[Federal Register Volume 60, Number 126 (Friday, June 30, 1995)]
[Rules and Regulations]
[Pages 34109-34126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15303]



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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM94-14-000; and Order No. 580]


Nuclear Plant Decommissioning Trust Fund Guidelines; Final Rule

Issued June 16, 1995.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Final rule.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
adopting rules setting forth the guidelines for the formation, 
organization and purpose of nuclear plant decommissioning trust funds 
(Fund) and for Fund investments. The rules will give Funds greater 
investment flexibility. The rules are intended to improve the returns 
earned on funds contributed through wholesale electric rates and thus 
decrease the amount collected from ratepayers for decommissioning.

EFFECTIVE DATE: This order is effective July 31, 1995. The 
incorporation by reference of a publication listed in the regulations 
is approved by the Director of the Federal Register as of July 31, 
1995.

FOR FURTHER INFORMATION CONTACT: Joseph C. Lynch (Legal Information), 
Federal Energy Regulatory Commission, Office of the General Counsel, 
825 North Capitol St., N.E., Washington, D.C. 20426, Telephone: (202) 
208-2128
James K. Guest (Accounting Information), Office of Chief Accountant, 
825 North Capitol Street, N.E., Washington, D.C. 20426, Telephone: 
(202) 219-2602

SUPPLEMENTARY INFORMATION: In addition to publishing the full text of 
this document in the Federal Register, the Commission also provides all 
interested persons an opportunity to inspect or copy the contents of 
this document during normal business hours in Room 3401, at 941 North 
Capitol Street, N.E., Washington, D.C. 20426.
    The Commission Issuance Posting System (CIPS), an electronic 
bulletin board service, provides access to the texts of formal 
documents issued by the Commission. CIPS is available at no charge to 
the user and may be accessed using a personal computer with a modem by 
dialing (202) 208-1397. To access CIPS, set your communications 
software to 19200, 14400, 12000, 9600, 7200, 4800, 2400 or 1200, full 
duplex, 

[[Page 34110]]
no parity, 8 data bits and 1 stop bit. The full text of this document 
will be available on CIPS for 60 days from the date of issuance in 
ASCII and WordPerfect 5.1 format. After 60 days the document will be 
archived, but still accessible. The complete text on diskette in 
WordPerfect format may also be purchased from the Commission's copy 
contractor, La Dorn Systems Corporation, also located in Room 3104, 941 
North Capitol Street, N.E., Washington, D.C. 20426.

Table of Contents

I. Introduction
II. Public Reporting Burden
III. Background
IV. Jurisdiction
    A. Background
    B. The Energy Policy Act
    C. The Federal Power Act
    D. Nuclear Regulatory Commission (NRC) regulation of nuclear 
facilities
    E. Managerial discretion
V. Treatment of Funds (and Earnings on Those Funds) Collected Prior 
to Effective Date of a Final Rule in This Proceeding
VI. Whether, and, if so, and Under What Circumstances the Commission 
Should Allow State Trust Fund Standards to Govern the Portion of 
Fund Contributions and Earnings That Are Related to Commission-
Jurisdictional Service
VII. General Guidelines
VIII. Reports
IX. The Alternatives
X. Conclusion regarding selection of Alternative
XI. Environmental Statement
XII. Regulatory Flexibility Act Certification
XIII. Information Collection Statement
XIV. Effective Date
    Before Commissioners: Elizabeth Anne Moler, Chair; Vicky A. 
Bailey, James J. Hoecker, William L. Massey, and Donald F. Santa, 
Jr.

I. Introduction

    On June 1, 1994, the Federal Energy Regulatory Commission 
(Commission) issued a Notice of Proposed Rulemaking (NOPR) in which the 
Commission proposed to amend 18 CFR Part 35 by adding a new Subpart E, 
setting forth guidelines for the formation, organization and purpose of 
Funds by public utilities and for the investment of Fund assets.
    The Commission proposed to adopt: (a) General guidelines for the 
formation, organization and operation of Funds; and (b) specific 
guidelines governing the quality and quantity of investments that Funds 
may make. The Commission requested comments on: (a) The proposed 
general and specific guidelines; (b) the meaning of the reasonable 
person standard under the general guidelines and under Alternatives 2 
and 3 of the specific guidelines; and (c) on two additional issues: (1) 
The treatment of monies collected in rates for decommissioning before 
the effective date of the final rule in this proceeding; and (2) 
whether, and, if so, under what circumstances, the Commission should 
allow Funds to follow State trust fund standards for that portion of 
contributions and earnings that are related to Commission-
jurisdictional service.\1\

    \1\ Nuclear Plant Decommissioning Trust Fund Guidelines; Notice 
of Proposed Rulemaking, 59 FR 28297 (June 1, 1994), IV FERC Stats. & 
Regs., Proposed Regulations para. 32,506 (1994).
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A. General Guidelines Governing the Organization and Operation of Funds

    The proposed general guidelines provide that the Fund must be an 
external trust fund and that the Trustee must be independent of the 
utility, have a net worth of at least $100 million, and exercise the 
care that a reasonable person would use in the same circumstances.
    Under the NOPR, the Trustee would: (a) Keep accurate and detailed 
records; (b) open the Fund to inspection and audit; (c) limit Fund 
investments to those that the Commission allows; and (d) not invest in 
any securities of the utility that owns the plant, or in the utility's 
affiliates, associates, successors or assigns.
    The Trustee would also use the Fund only to decommission the 
nuclear power plant to which the Fund relates, and to pay any 
administrative or other expenses of the Fund. If Fund balances exceed 
the amount necessary for plant decommissioning, the utility would 
refund the excess to its customers in a manner that the Commission will 
determine. The utility would deposit in the Fund at least quarterly all 
monies that it collects in Commission-jurisdictional rates to fund 
decommissioning. The proposed general guidelines also provided that 
establishing a Fund does not relieve a utility of any obligation that 
it may have to decommission a nuclear power plant.

