| (B) 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 must 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 must contain at least 20 different
issues of securities. Municipal securities and real estate investments
must be diversified as to geographic region.
(C) Qualified trusts. The utility may invest the decommissioning
funds by means of qualified or unqualified nuclear decommissioning
trusts; however, the utility must, to the extent permitted by the
Internal Revenue Service, invest its decommissioning funds in "qualified"
nuclear decommissioning trusts, in accordance with the Internal Revenue
Service Code §468A.
(D) 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.
(E) The use of leverage (borrowing) to purchase securities
or the purchase of securities on margin for the trust is prohibited.
(F) Investment limits in equity securities. The following
investment limits must 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), when the weighted
average remaining life of the liability exceeds 5 years, the equity
cap is 60%;
(ii) When the weighted average remaining life of the
liability ranges between 5 years and 2.5 years, the equity cap must
be 30%. Additionally, during all years in which expenditures for decommissioning
the nuclear units occur, the equity cap must also be 30%;
(iii) When the weighted average remaining life of the
liability is less than 2.5 years, the equity cap must 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; and
(v) Should the market value of non-fixed income investments,
measured monthly, exceed the appropriate cap due to market fluctuations,
the utility must, 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.
(G) A decommissioning trust must not invest in securities
issued by the electric utility collecting the funds or any of its
affiliates; however, investments of a decommissioning trust may include
commingled funds that contain securities issued by the electric utility
if the securities of the 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.
(3) Specific investment restrictions. The following
restrictions must apply to all decommissioning trusts. Where a utility
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) Fixed-income investments. A decommissioning trust
must 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 must 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 must have a quality level, measured
quarterly, 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 must be considered as having a "AAA" rating.
(B) Equity investments.
(i) At least 70% of the aggregate market value of the
equity portfolio, including the individual securities in commingled
funds, must 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 must 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 utility must 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 must not invest in equity
securities where the issuer has a capitalization of less than $100
million.
(C) Commingled funds. The following guidelines must
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.
(i) The commingled funds should be selected consistent
with the goals specified in paragraph (1) and the requirements in
paragraph (2) of this subsection.
(ii) In evaluating the appropriateness of a particular
commingled fund, the utility has the following duties, which must
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 utility
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 decommissioning
trust investment portfolio.
(iii) The payment of load fees must be avoided.
(iv) Commingled funds focused on specific market sectors
or concentrated in a few holdings must be used only as necessary to
balance the trust’s overall investment portfolio mix.
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