ML20248B620

Comments on Draft Reg Guide, Assuring Availability of Funds for Decommissioning Nuclear Reactors. NRC Should Permit Use of Potential Tax Refund as Source of Decommissioning Funds

ML20248B620
Person / Time
Site:	Seabrook, Yankee Rowe, Maine Yankee, 05000000
Issue date:	08/02/1989
From:	Denise Edwards YANKEE ATOMIC ELECTRIC CO.
To:	NRC OFFICE OF ADMINISTRATION (ADM)
References
FRN-54FR25393, RTR-REGGD-01.XXX, RTR-REGGD-1.XXX, TASK-DG1003, TASK-RE 54FR25393-00011, 54FR25393-11, GLA-89-061, GLA-89-61, NUDOCS 8908090273
Download: ML20248B620 (6)

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.S,, n-< m _7 e 4 August 2, 1989 66- GLA 89-061 Regulatory Publications Branch DFIPS y

Office of Administration and Resources Management U.S. Nuclear Regulatory Commission Washi'igton , DC 20555  % }g}

SUBJECT:

Draft Regulatory Guide -- Assuring the Availability GyWM of Funds for Decommissioning Nuclear Reactors

Dear Sir:

Yankee Atomic Electric Company (YAEC) appreciates the opportunity to comment on the subject draft Regulatory Guide. YAEC owns and operates a nuclear power plant in Rowe, Massachusetts. Our Nuclear Services Division (NSD) also provides engineering and licensing services for other nuclear power plants in the Northeast, including Vermont Yankee, Maine Yankee, and Seabrook. YAEC is a member of the Utility Decommissioning Group, and we fully endorse the detailed comments on the draft Regulatory Guide which have been submitted on behalf of this Group by the law firm of Bishop, Cook, Purcell and Reynolds. In addition, we offer the following comments which address the use of an external sinking fund and the provisions of the Internal Revenue Code (the " Code") governing decommissioning expenses.

An external sinkiry fund is one available means recognized by the NRC for assuring the availability of funds for decommissioning.

The draft Regulatory Guide provides that "the total external sinking fund would be sufficient to pay decommissioning costs at the expected time of termination of operation". We request that in certain situations companies be entitled to meet the funding requirements by a combinatica of the monies in the trust fund and the tax refund available urader the net operating loss carryback provisions of the Code.

Code Provisions Affectina Decommissioning Amounts collected to fund decommissioning are subject to federal income tax (Code sec. 88). For a corporation paying tax at the maximum federal rate of 34%, the practical effect of this rule is that for every dollar collected for decommissioning 34 cents are used to pay federal income taxes and only 66 cents remain to be accumulated in an external trust.

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The owner of a nuclear power plant can obtain a current deduction for contributions to an external decc.aissioning fund only by complying with the requirements of Code section 468A. This deduction offsets the inclusion in income required by section 88 of the Code. For monies qualifying under section 468A, the amount L collected can be contributed to an external fund without reduction for federal income taxes.

However, the use of section 468A is limited. For nuclear power plants that began operations prior to 1984, only a portion of the amounts collected for decommissioning can qualify for the section 468A deduction. For example, if two-thirds of a plant's useful life occurred prior to 1984, only one-third of the amount needed for decommissioning can be accumulated in a section 468A j trust. With . respect to the remaining two-thirds of the amount needed for decommissioning, the company has no choice but to pay-federal taxes on those collections. The portion of a company's estimated cost of decommissioning that is eligible for treatment under section 468A is the company's " qualified percentage". For Yankee's Rowe facility, the qualified percentage is only 37.84%.