B. Specific Guidelines Governing the Investment of Fund Monies

    The Commission proposed for consideration three alternative 
approaches to Fund investment:
    Alternative No. 1.: No change in present guidelines, i.e., 
continuation of ``Black Lung'' restrictions;
    Alternative No. 2.: A reasonable person standard with no 
restrictions; and
    Alternative No. 3.: A reasonable person standard with certain 
restrictions on the quality and quantity of Fund investments.
    The Commission requested comments on the appropriate alternative. 
With respect to the general guidelines and with respect to Alternatives 
2 and 3 of the specific guidelines, the Commission requested comments 
on the precise definition and content of the reasonable person 
standard.
    Thirty-three entities (Commenters) submitted comments.2 The 
Commission is now adopting a final rule promulgating regulations 
governing the formation, organization and operation of Funds and 
permissible Fund investments applicable to amounts collected from 
Commission-jurisdictional customers for nuclear decommissioning.3

    \2\ The Commenters are: Boatmen's Trust Company of Illinois and 
Boatmen's Trust Company (Boatmen's); Sanford C. Bernstein & Co. 
(Bernstein); Carolina Power & Light Company (Carolina Power & 
Light); Connecticut Department of Public Utility Control 
(Connecticut Commission); Consolidated Edison Company of New York 
(Consolidated Edison); Consumers Power Company (Consumers Power); 
Cooperatives (consisting of Old Dominion Electric Cooperative, North 
Carolina Electric Membership Cooperative, Oglethorpe Power 
Corporation and the National Rural Electric Cooperative 
Association); Duke Power Company (Duke); Edison Electric Institute 
(Edison Electric); Entergy Services, Inc. (Entergy - commenting on 
behalf of: Arkansas Power & Light Company, Gulf States Utilities 
Company, Louisiana Power & Light Company, and System Energy 
Resources, Inc.); Florida Power & Light Company, Texas Utilities 
Electric Company, and The Washington Public Power Supply System 
(Companies); Florida Public Service Commission (Florida Commission); 
Indiana Michigan Power Company (Indiana Michigan); Investment/Trust/
Utility Companies; Louisiana Public Service Commission (Louisiana 
Commission); Maine Yankee Atomic Power Company (Maine Yankee); 
Mellon Bank (Mellon); Michigan Public Service Commission (Michigan 
Commission); National Association of Regulatory Utility 
Commissioners (NARUC); New England Power Company (New England 
Power); New Hampshire Nuclear Decommissioning Finance Committee (New 
Hampshire Committee); New York State Department of Public Service 
(New York State); NISA Investment Advisors, L. L. C. (NISA); 
Northeast Utilities Service Company (Northeast Utilities); Nuclear 
Energy Institute (Nuclear Energy); Nuveen-Duff & Phelps Investment 
Advisors (Nuveen); Pennsylvania Public Utility Commission 
(Pennsylvania Commission); South Carolina Electric & Gas Company 
(South Carolina E&G); Union Electric Company (Union Electric); 
Virginia Electric and Power Company (Virginia Power); Wisconsin 
Electric Power Company (Wisconsin Electric); and Wisconsin Power and 
Light Company (Wisconsin Power and Light).
    Because the Investment Advisory and Trust Companies' and the 
Utility Companies' comments are virtually identical, we are treating 
their comments, although filed separately, as joint comments. 
Citations to these filings will track the page numbers in the 
Investment Advisory and Trust Companies' filing. Appendices A and B 
list the Investment Advisory and Trust Companies and the Utilities 
Companies respectively.

    Note: These Appendices will not appear in the Code of Federal 
Regulations.

    Although Companies filed their Comments one day past the filing 
deadline, we find good cause to accept them.
    \3\ The Funds' funding status as of December 31, 1993 appears in 
Appendix C. Please Note: This Appendix will not appear in the Code 
of Federal Regulations. 

[[Page 34111]]

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II. Public Reporting Burden

    The final rule codifies and clarifies the Commission's requirements 
regarding the organization and operation of Funds and the investment of 
Fund assets. The Commission estimates that the public reporting 
requirements for the information collection requirements contained in 
this rule average 4 hours per response. Public utilities will submit 
the information to the Commission on an annual basis. The Commission 
estimates that the number of respondents is 72. The burden estimate 
includes the time required to implement the standards, search existing 
data sources, gather and maintain the data needed, and complete and 
review the information. The annual burden associated with this 
information requirement is 288 hours. Interested parties may file 
comments regarding these burden estimates or any other aspect of this 
information collection requirement, including suggestions for reducing 
this burden, with the Federal Energy Regulatory Commission, 941 North 
Capitol Street, N.E., Washington, D.C. 20426 [Attention: Michael 
Miller, Information Services Division, (202) 208-1415, FAX (202) 208-
2425], and send them to the Office of Information and Regulatory 
Affairs of OMB (Attention: Desk Officer for the Federal Energy 
Regulatory Commission--(202) 395-3087; FAX: (202) 395-5167).

