| (a) Duties of electric utilities.
(1) Each electric utility collecting funds for a nuclear
decommissioning trust must assure that the nuclear decommissioning
trust is managed so that the funds are secure and earn a reasonable
return; and, that the funds provided from the utility’s cost
of service, plus the amounts earned from investment of the funds,
will be available at the time of decommissioning.
(2) Each electric utility collecting funds for a nuclear
decommissioning trust must place the funds in an external, irrevocable
trust fund. The utility must appoint an institutional trustee and
may appoint an investment manager(s). Unless otherwise specified in
subsection (b) of this section, the Texas Trust Code controls the
administration and management of the nuclear decommissioning trusts,
except that the appointed trustee(s) need not be qualified to exercise
trust powers in Texas.
(3) The utility must retain the right to replace the
trustee with or without cause. In appointing a trustee, the electric
utility must have the following duties, which will be of a continuing
nature:
(A) A duty to determine whether the trustee’s
fee schedule for administering the trust is reasonable, when compared
to other institutional trustees rendering similar services, and meets
the requirement of subsection (c)(2)(A) of this section;
(B) A duty to investigate and determine whether the
past administration of trusts by the trustee has been reasonable;
(C) A duty to investigate and determine whether the
financial stability and strength of the trustee is adequate;
(D) A duty to investigate and determine whether the
trustee has complied with the trust agreement and this section as
it relates to trustees; and,
(E) A duty to investigate any other factors which may
bear on whether the trustee is suitable.
(4) The utility must retain the right to replace the
investment manager with or without cause. In appointing an investment
manager, the utility must have the following duties, which will be
of a continuing nature:
(A) 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 subsection
(c)(2)(A) of this section;
(B) A duty to investigate and determine whether the
past performance of the investment manager in managing investments
has been reasonable;
(C) A duty to investigate and determine whether the
financial stability and strength of the investment manager is adequate
for purposes of liability;
(D) 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,
(E) A duty to investigate any other factors which may
bear on whether the investment manager is suitable.
(b) Agreements between the electric utility and the
institutional trustee or investment manager.
(1) The utility must execute an agreement with the
institutional trustee. The agreement must include the restrictions
in subparagraphs (A) - (E) of this paragraph and may include additional
restrictions on the trustee. An electric utility must not grant the
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.
(A) 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.
(B) A trustee must have a continuing duty to review
the trust portfolio for compliance with investment guidelines and
governing regulations.
(C) A trustee must not lend funds from the decommissioning
trust with itself, its officers, or its directors.
(D) A trustee must 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.
(E) The agreement must comply with all applicable requirements
of the Nuclear Regulatory Commission.
(2) The utility must execute an agreement with the
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 must include the restrictions
set forth in subparagraphs (A) - (E) of this paragraph and may include
additional restrictions on the manager. An electric utility must 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.
(A) An investment manager must, in investing and reinvesting
the funds in the trust, comply with subsection (c) of this section.
(B) 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.
(C) An investment manager must have a continuing duty
to review the trust portfolio to determine the appropriateness of
the investments.
(D) An investment manager must not invest funds from
the decommissioning trust with itself, its officers, or its directors.
(E) The agreement must comply with all applicable requirements
of the Nuclear Regulatory Commission.
(3) A copy of the trust agreement, any investment management
agreement, and any amendments must be filed with the commission within
30 days after the execution or modification of the agreement, and
copies provided to the commission’s Legal Division and Rate
Regulation Division and the Office of Public Utility Counsel. All
previously executed agreements and amendments must be filed within
30 days of the effective date of this section.
(4) Within 90 days after the effective date of this
section, a utility that is a party to a trust agreement or an investment
management agreement that is not in compliance with this section must
revise the agreement to comply with this section.
(c) Trust investments.
(1) Investment portfolio goals. The funds should be
invested consistent with the following goals. The utility may apply
additional prudent investment goals to the funds so long as they are
not inconsistent with the stated goals of this subsection.
(A) 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.
(B) In keeping with prudent investment practices, the
portfolio of securities held in the decommissioning trust must be
diversified to the extent reasonably feasible given the size of the
trust.
(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 subparagraph (A) of this paragraph,
the investment emphasis when the remaining life of the liability,
as defined in paragraph (2)(F)(iv) of this subsection, 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) General requirements. The following requirements
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. 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) Fees limitation. The total trustee and investment
manager fees paid on an annual basis by the utility for the entire
portfolio including commingled funds must not exceed 0.7% of the entire
portfolio’s average annual balance.
(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.
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