Attorney Preps for and Follows Up on Utility Decommissioning Cost Meeting

In a September 9, 1998 letter, Patricia M. Healy of Thelen Reid & Priest LLP, Washington, on behalf of the Utility Decommissioning Group, thanked Treasury for agreeing to meet with her on September 11, 1998, to discuss the group's concerns about the the effect of utility restructuring on section 468A. At the same time, Healy also outlined changes to the applicable regs that the group would like to see. Those changes included (1) permitting former owners of nuclear plants who retain liability for decommissioning and affiliated taxpayers of current owners to maintain and supplement qualified funds; (2) acknowledging that decommissioning costs identified in filings with the Federal Energy Regulatory Commission are decommissioning costs included in the cost of service under section 468A; and (3) extending the nonrecognition provisions of reg. section 1.468A-6(c) to transfers of qualified funds to "non-rate-regulated" buyers.

In a September 18, 1998 follow-up letter, Healy forwarded copies of SEC Forms 8-K and press releases that Treasury officials requested during the meeting.

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September 18, 1998

Joseph Mikrut, Esquire

Re: Qualified Nuclear Decommissioning Reserve Funds --

Dear Mr. Mikrut:

[1] Pursuant to your request during our meeting last Friday, enclosed are copies of SEC Forms 8-K and press releases of PECO Energy Company and GPU, Inc. in connection with the transfer of Three Mile Island Unit 1 Nuclear Generating Station. We appreciate your interest in the matters we discussed last week. If you have any questions as you proceed with your internal discussions, please do not hesitate to call.

Very truly yours,

Patricia M. Healy

Enclosures

cc: John Parcell, Esq. (w/encls.)

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September 9, 1998

Joseph Mikrut, Esq.

Re: Qualified Nuclear Decommissioning Reserve Funds -- Code

Dear Mr. Mikrut:

[2] Thank you for scheduling a meeting on Friday, September 11, 1998, at 10:00 a.m. to discuss concerns of the Utility Decommissioning Tax Group (Group) relating to the impact of electric utility restructuring on section 468A of the Internal Revenue Code of 1986, as amended (Code) and applicable Treasury Regulations regarding qualified nuclear decommissioning reserve funds (qualified funds). Accompanying me will be Senator Bob Packwood of Sunrise Research and Mr. Harvey Dikter of PECO Energy Company. Enclosed is a list of the members of the Group.

[3] The Group seeks minor modifications to existing Treasury Regulations (or issuance of notices or rulings) to accomplish the foregoing:

1. Permit (a) former owners of nuclear plants who retain

2. Acknowledge that decommissioning costs identified in filings

3. Extend the nonrecognition provisions of Treasury Regulations

Enclosed are proposed amendments to the applicable sections of the

[4] In the event these modifications are not achieved administratively, the Group seeks to incorporate them into the Nuclear Decommissioning Restructuring Act of 1998 (Act), which also would:

1. Eliminate the cost-of-service requirement in Code section

2. Define "nuclear decommissioning costs" and acknowledge that

3. Provide flexibility to taxpayers to make contributions to a

4. Allow taxpayers to use a qualified fund to accumulate all

5. Codify existing regulations on tax-free transfers of

6. Eliminate the ruling requirement in Code section 468A.

[5] Enclosed is a copy of the Act and a detailed explanation thereof.

[6] We look forward to our meeting on Friday to discuss the foregoing matters.

Very truly yours,

Patricia M. Healy

Enclosures

cc: John Parcell, Esq. (w/encs.)

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UTILITY DECOMMISSIONING TAX GROUP

Alliance Capital Management, L.P.

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PROPOSED AMENDMENTS TO TREASURY REGULATIONS

Treasury Regulations section 1.468A-1(b)(2) is amended to read as

The term "qualifying interest" includes

(i) A direct or indirect ownership interest;

(ii) A leasehold interest in any portion of a nuclear power

(A) The holder of the leasehold interest is primarily

(B) No other person establishes a nuclear decommissioning

(iii) An interest as the former holder of a direct or indirect

A direct or indirect ownership interest includes an interest as

Treasury Regulations section 1.468A-1(b)(4) is amended to read:

The term "nuclear power plant" means any nuclear power reactor

105th Congress

A BILL

To amend section 468A of the Internal Revenue Code of 1986 with respect to deductions for decommissioning costs of nuclear powerplants.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the "Nuclear Decommissioning Restructuring Act of 1998."

SECTION 2. NUCLEAR DECOMMISSIONING RESERVE FUND.

A. Subsection (b) of section 468A of the Internal Revenue Code of 1986 is amended to read as follows:

(b) LIMITATION ON CONTRIBUTIONS TO FUND. In general, a

B. Paragraph (2) of subsection (c) of section 468A of the Internal Revenue Code of 1986 is amended to read as follows:

(2) DEDUCTION UPON PAYMENT OF NUCLEAR DECOMMISSIONING

C. Subsection (d) of section 468A of the Internal Revenue Code of 1986 is amended to read as follows:

(d) NUCLEAR DECOMMISSIONING COSTS. For purposes of this

D. Subsection (e) of section 468A of the Internal Revenue Code of 1986 is amended --

1. in paragraph (1), by striking "Nuclear Decommissioning Reserve," and

2. in paragraph (7), by inserting "be permitted to" after "the taxpayer shall."

3. by adding a new paragraph (8) to read as follows:

(8) In connection with the transfer of a nuclear power

E. Subsection (f) of section 468A of the Internal Revenue Code of 1986 is amended to read as follows:

(f) NUCLEAR POWERPLANT. For purposes of this section, the

SECTION 3. EFFECTIVE DATE.

The amendments made by this Act shall apply to taxable years beginning after December 31, 1997.

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DETAILED EXPLANATION OF

I. BACKGROUND.

[7] Section 468A of the Internal Revenue Code of 1986, as amended (Code), allows an electric utility company with a direct ownership or leasehold interest in a nuclear power plant to elect to deduct contributions made to a Qualified Nuclear Decommissioning Reserve Fund (Fund), subject to certain limitations. The Fund must be a segregated trust used exclusively for the payment of decommissioning (i.e., shut down) costs of a nuclear power plant, for administrative costs of the Fund (including taxes), and, to the extent not currently needed for the foregoing purposes, for making investments. Contributions to the Fund are limited to that portion of total nuclear decommissioning costs (referred to as the qualifying percentage) that corresponds to the portion of the estimated useful life of the plant that remained when Congress first enacted Code section 468A in 1984.

[8] Code section 468A, when enacted in 1984, was designed to operate within the structure of a regulated electric utility industry. Its mechanics are dependent on traditional cost-of-service ratemaking proceedings in which the public service commission authorizes specifically identified costs (such as decommissioning expenses) that an electric utility company can charge its customers. The annual contributions to the Fund typically extend over the period of year that the public service commision authorizes the taxpayer to recover its capital investment and operating costs (including decommissioning costs)of the nuclear power plant from its customers.

[9] The amount of the annual contribution is limited to the lesser of (i) the amount of nuclear decommissioning costs included in the taxpayer's cost of service for ratemaking purposes for such taxable year, or (ii) the "ruling amount" applicable to such taxable year. To determine the "ruling amount," the taxpayer must request and receive a schedule of ruling amounts from the Internal Revenue Service (IRS). As part of its request, the taxpayer actually calculates the annual ruling amounts, which then are reviewed and approved by the IRS. A taxpayer must request a separate schedule of ruling amounts for each nuclear unit in which it holds an interest.

II. NEED FOR NUCLEAR DECOMMISSIONING RESTRUCTURING ACT OF 1998.

[10] As a result of the Energy Policy Act of 1992 (Public Law 102-486), the electric utility industry is in the process of deregulation. This process includes retail wheeling, restructuring, competition and alternative forms of regulation. As a result, in the near future, an electric utility company may not be subject to traditional ratemaking whereby a specified amount for future decommissioning costs of a nuclear power plant is included in its cost of service. Rather, such costs could be left to the electric utility company to determine and provide for from "market-based" or competitive rates. If Code section 468A is not changed, taxpayers who sell power based on market rates will be unable to deduct amounts segregated for future decommissioning costs and these segregated decommissioning monies will be depleted needlessly by income taxes not incurred under current law due to the nexus of Code section 468A to traditional cost-of-service ratemaking.

[11] The tax-writing conferees, in enacting Code section 468A in 1984, recognized the continuing importance of ensuring that taxpayers comply with nuclear power plant decommissioning requirements and noted that their committees should study further the tax treatment of decommissioning costs and the merits of providing tax incentives for establishing decommissioning funds. See H. Rept. 98-861, Deficit Reduction Act of 1984, 98th Cong., 2d Sess. 879 (1984). Implicit in their remarks is the desire to continue the function of Code section 468A notwithstanding the restructuring of the industry.

[12] In order to permit taxpayers to continue to deduct contributions to a Fund as the electric utility industry is restructured, Code section 468A should be modified to permit a taxpayer to make deductible contributions to a Fund based on decommissioning costs reflected in traditional cost-of-service ratemaking, in "market-based" or competitive rates, or in deregulation transition charges. In the absence of the cost-of- service limitation on contributions to a Fund, it is appropriate to codify the definition of "nuclear decommissioning costs" to limit contributions to a Fund. Additionally, the deductibility of nuclear decommissioning costs upon payment should be clarified.