III. Background

    The Commission set forth the background of the development of its 
current guidelines for Fund investments in the NOPR. We will repeat 
that discussion here only to the extent necessary to provide a context 
for our summary and discussion of the comments received in response to 
the NOPR.
    In System Energy Resources, Inc. (System Energy I) 4 the 
Commission set forth the guidelines for public utilities to use in 
developing Funds and for investing Fund assets. The Commission based 
those guidelines, inter alia, upon the then applicable Internal Revenue 
Service (IRS) standards, which imposed on Fund investments the same 
investment restrictions that the Internal Revenue Code (IRC) imposed on 
Black Lung Disability Trusts.5 Subsequently, section 1917 of the 
Energy Policy Act of 1992,6 among other things, repealed the 
portion of 468A(e)(4) of the IRC that restricted the types of assets in 
which a Fund could invest and still qualify for tax benefits. On 
December 30, 1992, the IRS amended its regulations to reflect the 
statutory change.

    \4\ 37 FERC para. 61,261 (1986).
    \5\ 37 FERC at 61,726-728. Former IRC section 468A(e)(4) imposed 
investment restrictions on Fund investments by cross-referencing IRC 
section 501(c)(21), which allowed a deduction for a contribution 
only to those Black Lung Disability Trusts that met certain 
investment restrictions.
    \6\ Pub. L. No. 102-486, 106 Stat. 2776, 3024-25 (1992); see 26 
U.S.C. Secs. 468A(e) (1988) (Energy Policy Act).
    In response to section 1917 of the Energy Policy Act and the IRS's 
revised regulations, the Commission, in System Energy Resources, Inc. 
(System Energy II), 7 issued an order clarifying its policy 
regarding permissible Fund investments. In that order, the Commission 
continued to restrict Fund investments to those assets permissible for 
Black Lung Disability Trusts (Black Lung assets). The Commission's 
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order provided that:

    \7\ 65 FERC para. 61,083 (1993).
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    Except to the extent that a public utility can demonstrate in 
advance that a proposal [to deviate from the guidelines] offers 
equal or greater assurance of the availability of funds at the time 
of decommissioning and is at least as beneficial to consumers as the 
guidelines specified below, public utilities shall limit the 
investments in Nuclear Decommissioning Reserve Funds to: (1) public 
debt securities of the United States; (2) obligations of a state or 
local government which are not in default as to principal or 
interest; and (3) time or demand deposits in a bank, as defined in 
26 U.S.C. Sec. 581 or an insured credit union, within the meaning of 
12 U.S.C. Sec. 1752(7), located in the United States. [8]

    \8\ 65 FERC at 61,514. Duke/TU filed a Request for Rehearing but 
did not file comments. While the Commission accepts the Requests for 
Rehearing as comments in this proceeding, the citations in this 
section, for the sake of clarity, distinguish between the earlier-
filed Requests for Rehearing and the later-filed Comments.
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    A number of parties intervened in System Energy II, seeking 
rehearing of the Commission's decision to continue to require Funds to 
invest in Black Lung assets; in the alternative, the parties sought a 
rulemaking proceeding to decide Fund investment standards. In System 
Energy III,9 the Commission denied rehearing of System Energy II 
and commenced this rulemaking to adopt rules for the formation, 
organization and operation of Funds and to explore whether the 
Commission should retain its existing rules or adopt alternative rules 
governing Fund investments.10

    \9\ 67 FERC para. 61,228 (1994).
    \10\ The Commission accepted the pleadings filed in System 
Energy III as timely-filed comments in this rulemaking proceeding. 
See 59 FR 28299 n. 10, IV FERC Stats. & Regs., Proposed Regulations, 
at 32,851 n. 10. See also 67 FERC at 61,696.
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IV. Jurisdiction

A. Background

    In the NOPR, the Commission stated that it would treat the requests 
for rehearing of System Energy II (Requests for Rehearing) as comments 
in this proceeding.11 Several Requests for Rehearing challenged 
the Commission's jurisdiction over Fund investments, and some of the 
Commenters reference their Requests for Rehearing in their 
comments.12 Companies devoted its comments to the jurisdictional 
issue; it argues that the Commission has no jurisdiction to dictate the 
type of investments that a Fund may make.13

    \11\ 59 FR at 28299 n. 10, IV FERC Stats & Regs., Proposed 
Regulations at 32,851 n.10.
    \12\ E.g., Cooperatives Comments at 2-3; Duke Comments at 2; 
Edison Electric Comments at 26; Investment/Trust/Utility Companies 
Comments at 2 n.1.
    \13\ Companies Comments at, e.g., 2, 14.
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B. The Energy Policy Act

    The Commission adopted the Black Lung restrictions for Fund 
investments in System Energy I.14 In that order the Commission 
required ``that a utility adopt the [Black Lung] requirements in 
[Sec. 1.468A-5T of the IRS temporary regulations] or any subsequent 
regulations pursuant to section 468(A) of the IRC in designing its 
decommissioning fund.''15

    \14\ 37 FERC para. 61,261 (1986).
    \15\ 37 FERC at 61,726.
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    Once section 1917 of the Energy Policy Act repealed the Black Lung 
restrictions in the IRC on Fund investments, the IRS regulations had no 
further legal effect for internal revenue purposes and, on December 20, 
1992, the IRS modified its regulations to indicate that the Black Lung 
restrictions no longer applied.16 Edison Electric states that the 
Commission ``explicitly incorporated''17 the IRS regulations into 
its decision. From this premise, Edison Electric argues that:

    \16\ Nuclear Decommissioning Fund Qualification Requirements, 57 
FR 62198 (December 30, 1992).
    \17\ Edison Electric Request for Rehearing at 3 n.1.
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[R]estrictions of nuclear decommissioning reserve fund investment 
vehicles ceased when the Internal Revenue Code no longer applied 
such restrictions.[18]

    \18\ Id.

