| (C) 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 this section, the investment
emphasis when the remaining life of the liability 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.
(D) 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.
(2) The following requirements shall apply to all PGC
decommissioning trusts under this section. Where a PGC has multiple
trusts for a single generating unit, the restrictions contained in
this subsection apply to all 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.
(A) The total trustee and investment manager fees paid
on an annual basis by the PGC for the entire portfolio including commingled
funds shall not exceed 0.7% of the entire portfolio's average annual
balance.
(B) For the purpose of this subsection, 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 PGC decommissioning trusts
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.
(C) The PGC may invest the decommissioning funds by
means of qualified or unqualified PGC decommissioning trusts; however,
the PGC shall, to the extent permitted by the Internal Revenue Service,
invest its decommissioning funds in "qualified" PGC decommissioning
trusts, in accordance with the Internal Revenue Service Code §468A.
The PGC shall avoid, whenever possible, the investment of taxable
decommissioning funds in "unqualified" PGC decommissioning trusts.
(D) 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.
(E) The use of leverage (borrowing) to purchase securities
or the purchase of securities on margin for the trust is prohibited.
(F) 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 clause (ii) of this subparagraph,
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 2.5 years, the equity cap
shall be 30%;
(iii) When the weighted average remaining life of the
liability is less than 2.5 years, the equity cap shall be 0%. Additionally,
during all years in which expenditures for decommissioning the nuclear
units occur, the equity cap shall also be 0%;
(iv) For purposes of this subsection, 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; and
(v) Should the market value of non-fixed income investments,
measured monthly, exceed the appropriate cap due to market fluctuations,
the PGC 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.
(vi) A PGC decommissioning trust shall not invest in
securities issued by the PGC collecting the funds or any of its affiliates
or any company providing security for the state assurance obligation;
however, investments of a PGC decommissioning trust may include commingled
funds that contain securities issued by the PGC if the securities
of the PGC constitute no more than 5.0% of the fair market value of
the assets of such commingled funds at the time of the investment.
(3) The following restrictions shall apply to all PGC
decommissioning trusts. Where a PGC has multiple trusts for a single
generating unit, the restrictions contained in this subsection apply
to all trusts in the aggregate for that generating unit.
(A) A PGC 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 any 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, that is not below
a "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 a "AAA" rating.
(B) 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 PGC shall as soon as practicable
and prudent to do so, increase the quality level of the equity portfolio
to the required level. A PGC decommissioning trust shall not invest
in equity securities where the issuer has a capitalization of less
than $100 million.
(C) The following guidelines shall apply to the investments
made through commingled funds. Examples of commingled funds appropriate
for investment by PGC decommissioning trusts include equity-indexed
funds, actively managed equity funds, balanced funds, bond funds,
and real estate investment trusts.
(i) The commingled funds should be selected consistent
with the goals of this section.
(ii) In evaluating the appropriateness of a particular
commingled fund, the PGC has the following duties, which shall be
of a continuing nature:
(I) A duty to determine whether the fund manager's
fee schedule for managing the fund is reasonable, when compared to
fee schedules of other such managers;
(II) A duty to investigate and determine whether the
past performance of the investment manager in managing the commingled
fund has been reasonable relative to prudent investment and PGC decommissioning
trust practices and standards; and
(III) A duty to investigate the reasonableness of the
net after-tax return and risk of the fund relative to similar funds,
and the appropriateness of the fund within the entire PGC decommissioning
trust investment portfolio.
(iii) The payment of load fees shall be avoided.
(iv) Commingled funds focused on specific foreign countries,
industries, or market sectors or concentrated in a few holdings shall
be used only as necessary to balance the trust's overall investment
portfolio mix.
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