468A-3(f)(1)(iv) of the Income Tax Regulations. Taxpayer was previously
granted revised schedules of ruling amounts, most recently on Date 1. This request is
mandatory as a result of an extension of Taxpayer’s operating license on Date 3.
Supplemental information was submitted 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 an investor-owned electric utility incorporated in State that is
engaged in the generation, purchase, distribution, and sale of electric energy in State.
Taxpayer is also a wholly-owned subsidiary of Parent and a member of Parent’s
consolidated group that files a consolidated federal income tax return on a calendar
year basis using an accrual method of accounting.

       Taxpayer is the sole owner and operator of the Plant, which is situated at
Location. The Plant’s operating license was extended by the Nuclear Regulatory
Commission (NRC) on Date 3 and expires on Date 4. The proposed method of
decommissioning the Plant is Method.

        With respect to the decommissioning costs related to the Plant that are included
in Taxpayer’s cost of service for ratemaking purposes, Taxpayer is subject to regulation
by Commission A (A percent) and Commission B (B percent). In December 2015,
Commission A issued Order in which it approved the estimated decommissioning costs
for the Plant to be included in Taxpayer’s cost of service for ratemaking purposes based
on the assumptions derived in the Independent Study, which takes the extension of the
operating license of Plant into account.

        The estimated cost of $C (Year 1 dollars) was used as a base cost for
decommissioning the Plant. The estimated cost of decommissioning the Plant in future
dollars is $D (Year 4 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 4
dollars was by escalating the estimated costs at an inflation rate of E percent to the year
of estimated expenditure. The assumed after-tax rate of return to be earned by the
amount in the Fund is F percent.
PLR-108721-17                                3

       Taxpayer, in its prior revised schedule of ruling amounts, was granted 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 uses the
following formula to determine the ruling amount (“Formula”):
axb=c

Where:
   a = Total kWh sales subject to Commission A Nuclear Surcharge
   b = Nuclear decommissioning component of the Commission A Nuclear
       Surcharge expressed as cents/kWh and multiplied by .01 (to convert to
       dollars)

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

Using the Formula results in the following calculation for Year 2:

$G x ($H x .01) = $I

       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.
PLR-108721-17                                4

       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
PLR-108721-17                                 5

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).

       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
PLR-108721-17                                6

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-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 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
PLR-108721-17                                 7

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 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 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

                   Year                                     Commission A
                  Year 2                                          $I
              Year 3 – Year 5                        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,
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.
PLR-108721-17                                 8

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 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)