    Edison Electric is mistaken in arguing that Black Lung restrictions 
on Fund investments terminated when Congress repealed the portion of 
section 468A(e)(4) of the IRC that restricted the types of assets in 
which a Fund could invest and still qualify for tax benefits. In System 
Energy I the Commission did not adopt the IRS regulations implementing 
section 468A of the IRC; 

[[Page 34112]]
it merely set forth those regulations as a concise statement of the 
Black Lung requirements that the Commission (not the IRS) was imposing 
on Fund investments.
    The Commission's Fund investment guidelines could not depend upon 
and be co-terminus with IRC provisions or with IRS regulations, because 
the Commission draws its authority not from the IRC but from the 
Federal Power Act (FPA). The Commission's Black Lung guidelines for 
Fund investments remained in force regardless of Congress's amendment 
of section 468A of the IRC, because the Commission imposed those 
guidelines on public utilities through its authority under sections 205 
and 206 of the FPA, which Congress did not amend in the Energy Policy 
Act.
    In both System Energy II and System Energy III, the Commission 
confirmed the independence of its Black Lung guidelines from IRC 
section 468A. In System Energy II the Commission stated:

[W]e find that the former IRS regulations, limiting the type of 
investments in which a Nuclear Decommissioning Reserve Fund may 
invest, continue to be appropriate for decommissioning funds subject 
to our jurisdiction. We continue to believe that the security of a 
decommissioning fund is of primary importance. Thus, the Commission 
reaffirms the application of the * * * [Black Lung] guidelines to 
such funds * * *[ 19]

    \19\ 65 FERC at 61,513-514 (emphasis supplied).

    In System Energy III the Commission denied intervenors' requests 
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that it vacate its order in System Energy II, stating:

    Were we to vacate that order, there would be no guidelines 
governing Fund investments. Ensuring that there will be sufficient 
funds for the decommissioning of nuclear plants is too important to 
allow Funds to invest without guidelines. * * * [T]he guidelines 
that currently govern Fund investments, which are contained in 
System Energy II, will remain in effect until completion of the * * 
* [Final Rule]. [ 20]

    \20\ 67 FERC at 61,696 (emphasis added).

    In all of its System Energy cases, the Commission was plainly 
exercising its authority under the FPA. That authority remains 
unchanged by any modification of IRC section 468A.
    Duke maintains that, when removing Black Lung investment 
restrictions on Fund investments from the IRC, Congress intended to 
give Funds more leeway for their investments. 21 Edison Electric 
submits that the Energy Policy Act lowered the cost of decommissioning 
by lowering the tax rate on Funds and by allowing Funds to invest in 
common stocks and corporate debt, which have higher returns than Black 
Lung assets. According to Edison Electric, ``[t]hese two actions need 
to work in tandem to be highly effective in reducing [decommissioning] 
costs.'' 22 Cooperatives insist that the Commission may not re-
impose upon Fund investments the Black Lung guidelines that Congress 
has repealed. 23

    \21\ Duke Request for Rehearing at 3.
    \22\ Edison Electric Request for Rehearing at 6.
    \23\ Cooperatives states that ``[t]he Commission's peremptory 
reimposition of the very investment restrictions which were found by 
Congress to be unnecessarily inflexible flouts the legislature's 
considered and deliberate repeal of those restrictions.'' 
Cooperatives Request for Rehearing at 9. See also Investment/Trust/
Utility Companies Request for Rehearing at 13.
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    We disagree with Cooperatives, Duke and Edison Electric that in the 
Energy Policy Act ``Congress made a specific determination to ease 
prior investment restrictions[,]'' 24 and that the Commission no 
longer has the option of imposing Black Lung restrictions on Fund 
investments. In the Energy Policy Act Congress made no decision on the 
investment guidelines that Funds should follow; instead, Congress, as 
shown below, intended that Fund investment guidelines would be 
determined by public utility regulatory Commissions. Both the preamble 
to the IRS Final Rule modifying the IRS regulations to implement 
section 1917 of the Energy Policy Act (which modified IRC section 468A) 
and the statement of the House Ways and Means Committee Report on 
section 1917 of the Energy Policy Act support this view.

    \24\ Duke Request for Rehearing at 3.
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    In the preamble to the Final Rule, the IRS stated:

    The Treasury Department and the Internal Revenue Service believe 
that Congress intended the changes made by section 1917 to shift 
oversight of the types of investments made by nuclear 
decommissioning funds to the public utility commissions. [ 25]

    \25\ 57 FR 62198 (December 30, 1992).

    When commenting on the purpose of section 1917 of the Energy Policy 
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Act, the House Ways and Means Committee stated:

    The Committee believes that a nuclear decommissioning fund 
should be allowed to invest in any asset that is considered 
appropriate by the applicable public utility commission or other 
State regulatory body. [ 26]

    \26\ H.R. Rep. No. 474, 102d Cong., 2d Sess., pt. 6, at 47.

    As the statement of the House Ways and Means Committee indicates, 
Congress took no position in the Energy Policy Act on proper Fund 
investment policy. Rather, Congress referred resolution of that issue 
to the expertise of the public regulatory commissions. Funds can only 
invest in those assets that this Commission and the State Commissions 
(for that portion of Fund investments that is State-jurisdictional) 
``consider[] appropriate.'' 27

    \27\ Id.
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C. The Federal Power Act

    According to Duke/TU, ``[t]here is no provision * * * [in] the * * 
* [FPA] or [in] any other Act giving this Commission * * * specific 
authority over decommissioning trust fund dollars.'' 28 While we 
agree with Duke that there is no specific authority in the FPA giving 
the Commission specific authority over decommissioning trust fund 
dollars, we disagree that the Commission is without authority to set 
Fund requirements including investment requirements. We note that the 
FPA does not, for example, give the Commission specific authority to 
set requirements for the collection of dollars for construction work in 
progress (CWIP). Yet our CWIP regulations have been affirmed.29 We 
also note that our tax normalization regulations have been 
affirmed,30 as have our requirements for post retirement benefits 
other than pensions(PBOPs).31 Each of the requirements concern, as 
with Funds, the timing of the recovery of costs of jurisdictional 
service from ratepayers. Very simply, under sections 205 and 206 of the 
FPA,32 the Commission has sole jurisdiction to determine whether, 
how, and to what extent a public utility will obtain decommissioning 
funds through wholesale rates, just as it has authority to regulate the 
inclusion of all other costs of wholesale service.

    \28\ Duke/TU Request for Rehearing at 6. See also Companies 
Comments at 4-5, 14.
    \29\ Mid-Tex Electric Cooperative, Inc. et al. v. FERC, 864 F. 
2d 156 (D.C. Cir. 1988).
    \30\ Public Systems v. FERC, 709 F.2d 73 (D.C. Cir. 1983) 
(Public Systems).
    \31\ Town of Norwood v. FERC, ______ F. 3d ______ No. 93-1785 
(D.C. Cir. May 12, 1995) (Town of Norwood).
    \32\ 16 U.S.C. Secs. 824d, 824e.
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    The Commission does not have to allow public utilities to collect 
decommissioning funds in advance of their decommissioning 
expenditures.33 The Commission, as with its treatment of PBOPs, 
supra n.31, has allowed public utilities with nuclear units to collect 
decommissioning funds in advance of decommissioning expenditures 
because this method better matches the recovery of the costs of 
decommissioning with the ratepayers who used the nuclear facility's 
output. However, inclusion in rates of amounts to cover future 
decommissioning 

[[Page 34113]]
expenditures would not be just and reasonable without additional 
protection to ensure that the amounts will be used for their intended 
purpose.34 In addition, by allowing for collections from customers 
prior to cash expenditure needs, utilities can certify to the NRC that, 
upon termination of operations, funds will be available for 
decommissioning.35

    \33\ See Public Systems and Town of Norwood, supra.
    \34\ Most utilities likely will not make decommissioning 
expenditures for 20 years or longer.
    \35\ See 10 CFR 50.75(b).
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    By allowing public utilities with nuclear units to collect 
decommissioning funds in advance of decommissioning expenditures, the 
Commission has allowed the utilities to become fiduciaries for their 
ratepayers. The Commission did not have to allow this fiduciary 
relationship to form. But, having allowed the relationship to develop, 
the Commission undoubtedly has the authority to impose appropriate 
conditions upon the fiduciaries' use of ratepayers' funds to ensure 
that Fund monies will be available for their intended purpose, i.e., to 
cover the costs of decommissioning.
    The bulk of decommissioning expenditures may not take place until 
many years in the future.36 If the Commission did not have 
authority to regulate Fund organization, operation and investments, 
there would be no one to ensure the security of the many millions of 
dollars that, by the time decommissioning takes place, the utilities 
will have collected from their wholesale ratepayers and invested as 
fiduciaries for their ratepayers.

    \36\ See, e.g., Edison Electric Comments at 11 (use of SAFSTOR 
method of decommissioning could extend the need for a majority of 
funds about 50 years or so); Nuclear Energy Institute Comments at 2 
(in the case of the SAFSTOR option the amount of time before 
decommissioning would actually commence could be as much as 50 years 
after the plant has been retired); Consumers Power Comments at 5 
(``Because of the lack of storage capacity for spent nuclear fuel, 
complete decommissioning * * * may not occur as of the license 
expiration date.'').
    Companies cite Board of Public Utility Commissioners v. New York 
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Telephone Company 37 to the effect that:

    \37\ 271 U.S. 23 (1926) (New York Telephone).

    Customers pay for service, not for the property used to render 
it. * * * Property paid for out of monies received for service 
belongs to the company, just as does that purchased out of proceeds 
of its bonds and stock. [ 38]

    \38\ 271 U.S. at 32.

    From this premise, Companies argue that, while the Commission has 
authority to set just and reasonable rates, it has no jurisdiction over 
the monies collected for service provided.39

    \39\ Companies Comments at 4-5, 14.
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    Companies are mistaken. Although it is true that the monies that a 
company collects for the services it renders belongs to the company, 
that is not the situation that the Final Rule addresses. We are here 
setting requirements not for monies collected for services rendered, 
but for monies that the Company is investing on behalf of its 
ratepayers to meet a future cash expenditure obligation, i.e., 
decommissioning. In this instance, until the company meets its 
decommissioning liability, it is holding the monies that it collects 
for this purpose in trust for its ratepayers. New York Telephone is, 
therefore, inapposite. Under its authority to establish just and 
reasonable rates, the Commission has jurisdiction to ensure that public 
utilities prudently invest the monies that they are holding in trust 
for their ratepayers, so that the amounts that the public utilities 
collect will be available when the decommissioning obligation comes 
due.

D. Nuclear Regulatory Commission (NRC) Regulation of Nuclear Facilities

    Duke argues that by adopting Black Lung guidelines for Fund 
investments the Commission has exceeded its authority. Duke maintains 
that ``the * * * [NRC], not the Commission, is the agency charged with 
assuring that adequate funds are available for decommissioning.'' 
40 Although Duke concedes that ``[t]he Commission has the 
authority to * * * determine whether recovery of a utility's investment 
funds will be allowed in wholesale rates[,]'' 41 Duke maintains 
that, by imposing Black Lung requirements on Fund investments, ``the 
Commission has attempted to establish a rule or policy in an area in 
which the NRC has responsibility and primary concern.'' 42

    \40\ Duke Request for Rehearing at 4. See also Companies 
Comments at 10-14.
    \41\ Id. at 4-5.
    \42\ Id. at 5.
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    We do not agree with Duke that, in setting parameters for Fund 
investments, we are invading an area in which the NRC has primary 
jurisdiction.
    The Commission's jurisdiction over the utilities' collection of 
monies for Fund investments does not conflict with the NRC's 
responsibility, which is, inter alia, to protect the radiological 
health and safety of the public. Although the NRC requires public 
utilities with nuclear assets to provide reasonable assurances that the 
necessary funds will be available for decommissioning, the NRC's rules 
do not address the issue of how public utilities will obtain those 
funds through rates. For example, the NRC's calculations of the minimum 
amounts necessary to decommission a facility do not address such issues 
as intergenerational equity, rate of and procedures for fund 
collections, taxation effects, regulatory accounting, responsiveness of 
collection schedules to changing conditions, site restoration, or the 
additional cost, beyond that necessary to terminate the license, and of 
demolishing equipment and structures that are not radioactive.43 
These are all concerns intimately associated with decommissioning; and 
they are all exclusively the province of this Commission and state 
regulatory commissions. Accordingly, this Commission has ample 
authority to set reasonable parameters for the collection of 
decommissioning funds in wholesale rates.

    \43\ See 10 CFR 50.75, n.1.
    The NRC explicitly recognizes the Commission's authority over the 
collection of decommissioning funds through wholesale rates. The NRC 
regulations governing reporting and recordkeeping for decommissioning 
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planning acknowledge that:

    Funding for decommissioning of electric utilities is also 
subject to the regulation of agencies (e.g., Federal Energy 
Regulatory Commission * * * and State Public Utility Commissions) 
having jurisdiction over rate regulation. The requirements of this 
section * * * are in addition to, and not in substitution for, other 
requirements * * * [ 44]

    \44\ 10 CFR 50.75(a).
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    The issue in this proceeding, then, is not whether the Commission 
can continue to impose Black Lung restrictions on Fund investments, the 
issue is whether it should continue to do so.

E. Managerial Discretion

    Duke/TU submits that, since there are now alternative investment 
opportunities that do not result in the loss of the current 
deductibility of Fund collections, it is primarily management's 
responsibility to assure the availability of funds while minimizing the 
burden on current customers by achieving maximum return.45 Duke/TU 
argues that the Commission has no authority to promulgate guidelines 
for Fund investment, but must defer to management decisions, which, 
absent substantial evidence to the contrary, the Commission must 
presume to be prudent.46

    \45\ Duke/TU Request for Rehearing at 10-11.
    \46\ Duke/TU Request for Rehearing at 11.
---------------------------------------------------------------------------

    We disagree. Citing West Ohio Gas Company v. Public Utilities 
Commission 

[[Page 34114]]
of Ohio 47 and New England Power Company,48 Duke/TU refers 
---------------------------------------------------------------------------
to:

    \47\ 294 U.S. 63 at 72 (1935).
    \48\ 31 FERC para. 61,047 (1985), aff'd, sub nom., Violet v. 
FERC, 800 F.2d 280 (1st Cir. 1986)(New England Power).
---------------------------------------------------------------------------

[T]he longstanding practice and tradition which holds that 
management decisions are presumed to be prudent until substantial 
evidence is presented indicating imprudence. [ 49]

    \49\ Duke/TU Request for Rehearing at 11.

    What Duke/TU fails to recognize is that the development and 
management of Funds differs from ordinary day-to-day management 
decisions. Decommissioning is a cost,50 which public utilities 
must fully fund by accumulating funds through wholesale rates over a 
long period of time. The NRC and the Commission work in tandem in this 
area. Although it is the NRC that properly insists on the assurance 
that there will be sufficient monies to cover decommissioning 
liabilities, it is the Commission that determines how public utilities 
will accumulate those monies through wholesale rates. Because 
decommissioning vitally affects the public health and safety, ``the 
security of a decommissioning fund is of primary importance.'' 51 
The Commission does not intend to relinquish its regulatory oversight 
in this area through over-broad deference to management.

    \50\ Under the Commission's existing Uniform System of Accounts 
requirements, decommissioning is an estimated removal cost for plant 
facilities, which is recovered as a component of net salvage in 
determining depreciation expense. Removal costs are recognized on an 
accrual basis on the balance sheet over the life of the asset. The 
Financial Accounting Standards Board has recently undertaken a 
project which, among other things, examines whether a liability 
should be recognized for the entire cost of decommissioning at 
approximately the time the asset is placed in service.
    \51\ 65 FERC at 61,513.
---------------------------------------------------------------------------

    Duke/TU refers to:

[T]he longstanding regulatory principle that utility commissions are 
not authorized to make investment decisions and must defer to 
management in this area. [ 52]

    \52\ Duke/TU Request for Rehearing at 11.

