| (iv) A duty to investigate and determine whether the trustee has complied with the trust agreement and this section as it relates to trustees; and, (v) A duty to investigate any other factors which may bear on whether the trustee is suitable. (D) The funds administrator shall retain the right to replace the investment managers with or without cause. In appointing an investment manager, the funds administrator shall have the following duties, which will be of a continuing nature: (i) A duty to determine whether the investment manager's fee schedule for investment management services is reasonable, when compared to other such managers, and meets the requirement of paragraph (3)(B)(i) of this subsection; (ii) A duty to investigate and determine whether the past performance of the investment manager in managing investments has been reasonable; (iii) A duty to investigate and determine whether the financial stability and strength of the investment manager is adequate for purposes of liability; (iv) A duty to investigate and determine whether the investment manager has complied with the investment management agreement and this section as it relates to investments; and, (v) A duty to investigate any other factors which may bear on whether the investment manager is suitable. (2) Agreements between the fund administrator and the institutional trustee or investment manager. (A) The fund administrator shall execute an agreement with each institutional trustee. The agreement shall include the restrictions in subparagraphs (A)(i)-(v) of this paragraph and may include additional restrictions on the trustee. A fund administrator shall not grant such trustee powers that are greater than those provided to trustees under the Texas Trust Code or that are inconsistent with the limitations of this section. (i) The interest earned on the corpus of the trust becomes part of the trust corpus. A trustee owes the same duties with regard to the interest earned on the corpus as are owed with regard to the corpus of the trust. (ii) A trustee shall have a continuing duty to review the trust portfolio for compliance with investment guidelines and governing regulations. (iii) A trustee shall not lend funds from the decommissioning trust to itself, its officers, or its directors. (iv) A trustee shall not invest or reinvest decommissioning trust funds in instruments issued by the trustee, except for time deposits, demand deposits, or money market accounts of the trustee. However, investments of a decommissioning trust may include mutual funds that contain securities issued by the trustee if the securities of the trustee constitute no more than five percent of the fair market value of the assets of such mutual funds at the time of the investment. (v) The agreement shall comply with all applicable requirements of the Nuclear Regulatory Commission. (B) The fund administrator shall execute an agreement with each investment manager. (If the trustee performs investment management functions, the contractual provisions governing those functions must be included in either the trust agreement or a separate investment management agreement.) The agreement shall include the restrictions set forth in subparagraphs (B)(i)-(v) of this paragraph and may include additional restrictions on the manager. A funds administrator shall not grant the manager powers that are greater than those provided to trustees under the Texas Trust Code or that are inconsistent with the limitations of this section. (i) An investment manager shall, in investing and reinvesting the funds in the trust, comply with paragraph (3) of this subsection. (ii) The interest earned on the corpus of the trust becomes part of the trust corpus. An investment manager owes the same duties with regard to the interest earned on the corpus as are owed with regard to the corpus of the trust. (iii) An investment manager shall have a continuing duty to review the trust portfolio to determine the appropriateness of the investments. (iv) An investment manager shall not invest funds from the decommissioning trust with itself, its officers, or its directors. (v) The agreement shall comply with all applicable requirements of the Nuclear Regulatory Commission. (3) Trust investments. (A) Investment portfolio goals. The Nuclear Decommissioning Trust Funds should be invested consistent with the following goals. The funds administrator may apply additional prudent investment goals to the funds so long as they are not inconsistent with the stated goals of this subsection. (i) The funds should be invested with a goal of earning a reasonable return commensurate with the need to preserve the value of the assets of the trusts. (ii) In keeping with prudent investment practices, the portfolio of securities held in the decommissioning trust shall be diversified to the extent reasonably feasible given the size of the trust. (iii) Asset allocation and the acceptable risk level of the portfolio should take into account market conditions, the time horizon remaining before the commencement and completion of decommissioning, and the funding status of the trust. While maintaining an acceptable risk level consistent with the goal in subparagraph (A)(i) of this paragraph, the investment emphasis when the remaining life of the liability, as defined in subparagraph (B)(vi)(IV) of this paragraph, exceeds five years should be to maximize net long-term earnings. The investment emphasis in the remaining investment period of the trust should be on current income and the preservation of the fund's assets. (iv) In selecting investments, the impact of the investment on the portfolio's volatility and expected return net of fees, commissions, expenses, and taxes should be considered. (B) General requirements. The following requirements shall apply to all Nuclear Decommissioning Trust Funds. Where a Transferee Company has multiple Nuclear Decommissioning Trust Funds for a single generating unit, the restrictions contained in this subsection apply to all such trusts in the aggregate for that generating unit. For purposes of this section, a commingled fund is defined as a professionally managed investment fund of fixed-income or equity securities established by an investment company regulated by the Securities Exchange Commission or a bank regulated by the Office of the Comptroller of the Currency. (i) Fees limitation. The total trustee and investment manager fees paid on an annual basis by the fund administrator from the trust for the entire portfolio including commingled funds shall not exceed 0.7% of the entire portfolio's average annual balance. (ii) Diversification. For the purpose of this subparagraph, a commingled or mutual fund is not considered a security; rather, the diversification standard applies to all securities, including the individual securities held in commingled