A company that does not or cannot fully utilize section 468A can take advantage of the rules in the Code relating to net operating loss carrybacks. For federal income tax purposes, companies that have more expenses than income in a particular year (a " net operating loss") can use the loss to obtain a refund of taxes paid in previous years or to reduce taxes in future years (code sec. 172). In general, a company can carryback a year's loss to obtain a refund of taxes paid in the previous three years and can carry the loss forward to reduce taxes owed for the 15 years 1 after the loss. To the extent the loss is not fully absorbed by I I

income during that period, the loss expires and is of no further tax benefit. However, a special rule applies to net operating losses incurred in connection with decommissioning a nuclear power plant (Code sec. 172(k)). A decommissioning loss can be carried back to obtain a refund of taxes paid in any taxable year beginning after December 31, 1983 (or if later, the year in which the plant )

began operations).

Congressional Intent in Enactina Section 468A Section 468A was enacted by Congress in 1984 to permit the deduction of decommissioning reserves prior to the time the deduction would otherwise be permitted.. "The Congress believed that the establishment of segregated reserve funds for paying future nuclear decommissioning costs was of sufficient national importance that a tax deduction, subject to limitations, should be l l

U.S. Nuclear Regulatory Commission August 2, 1989 Page 3 provided for amounts contributed to qualified funds." Staff of the Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, p. 270 (1984); S.

Rep. No. 169, 98th Cong., 2d Sess. 277 (1984). A '. s o , in 1984, Congress enacted the special loss carryback provisdons relating to decommissioning expenses. In present value terms, Cong7.ess intended that a company's taxes be equal whether it used section 468A, the special carryback provisions, or some combination of the two. M.

Thus, while Congrest recognized the importance of external trusts in providing decommissioning funds, Congress limited the availability of a deduction based on the portion of a plant's life occurring after 1983. For the portion of a plant's life attributable to years before 1984, owners must use the special carryback provisions. However, either alternative (section 468A or section 172 (k) results in the same amount of federal income taxes paid by the owner in present value terms. The enactment of sections 468A and 172(k) reflects a Congressional intent that decommissioning funds be accumulated on an after-tax basis coupled with a future tax refund (section 172(k)), or on a pre-tax basis to the extent section 468A is available and that either approach is a reasonable means of assuring the availability of monies for decommissioning.

I; 3 certainties in the Use of the Loss Carryback Provisions We recognize that there are uncertainties if an owner relies on the loss carryback provisions of the Code: (1) section 172(k) may be repealed by Congress; (2) depending on a company's particular tax situation, current operating losses may result in the unavailability of the full potential tax refund (i.e., because of a portion of the potential refund is obtained prior to decommissioning; (3) if tax rates increase and a company has operating income (disregarding collections for decommissioning) the available tax refund may be less than the taxes actually paid on decommissioning collections; and (4) the potential tax refund may not be fully available if a plant is transferred or if its owner goes bankrupt.

The effect of these uncertainties, however, should not be overstated. The carryback provisions for nuclear power plants are in a special subsection of the Code. Those provisions will not be repealed or amended inadvertently by the repeal or amendment of the general carryback provisions. A proposed repeal of section 172(k) is sure to be met by strong opposition from nuclear power plant owners, state regulatory authorities, and all groups concerned with assuring that decommissioning properly occurs. The carryback

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! August 2, 1989 Page 4 provisions are part of an integrated Congressional response to the problem of dealing with the accumulation of decommissioning funds.

It is extremely unlikely that Congress would adversely change or repeal these provisions.

The potential tax refund may not be available if the plant owner goes bankrupt or transfers the plant to another owner.

However, in YAEC's case other projections exist. Even if YAEC were to go bankrupt, it has power contracts with each of its sponsors under which each sponsor would remain liable for its share of decommissioning expenses. Moreover, YAEC's position is that a transfer of the Rowe facility should trigger a tax deduction and refund; this refund could then be deposited into the external fund.

The NRC could condition approval of a license transfer on the existence of a reasonable plan for assuring the availability of decommissioning funds. The bankruptcy of a sponsor or the transfer of a sponsor's interest to another party would not affect the availability of the potential tax refund.