    However, the case to which Duke/TU refers, New England Power, has 
to do not with the investment of ratepayer funds to achieve the twin 
criteria of safety and maximum return on such funds, but rather with 
whether a public utility can recover the cost of an abandoned plant. 
New England Power had nothing to do with the investment of capital to 
fund decommissioning liability.
    Moreover, New England Power does not say, as Duke/TU suggests, that 
utility commissions must give utility managers unfettered discretion to 
invest funds provided by ratepayers in advance of the utility's 
spending dollars.53 What New England Power says is that:

    \53\ Duke/TU Request for Rehearing at 11.

[M]anagers of a utility have broad discretion in conducting their 
business affairs and in incurring costs necessary to provide 
services to their customers. In performing our duty to determine the 
prudence of specific costs, the appropriate test to be used is 
whether they are costs which a reasonable utility management * * * 
would have made, in good faith, under the same circumstances, and at 
the relevant point in time. [54]

    \54\ 31 FERC at 61,084, as quoted at 800 F.2d 282-83 (emphasis 
supplied and deleted).

    New England Power does not refer to investments of ratepayer 
advanced funds, but to the recovery of specific costs necessary to 
provide service to customers. Even in this restricted area, 
management's discretion is broad; it is not unlimited.55

    \55\ Id.
---------------------------------------------------------------------------

    For public utilities subject to our jurisdiction, we use the 
prudence test to determine whether a utility may recover its expenses 
in providing jurisdictional service.56 Fund investment guidelines 
govern how a Fund may invest monies obtained from ratepayers in advance 
of the need to pay for decommissioning work. The two are very 
different. The prudence test is retrospective; the utility has expended 
funds or committed to expend funds that it may recover from ratepayers 
if it has acted prudently. Fund investment guidelines are prospective; 
the utility is acting as a fiduciary to ratepayers from whom it has 
obtained funds to pay for decommissioning activity that will occur in 
the future. The Commission does not have to allow present collections 
to meet future expenditures. But, if it does, then it is well within 
the Commission's province to insist on appropriate guidelines for a 
public utility's management of monies that it is holding in trust for 
its ratepayers.

    \56\ 800 F.2d at 282.
---------------------------------------------------------------------------

V. Treatment of Funds (and Earnings on Those Funds) Collected Prior to 
Effective Date of a Final Rule in This Proceeding

    Several Commenters ask that the Commission either make the Final 
Rule prospective only or allow for a sufficient transition period so 
that utilities may conform Fund investments to the Final Rule without 
forced-liquidation losses.57 For example, Carolina Power & Light 
states that any immediate liquidation of securities to comply with new 
investment guidelines will most likely result in a significant 
premature tax payment. It recommends that, to minimize the payments of 
taxes and to maximize the after-tax return of the Fund, the final rule 
should only apply to fund collections taking place after the effective 
date of the final rule.58 According to Virginia Power, it was not 
apparent that the Commission's investment guidelines set forth in 
System Energy I were applicable to non-qualified trusts, given the 
Commission's reliance on the language in the Internal Revenue Code, 
section 468A. Virginia Power suggests that, because of what it sees as 
an ambiguity in the Commission's language, certain utilities may have 
invested non-qualified trust funds in other than Black Lung assets 
(e.g., equities).59

    \57\ Carolina Power & Light Comments at 13; Edison Electric 
Comments at 2, 26 and n.21 (Commission should allow time for prudent 
transition to new guidelines); Investment/Trust/ Utility Companies 
Comments at 16; Maine Yankee Comments at 5-6; South Carolina E&G 
Comments at 2; Pennsylvania Commission Comments at 18-19; Virginia 
Power Comments at 3; Wisconsin Electric Comments at 3.
    \58\ Carolina Power & Light Comments at 13.
    \59\ Virginia Power Comments at 3.
---------------------------------------------------------------------------

    Virginia Power speculates that utilities may also have begun 
investing qualified trust funds in assets other than Black Lung assets 
when Congress passed the Energy Policy Act.60

    \60\ Id. at 3.
---------------------------------------------------------------------------

Commission Ruling

    We do not agree that our order in System Energy I was at all 
unclear. Nor do we agree that the Energy Policy Act changed the System 
Energy I investment requirements and thereby gave public utilities a 
license to invest in other than Black Lung instruments.61 However, 
our adoption of the reasonable investor standard for Fund Investments 
moots this issue since the standard applies to all fund assets.