or mutual funds. Once the portfolio of securities (including commingled funds) held in the decommissioning trust(s) contains securities with an aggregate value in excess of $20 million, it shall be diversified such that: (I) no more than 5.0% of the securities held may be issued by one entity, with the exception of the federal government, its agencies and instrumentalities, and; (II) the portfolio shall contain at least 20 different issues of securities. Municipal securities and real estate investments shall be diversified as to geographic region. (iii) Optimum tax efficiency. The fund administrator may invest the decommissioning funds by means of tax exempt, "qualified" or "unqualified" nuclear decommissioning trusts; however, the fund administrator shall, to the extent permitted by the Internal Revenue Service, invest any taxable decommissioning funds in "qualified" nuclear decommissioning trusts, in accordance with the Internal Revenue Code §468A (or any successor thereto). The fund administrator shall avoid, whenever possible, the investment of taxable decommissioning funds in "unqualified" nuclear decommissioning trusts. (iv) Derivatives. The use of derivative securities in the trust is limited to those whose purpose is to enhance returns of the trust without a corresponding increase in risk or to reduce risk of the portfolio. Derivatives may not be used to increase the value of the portfolio by any amount greater than the value of the underlying securities. Prohibited derivative securities include, but are not limited to, mortgage strips; inverse floating rate securities; leveraged investments or internally leveraged securities; residual and support tranches of Collateralized Mortgage Obligations; tiered index bonds or other structured notes whose return characteristics are tied to non-market events; uncovered call/put options; large counter-party risk through over-the-counter options, forwards and swaps; and instruments with similar high-risk characteristics. (v) The use of leverage (borrowing) to purchase securities or the purchase of securities on margin for the trust is prohibited. (vi) Investment limits in equity securities. The following investment limits shall apply to the percentage of the aggregate market value of all non-fixed income investments relative to the total portfolio market value. (I) Except as noted in subclause (II) of this clause, when the weighted average remaining life of the liability exceeds five years, the equity cap is 60%. (II) When the weighted average remaining life of the liability ranges between five years and two and a half years, the equity cap shall be 30%. Additionally, during all years in which expenditures for decommissioning the nuclear units occur, the equity cap shall also be 30%. (III) When the weighted average remaining life of the liability is less than two and a half years, the equity cap shall be 0%. (IV) For purposes of this subparagraph, the weighted average remaining life in any given year is defined as the weighted average of years between the given year and the years of each decommissioning outlay, where the weights are based on each year's expected decommissioning expenditures divided by the amount of the remaining liability in that year. (V) Should the market value of non-fixed income investments, measured monthly, exceed the appropriate cap due to market fluctuations, the fund administrator shall, as soon as practicable, reduce the market value of the non-fixed income investments below the cap. Such reductions may be accomplished by investing all future contributions to the fund in debt securities as is necessary to reduce the market value of the non-fixed income investments below the cap, or if prudent, by the sale of equity securities. (vii) A decommissioning trust shall not invest in securities issued by the Transferee Company or the Collecting Utility collecting the funds or any of their respective affiliates; however, investments of a decommissioning trust may include commingled funds that contain securities issued by the Transferee Company or Collecting Utility if the securities of such company or utility constitute no more than 5.0% of the fair market value of the assets of such commingled funds at the time of the investment. (C) Specific investment restrictions. The following restrictions shall apply to all decommissioning trusts. Where a Transferee Company has multiple Nuclear Decommissioning Trust Funds for a single generating unit, the restrictions contained in this subsection apply to all such trusts in the aggregate for that generating unit. (i) Fixed-income investments. A decommissioning trust shall not invest trust funds in corporate or municipal debt securities that have a bond rating below investment grade (below "BBB-" by Standard and Poor's Corporation or "Baa3" by Moody's Investor's Service) at the time that the securities are purchased and shall reexamine the appropriateness of continuing to hold a particular debt security if the debt rating of the company in question falls below investment grade at some time after the debt security has been purchased. Commingled funds may contain some below-investment-grade bonds; however, the overall portfolio of debt instruments shall have a quality level, measured quarterly, not below an "AA" grade by Standard and Poor's Corporation or "Aa2" by Moody's Investor's Service. In calculating the quality of the overall portfolio, debt securities issued by the federal government shall be considered as having an "AAA" rating. (ii) Equity investments. (I) At least 70% of the aggregate market value of the equity portfolio, including the individual securities in commingled funds, shall have a quality ranking from a major rating service, such as the earnings and dividend ranking for common stock by Standard and Poor's or the quality rating of Ford Investor Services. Further, the overall portfolio of ranked equities shall have a weighted average quality rating equivalent to the composite rating of the Standard and Poor's 500 index assuming equal weighting of each ranked security in the index. If the quality rating, measured quarterly, falls below the minimum quality standard, the fund administrator shall as soon as practicable and prudent to do so, increase the quality level of the equity portfolio to the required level. (II) A decommissioning trust shall not invest in equity securities where the issuer has a capitalization of less than $100 million. (iii) Commingled funds. The following guidelines shall apply to the investments made through commingled funds. Examples of commingled funds appropriate for investment by nuclear decommissioning trust funds include United States equity-indexed funds, actively managed United States equity funds, balanced funds, bond funds, real estate investment trusts, and international funds. Cont'd... |
