Revised nuclear decommissioning funding schedule approved

Plain-English summary

An investor-owned electric utility requested a revised schedule of ruling amounts for the qualified fund used to pay for decommissioning its nuclear plant. The plant's operating license had been extended, and a state commission approved decommissioning costs based on an independent study. The utility proposed calculating annual contributions through a formula tied to electricity sales and the nuclear decommissioning component of a customer surcharge. The IRS found that the utility had a qualifying ownership interest, used reasonable assumptions, and properly calculated its share of decommissioning costs. It approved a stated amount for the first covered year and formula-determined amounts for the following three years, subject to future review and revision requirements.

Ruling snapshot

• Question: Does the utility's proposed revised schedule of nuclear decommissioning fund contributions satisfy section 468A?
• Outcome: Approved, with one stated ruling amount and later amounts determined by the approved formula
• Key authorities: IRC § 468A; Treas. Reg. §§ 1.468A-1 through 1.468A-3, 1.468A-7

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202433004
Release Date: 8/16/2024
Index Number: 468A.04-02

------------------------ Person To Contact:
------------------------------ ------------------ ID No. -----------------
------------------------------ Telephone Number:
------------------------ --------------------
--------------------------------------- Refer Reply To:
-------------------------- CC:PSI:B06 – PLR-105844-23
Date:
May 22, 2024

Re: Revised Schedule of Ruling Amounts
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LEGEND:

Taxpayer = ----------------------------------
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Parent = ----------------------------------
---------------------------------
State = ------------
Plant = ------------------------------------------------------------------------
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--------------------------
Location = ----------------------------------
Date 1 = ------------------
Date 2 = --------------------------
Date 3 = --------------------------
Date 4 = ---------------------
Method = -----------
Independent Study = ------------------------------------------------------------------------
Commission = -------------------------------------------------
Order = ------------------------------------------------------------------------
Amount = ---------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
 2
PLR-105844-23

Year 6 = -------
A = -------------------
B = -------------------
C = ----
D = ----
E = ---------------------
F = ---------
G = ---------------
Fund = ------------------------------------------

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

    This letter responds to your request, dated March 10, 2023, 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. 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. On Date 2, Commission 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.

    The estimated cost of $A (Year 1 dollars) was used as a base cost for

decommissioning the Plant. The estimated cost of decommissioning the Plant in future
dollars is $B (Year 4 dollars). It is estimated that substantial decommissioning costs will
PLR-105844-23 3

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 to escalate the estimated costs at an inflation rate of C percent to the year
of estimated expenditure. The assumed after-tax rate of return to be earned by the
amount in the Fund is D percent.

    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 Nuclear Surcharge
         b=       Nuclear decommissioning component of the Commission Nuclear
                  Surcharge expressed as cents/kWh and multiplied by .01 (to
                  convert to dollars).
           c=     Collections from customers

   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:

    $E x ($F x .01) = $G

    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
PLR-105844-23 4

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.

     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
PLR-105844-23 5

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 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.
PLR-105844-23 6

     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 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 ownership 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.

PLR-105844-23 7

    4. The proposed schedule of ruling amounts was derived by following the
       assumptions contained in Independent Study that Taxpayer has represented
       is a standard type study used in the industry. In addition, Independent Study
       was used by Commission 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                                    Ruling Amount
               Year 2                                         $G
           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, 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.
Specifically, no determination is made whether the independent decommissioning 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 representatives. Pursuant to § 1.468A-7(a), a copy of this letter must be
PLR-105844-23 8

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,
                                              Associate Chief Counsel
                                              (Passthroughs and Special Industries)


                                    By:       ______________/S/_______________
                                              PATRICK S. KIRWAN
                                              Branch Chief, Branch 6
                                              Office of the Associate Chief Counsel
                                              (Passthroughs and Special Industries)

Enclosure
Copy for § 6110 purposes

cc: