On Friday, April 24, 2020, the Internal Revenue Service (IRS) issued three private letter rulings providing guidance to regulated public utilities on three distinct issues. Specifically, the rulings addressed the following:
• Whether solar property owned by a utility that charged customers negotiated market rates is public utility property subject to the normalization rules (PLR 202017027);
• Whether the proposed treatment of excess accumulated deferred income taxes following a change in method of accounting would be a violation of the normalization rules (PLR 202017015); and
• Whether an arrangement with an unrelated third party to decommission a taxpayer’s nuclear plant is consistent with section 468A (PLR 202017007).
Each of these rulings is summarized below.
1. PLR 202017027 – The public utility commission authorized an arrangement for the utility to own, operate and maintain a solar generation system on customer premises. Notwithstanding its ownership of the system, the utility will not include the property in rate base, and, although not expressly stated, will presumably not depreciate the property for regulatory purposes. The rates charged to customers for electricity will be based on the market price established through negotiation tailored to individual customer needs and risks presented. Consistent with other recent rulings, the PLR held that because the rates charged for electricity were not based on a cost of service, rate of return ratemaking, the solar property will not be public utility property subject to the normalization rules.
2. PLR 202017015 – This ruling addressed the proper treatment of the taxpayer’s excess accumulated deferred income taxes (EADIT) following its change in method of accounting from capitalizing and depreciating items to deducting them as repairs, and a change to its treatment of dispositions. The EADIT attributable to property included in rate base and depreciated for regulatory purposes, but the costs of which are deductible as repairs for tax purposes, was not subject to the normalization rules. Thus, the EADIT could be shared with customers without regard to the timing rules of the Average Rate Assumption Method (ARAM). Second, for public utility property immediately prior to the year of change, the net EADIT resulting from the repair-related component of the section 481(a) adjustment is also not subject to the normalization rules, and thus is not limited by the ARAM timing rules. Similarly, for public utility property immediately prior to the year of change, the net EADIT resulting from the depreciation-related component of the section 481(a) adjustment is not subject to the normalization rules and thus is not limited by the ARAM timing rules.
The IRS did not rule on the excess tax reserves resulting from the corporate tax rate reduction in the Tax Cuts and Jobs Act, nor did it address the treatment of the accumulated deferred income taxes (ADIT) resulting from the disposition-related components of the section 481(a) adjustment. With respect to the latter, the IRS specifically noted that it was not ruling on the ADIT related to the restored basis of public utility property that was treated as disposed under the old method of accounting but was not treated as disposed under the new method of accounting.
| Eversheds Sutherland Observation: PLR 202017015 is a good reminder that the depreciation normalization rules and the treatment of ADIT related thereto is premised on the use of different methods of depreciation for regulatory and federal income tax purposes with respect to public utility property included in rate base. Here, under the taxpayer’s new method of accounting, the costs attributable to property previously capitalized and depreciated under the old method of accounting were deductible as repairs under section 162 under the new method of accounting. Because the taxpayer no longer used a different method of depreciation for regulatory and tax purposes, the normalization rules no longer applied. |
3. PLR 202017007 – This ruling addressed some of the issues that arise in connection with the increasingly frequent arrangements whereby third parties are engaged to perform the nuclear decommissioning of a taxpayer’s nuclear power plants. In this ruling, the taxpayer retained title to the facility but the contractor and its affiliate received title to the spent fuel and the independent spent fuel storage installation (ISFSI). The taxpayer agreed to pay the contractor a fixed amount and the Qualified Fund created a subaccount for the fixed amount, increased by any earnings, and decreased by all losses, taxes and expenses of the subaccount. The taxpayer represented that the contractor and its affiliate were unrelated to the taxpayer and thus were not “disqualified persons” under section 468A and that all payments to the contractor would be for qualified decommissioning costs as defined in Treas. Reg. § 1.468-1(b)(6).
The IRS ruled that the mere transfer of possession of the facility to the contractor for purposes of conducting decommissioning activities will not cause a disqualification of the Qualified Fund. Because the taxpayer represented that all payments to the contractor from the Qualified Fund were for decommissioning services, that all costs were qualified decommissioning costs, and that the contractor and its affiliate were not disqualified persons, the IRS had no difficulty ruling that the payments from the Qualified Fund were for a permissible use. Lastly, under the service agreement, the taxpayer sold the spent fuel and ISFSI to the contractor, but retained ownership of the facility and the Qualified Fund. Accordingly, the IRS ruled that the sale of the fuel and ISFSI neither constituted a disposition of the plant nor caused a disqualification of the Qualified Fund.
| Eversheds Sutherland Observation: Given the long-delayed issuance of the section 468A final regulations, it is quite likely that the taxpayer had to represent that the third parties were not “disqualified persons” and that the costs were qualified decommissioning costs under the IRS policy of not ruling on issues that are potentially implicated by pending regulations projects. Nevertheless, given the limited number of rulings addressing third party decommissioning, this ruling is welcome, albeit limited guidance on such arrangements. |
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