[13] In addition, the Code should recognize that, as a result of restructuring, nuclear power plants will no longer be owned or leased exclusively by rate-regulated taxpayers. Therefore, the scope of taxpayers eligible to establish or maintain a Fund should include all taxpayers that directly or indirectly own or lease a nuclear power plant (or previously owned or leased a plant and remain liable for decommissioning costs) that is (or was) used predominantly in the trade or business of furnishing or selling electric energy.

[14] State restructuring laws or initiatives sometimes require taxpayers to fund amounts for decommissioning costs over a limited number of years. Code section 468A should be amended to afford flexibility to taxpayers to match their contributions to a Fund to these laws or initiatives.

[15] The impact of the qualifying percentage is to arbitrarily treat taxpayers with identical decommissioning expenses differently based solely on the age of their plants. This produces inequitable results and should be abandoned.

[16] Restructuring of the electric utility industry has brought regulatory and market forces to bear upon continued ownership of nuclear power plants. As a result, taxpayers are planning transfers of nuclear power plants. Existing Code section 468A does not adequately address the income tax consequences of transferring a Fund in connection with the disposition of the nuclear power plant. Uncertainty in this area will impede transfers prompted by the restructuring of the electric utility industry. Nonrecognition treatment for transfers of Funds in this context would preserve the integrity of these Funds for their intended purpose, i.e., to pay to decommission nuclear power plants.

[17] Section 468A is the only provision of the Code in which a tax deduction is made conditional upon PRE-approval by the IRS. The multiple ruling process which taxpayers undertake in order to comply with Code section 468A is entirely computational, and presents no rationale for departing from the normal rule that taxpayers claim deductions on their tax returns subject to a subsequent audit by the IRS. In addition to the $3,650 "user fee" charged for filing each ruling request the process of preparing each request requires taxpayers to incur significant legal fees and internal costs.

III. NUCLEAR DECOMMISSIONING RESTRUCTURING ACT OF 1998.

[18] The Nuclear Decommissioning Restructuring Act of 1998 would modify existing Code section 468A to permit a taxpayer to make deductible contributions to a Fund prior to the expiration of the "possession only" license for the plant. This date correlates to the completion of decommissioning of the plant. Taxpayers would calculate their allowable contributions to a Fund by taking into account a reasonable rate of return on assets in the Fund and a reasonable rate of inflation for nuclear decommissioning costs until incurred. The Nuclear Decommissioning Restructuring Act of 1998 would eliminate the qualifying percentage to permit amounts needed to fund ALL decommissioning costs to be contributed to a Fund regardless of when the associated nuclear power plant began operations.

[19] Insofar as a public service commission would not be specifying decommissioning costs as in traditional cost-of-service ratemaking, the Nuclear Decommissioning Restructuring Act of 1998 defines nuclear decommissioning costs to include all amounts to be incurred by a taxpayer in connection with the entombing, decontaminating, dismantling, removing and disposing of a nuclear power plant, including all associated preparation, security, fuel storage and radiation monitoring expenses. It also provides that taxpayers will identify such costs by reference either to a site- specific engineering study or to the financial assurance amount calculated pursuant to section 50.75 of Title 10 of the Code of Federal Regulations. Consistent with recent rulings of the Internal Revenue Service, the Nuclear Decommissioning Restructuring Act of 1998 clarifies that a taxpayer may deduct the amount of nuclear decommissioning costs paid during a taxable year by the taxpayer or a Fund.

[20] The Nuclear Decommissioning Restructuring Act of 1998 acknowledges the expanding scope of taxpayers responsible for nuclear decommissioning costs to include all taxpayers, whether regulated or non-regulated, with existing or former, direct or indirect ownership or leasehold interests in a nuclear power plant including interests as a member of a consolidated group that includes a corporation that owns or leases a nuclear power plant. In addition, the Act would provide flexibility to taxpayers to make contributions to Funds at any time before decommissioning is completed.

[21] The Nuclear Decommissioning Restructuring Act of 1998 would provide that, upon a transfer of a nuclear power plant, the transfer of a Fund or its assets to the buyer would receive nonrecognition treatment and the basis of assets in the seller's Fund would carry over to the buyer. This result is consistent with existing regulations.

[22] To alleviate an administrative burden on taxpayers, the Nuclear Decommissioning Restructuring Act of 1998 would eliminate the requirement that taxpayers request a ruling from the IRS setting forth the allowable contributions.

[23] The Nuclear Decommissioning Restructuring Act of 1998 would be effective for taxable years beginning after December 31, 1997.

September, 1998