(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.
(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 fund administrator has the following duties,
which shall be of a continuing nature:
(-a-)
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;
(-b-) 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
(-c-) 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 shall be
avoided.
(IV) Commingled funds
focused on specific market sectors or concentrated in a few holdings shall be
used only as necessary to balance the trust's overall investment portfolio
mix.