Texas Administrative Code
Title 16 - ECONOMIC REGULATION
Part 2 - PUBLIC UTILITY COMMISSION OF TEXAS
Chapter 25 - SUBSTANTIVE RULES APPLICABLE TO ELECTRIC SERVICE PROVIDERS
Subchapter L - NUCLEAR DECOMMISSIONING
Section 25.301 - Nuclear Decommissioning Trusts
Universal Citation: 16 TX Admin Code § 25.301
Current through Reg. 50, No. 13; March 28, 2025
(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.
(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.
Disclaimer: These regulations may not be the most recent version. Texas may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.
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