Finally. While a change in the tax rates or the peculiarities of an owner's tax situation may reduce somewhat the potential tax refund, we suggest that if this uncertainty is a concern it is best dealt with as described below under " Suggested Approach".

Effect of the NRC's Position on Ratepavers We recognize that the NRC may wish to require the use of section 468A to the extent permitted by the Code. However, the l licensees of those plants in operation prior to 1984 should not be denied the right to utilize the potential tax refund as a source of decommissioning funds. Licensees of older plants and their ratepayers should not be penalized because Congress limited the benefits of section 468A to that portion of a plant's life j occurring after 1983. This result is consistent with the intent I of Congress as expressed in the Code. For such plants, Congress provided partial use of an immediate tax deduction for amounts put in an external trust and special carryback provisions to the extent section 468A could not be used.

To preclude the use of the potential tax refund as a source of funds for plants that were in operation prior to 1984 is unfair i to ratepayers. For YAEC, decommissioning collections would have l to increase subt ..antially if full external funding were required without regard to the potential tax refund. For example, to the extent the company cannot use section 468A, approximately $1.515 million would be needed to produce a fund balance of $1 million

($1.515 - 34% of $1. 515 = $1. 000) . FERC currently requires YAEC to use the potential tax refund as a source of decommissioning

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funds in calculating permissible decommissioning collections and rates. If the NP.C were to ignore the potential tax refunds, the companies would be required to ask FERC for significant rate incrcases. If FERC were to approve such rate increases, the result vs.ld be substantially higher costs to current ratepayers. In Rowe Yauw 's case, full funding to meet end of life decommissioning i costs "li approximately double funding rates. While current ratepayers would have significantly higher costs, a large tax refund would in all likelihood be available to future ratepayers.

Ignoring the potential tax refund does not achieve the purpose of the NRC certification which is "to minimize NRC involvement in the rate regulatory process which is an area outside of NRC jurisdiction". NRC, General Requirements for Decommissioning Nuclear Facilities, 54 Fed. Reg. 24018, 24030 (June 27, 1988).

Succested Approach In light of the factors that mitigate the uncertainties with the use of the carryback provisions of the Code, the Congressional intent in enacting sections 468A and 172(k), and the effect of the NRC's position on ratepayers, the NRC should accept the tax refund as a source of decommissioning funds. If, however, the NRC remains concerned, the situation is best dealt with by not precluding the use of the potential tax refund as a source of funds for decommissioning, but by the NRC monitoring a licensee's tax refund on a periodic basis. For example, a licensee should be able to use a potential tax refund if it can show that based on the current tax law and the licensee's particular tax situation to date, the tax refund would be available. A licensee can be required to make a certification on a periodic basis (e.a., every 5 years) that the amount of monies in the external fund, plus expected earnings, and the tax refund expected under current law is sufficient to cover decommissioning expenses. If, as a result of a change in circumstances or a change in the tax law, the full tax refund is no longer available, that would be an appropriate time to require additional external funding to make up for the decrease in the expected tax refund. Where a licensee has an operating loss prior to decommissioning and receives a refund of taxes paid on l decommissioning collections, the licensee could be required to deposit the tax refund in the external fund. In fact, as indicated cbove, the NRC can enndition approval of a license transfer on the j availability of adequate decommissioning funds. )

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U.S. Nuclear Regulatory Commission August 2, 1989 Page 6 In sum, at least for companies that cannot take full advantage of section 468A, the NRC should permit the use of the potential tax refund as a source of decommissioning funds. The tax refund available to a particular owner can be reviewed on a periodic basis. Any deficit because of changes to the tax law or otherwise can then be funded. This approach is consistent with the NRC's objective "to assure that at the time of permanent end of operations, sufficient funds are available to decommission the facility in a manner which protects public health and safety ."

J_d. at 24031.

We would be happy to meet with you to discuss this matter.

Sincerely, Donald W. Edwards Director of Industry Affairs DWE/mem J