Nuclear Power Plant

Nuclear Power Plant

October 01, 2004

Nuclear power plant purchasers got relief from the US Treasury, but only for acquisitions on or after September 15, 2004.

Owners of nuclear power plants are required by federal law to set up decommissioning funds to cover the cost of decommissioning a plant after it reaches the end of its useful life.  The liability for these costs is a significant figure.  When someone buys a nuclear power plant, he acquires not only the power plant but also the decommissioning fund.  US tax rules require the parties to allocate the purchase price among the various assets sold.

Under current allocation rules, a large share of the purchase price is allocated first to the decommissioning fund — without taking into account the liabilities for decommissioning as an offset against the value of the investments in the fund — before there is any allocation of remaining purchase price to the power plant itself.  The result is a large share of the purchase price is allocated to the fund, and little is left over to allocate to the power plant.  This makes it harder to sell nuclear power plants since the buyer will not be able to claim as much tax depreciation.  Amounts allocated to the fund cannot be deducted until the fund is later resold or used to pay decommissioning expenses.  The cost of the power plant can be deducted starting immediately through depreciation.

The Internal Revenue Service issued temporary regulations in September that will allow either party — the seller or the buyer of a nuclear power plant — to make an election to take the fund liabilities into account.  This would let whichever party or parties choose to make the election allocate the purchase price among all the assets, including the fund net of liabilities, in relation to their relative values.  The new rules are prospective in effect. 

Keith Martin