IRS approves revised nuclear decommissioning ruling amounts

Plain-English summary

An electric utility requested elective review of the ruling amounts for contributions to its nuclear decommissioning fund after a public utility commission revised the decommissioning costs included in rates. The request used updated regulatory minimum funding requirements, growth factors, after-tax investment returns, and an independent decommissioning study. The IRS found that the utility held a qualifying plant interest, properly calculated its share of decommissioning costs, and supported the proposed schedule with reasonable assumptions consistent with IRC § 468A. It approved the revised annual ruling amount for the stated years. The ruling did not determine whether the independent study met industry standards or whether each listed cost qualified as a nuclear decommissioning cost.

Ruling snapshot

• Question: Did the utility's proposed revised schedule of nuclear decommissioning ruling amounts satisfy § 468A?
• Outcome: Approved
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1, 1.468A-2, and 1.468A-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202104005                                             Third Party Communication: None
Release Date: 1/29/2021                                       Date of Communication: Not Applicable
Index Number: 468A.04-02
                                                              Person To Contact:
--------------------                                          --------------------------, ID No. ----------------
--------------------------                                    -----------------
--------------------------------                              Telephone Number:
-------------------------------------                         --------------------
------------------------                                      Refer Reply To:
                                                              CC:PSI:B06
In Re: Revised Schedule of Ruling Amounts                     PLR-111349-20
         --------------------------------------------------- Date:
------------------------------------------------------------ November 03, 2020




LEGEND:
Taxpayer                 =        -----------------------------------------------------------
Parent                   =        ----------------------------------------------------------
Plant                    =        --------------------------------------------------
State                    =        -----------
Location                 =        ---------------------------------
Date 1                   =        ------------------------
Date 2                   =        ----------------------
Date 3                   =        --------------------
Date 4                   =        ----------------------
Commission A             =        ------------------------------------------------
Commission B             =        ------------------------------------------------------
Method                   =        -----------
Order                    =        ---------------------------------------------------------------------------------
                                  -----------------------
Independent Study =               ---------------------------------------------------------------------
                                  -----------------------
Year 1                   =        -------
Year 2                   =        -------
Year 3                   =        -------
Year 4                   =        -------
a                        =        ------
b                        =        -----
c                        =        --
d                        =        -----------------
e                        =        ------
f                        =        -----------------

g                     =     ------
h                     =     -------------
Fund                  =     ------------------------------------------
Director              =     ---------------------------------------


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

       This letter responds to your request, dated Date 1, for a schedule of ruling
amounts pursuant to § 468A(d) of the Internal Revenue Code and § 1.468A-3 of the
Income Tax Regulations. Taxpayer was previously granted schedules of ruling
amounts with respect to the Plant most recently on Date 2. As the result of a recent
adjustment to the nuclear decommissioning cost allowed to be included in Taxpayer’s
cost of service for ratemaking purposes, Taxpayer requests an elective review of the
Plant’s most recent revised schedule of ruling amounts pursuant to § 1.468A-3(f)(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 an electric utility, principally engaged in the
generation, transmission, and distribution of electrical energy in State. Taxpayer is a
member of an affiliated group of corporations that files a consolidated federal income
tax return, the common parent of which is Parent, on a calendar-year basis using the
accrual method of accounting.

       Taxpayer is owner the operator and owner of a a percent joint and undivided fee
simple interest in the Plant. Plant is situated in Location. The amended operating
license for the Plant is scheduled to expire on Date 3. The proposed method of
decommissioning the Plant is Method.

        With respect to the decommissioning costs of the Plant which are included in
Taxpayer’s cost of service for ratemaking purposes, Taxpayer is subject to the
regulatory jurisdiction of Commission A and Commission B. For purposes of this letter
ruling, Taxpayer’s demand-related costs, including decommissioning costs, are
allocated b percent to Commission A and c percent to Commission B.

       As a result of the Nuclear Regulatory Commission’s minimum funding
requirements, revised growth factors, revised after-tax earnings assumptions, and an
updated Independent Study, Commission A, in Order, revised the amount of
decommissioning costs for the Plant to be included in Taxpayer’s cost of service for
ratemaking purposes for the period from Year 2 through Year 3, effective for rates on
and after Date 4.

      Based on the assumptions adopted by Commission A in Order, the total
remaining estimated base cost of decommissioning the Taxpayer’s a percent interest in

the Plant is $d (Year 1 dollars). This base cost for decommissioning the Taxpayer’s a
interest in the Plant was escalated at the rate of e percent annually to the year that
costs are expected to be incurred, resulting in total estimated future decommissioning
costs for Taxpayer’s a interest in the Plant of approximately $f (Year 3 dollars). The
assumed average after-tax rate of return to be earned by the assets in the Fund is g
percent. Taxpayer estimates that it will first incur substantial decommissioning costs for
the Plant in Year 3 and that decommissioning will be substantially complete in 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
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), 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 must be based on
reasonable assumptions concerning the after-tax rate of return to be earned by the
assets of the qualified nuclear decommissioning fund, the total estimated cost of
decommissioning the nuclear power 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. Section 1.468A-3(b)(3) provides that the ruling amount specified in a schedule of
ruling amounts for the last taxable year in the funding period may be less than the ruling
amount specified in such schedule for an earlier taxable year if, when annualized under
the rules provided § 1.468A-3(b)(3), the amount specified for the last taxable year is not
less than the amount specified for such earlier taxable 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 power plant will no longer be included in the taxpayer’s rate base is
the end of the estimated useful life of the nuclear power plant.

       Section 1.468A-3(c)(2)(i)(B) provides that, if the nuclear power plant is not
described in § 1.468A-3(c)(2)(i)(A), the last day of the estimated useful life of the
nuclear power 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 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)(i) provides that any taxpayer that has obtained a schedule
of ruling amounts pursuant to § 1.468A-3(e) must file a request for a revised schedule of
ruling amounts on or before the deemed payment deadline date for the 10th taxable
year that begins after the taxable year in which the most recent schedule of ruling
amounts was received. If the taxpayer calculated its most recent schedule of ruling
amounts on any basis other than an order issued by a public utility commission, the
taxpayer must file a request for a revised schedule of ruling amounts on or before the
deemed payment deadline date for the 5th taxable year that begins after the taxable
year in which the most recent schedule of ruling amounts was received.

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

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

3)      The proposed schedule of ruling amounts was derived by adhering to the
Nuclear Regulatory Commission’s minimum funding requirements and by following the
assumptions contained in the Independent Study. In addition, the same underlying
assumption 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.

4)     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).

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 for Commission A.


                       APPROVED SCHEDULE OF RULING AMOUNTS

                 YEAR                                  Schedule of Ruling Amount
        Each Year Year 2 – Year 3                                  h

        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 by the date
provided in this regulation. When no such event occurs, Taxpayer must file a request
for a revised schedule of ruling amounts by the date provided in § 1.468A-3(f)(1)(i).

       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 as to whether the Independent Study conforms to
industry standards and practices or whether any particular item contained in that study
constitutes a nuclear decommissioning cost under § 1.468A-1(b)(6).

      This ruling is directed only to 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 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.

      This letter ruling is being issued electronically in accordance with Rev. Proc.
2020-29, 2020-21 I.R.B. 859. A paper copy will not be mailed to Taxpayer.


                                          Sincerely yours,



                                          Patrick S. Kirwan
                                          Chief, Branch 6
                                          Office of Associate Chief Counsel
                                          (Passthroughs & Special Industries)



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