    \61\ See discussion under Jurisdiction, supra.
---------------------------------------------------------------------------

VI. Whether, and, if so, and Under What Circumstances the Commission 
Should Allow State Trust Fund Standards to Govern the Portion of Fund 
Contributions and Fund Earnings That Are Related to Commission 
Jurisdictional Service

    Several Commenters recommend that, when a State having jurisdiction 
over a utility's retail rates has Fund investment guidelines and the 
Commission-jurisdictional portion of a Fund is relatively small (25 
percent or less) in comparison to the State-regulated portion, the 
Commission should either adopt or defer to the State's Fund investment 
guidelines.62 These 

[[Page 34115]]
Commenters emphasize the State's interest in ensuring that Fund 
investments achieve the highest possible returns consistent with 
prudence and the administrative costs that utilities would avoid by not 
having to maintain separate Funds for State and Commission-
jurisdictional portions of their decommissioning collections. Union 
Electric recommends that, when more than one State regulates a Fund, 
the Commission should afford the utility the option of selecting which 
State standards to apply to the Commission Fund.63

    \62\ E.g., Edison Electric Comments at 3; Entergy Comments at 5; 
Indiana Michigan Comments at 9; Investment/Trust/Utility Companies 
Comments at 14-15; Louisiana Commission Comments at 12-13; NARUC 
Comments at 6; New Hampshire Committee Revised Comments at 1; 
Northeast Utilities Comments at 21; Union Electric Comments at 2; 
Virginia Power Comments at 3; Wisconsin Electric Comments at 3.
    \63\ Union Electric at 2.
---------------------------------------------------------------------------

    On the other hand, New England Power asks the Commission not to 
adopt State standards for the investment of Commission-jurisdictional 
Fund contributions. New England Power submits that there should be one 
set of national standards for the investment of Commission-
jurisdictional Fund contributions rather than many different standards, 
which may support various State policies.64

    \64\ New England Power Comments at 2-3.
---------------------------------------------------------------------------

Commission Ruling

    We will not adopt State standards for the Commission-jurisdictional 
portion of decommissioning Funds. We agree with New England Power that 
there should be but one national, uniform set of regulations for Fund 
investments concerning wholesale sales of electric energy in interstate 
commerce by public utilities. If there are special circumstances that 
dictate the use of State guidelines for a specific Fund, the utility 
may bring those circumstances to our attention. We will consider 
allowing the application of State guidelines in specific instances on a 
case-by-case basis.
VII. General Guidelines

    In the NOPR, the Commission proposed general guidelines for the 
formation, organization and purpose of Funds. Virginia Power suggests 
that we narrow the focus of the guidelines, lest we inadvertently 
summarily prohibit other decommissioning alternatives available to 
nuclear utilities under the NRC's regulations governing reporting and 
recordkeeping for decommissioning planning.65 Besides an external 
sinking fund, the NRC's guidelines allow nuclear utilities to fund 
decommissioning by prepayment, surety, insurance or ``other 
guarantee.'' 66

    \65\ Virginia Power Comments at 1-2.
    \66\ 10 CFR 50.75(e)(1)(i)(iii).
---------------------------------------------------------------------------

    Many of the other Commenters seek other modifications of the 
proposed general guidelines. For example, Commenters ask the Commission 
to clarify what it means by a ``Trustee.'' Commenters state that, under 
the trust agreement establishing an external Fund, the utility appoints 
the Trustee to perform certain functions, including recordkeeping, 
valuation and custodial services. According to Commenters, the utility 
may also grant the Trustee the responsibility to invest the Fund's 
assets. Alternatively, the utility may retain the investment 
responsibilities, or may appoint an outside investment advisor to 
direct the Trustee in investing the Fund's assets. Commenters suggest 
that the Commission use the term ``fiduciary'' to designate the party 
with investment responsibility.67

    \67\ Edison Electric Comments at 7-8, 28-29; Investment/Trust/ 
Utility Companies Comments at 10-11; Mellon Comments at 1-2.
---------------------------------------------------------------------------

    Commenters recommend that the $100,000,000 net worth requirement 
for a Trustee include the assets of the Trustee's parent corporation 
and affiliates.68 Commenters also maintain that a public utility 
should be able to audit a fund without first notifying the Commission 
and that the Commission should not be able to direct a utility to 
perform an audit or inspection, as the Commission has proposed to do in 
the general guidelines.69

    \68\ Boatmen's Comments at 1; Edison Electric Comments at 31; 
Union Electric Comments at 1-2. Michigan Commission asks the 
Commission to provide that the Trustee shall have assets of at least 
five times the total of the decommissioning funds that it manages, 
but in no event less than $100 million. Michigan Commission Comments 
at 3.
    \69\ Indiana Michigan Comments at 11; Virginia Power Comments at 
2. Virginia Power states that a provision allowing the Commission to 
direct a public utility to perform an audit or inspection of the 
Fund is unnecessary, because the Commission has the ability to 
conduct its own audits of Fund operations at any time, and will 
receive annual statements showing all Fund activity. Virginia Power 
Comments at 2.
---------------------------------------------------------------------------

    With respect to Fund surpluses and shortages, Commenters recommend 
that the Commission: (a) Give utilities the right to bill current or 
past customers for Fund shortages; 70 (b) provide for the 
equitable distribution of excess Fund balances between shareholders and 
ratepayers in those instances in which a utility has contributed 
shareholder money to the Fund; 71 (c) provide that the company may 
receive some portion of any Fund surplus resulting from superior Fund 
and/or decommissioning-cost management; 72 and (d) allow a company 
with multiple Funds to retain any excess in a particular Fund until 
there is no possibility of a decommissioning deficiency in another Fund 
of the same company.73

    \70\ Edison Electric Comments at 31; Indiana Michigan Comments 
at 11-12; Wisconsin Electric Comments at 3.
    \71\ Edison Electric Comments at 31; Entergy Comments at 2; 
Indiana Michigan Comments at 11; Investment/Trust/Utility Companies 
Comments at 13; Wisconsin Electric Comments at 3.
    \72\ Edison Electric Comments at 31-32.
    \73\ Indiana Michigan Comments at 12.
---------------------------------------------------------------------------

    With respect to Fund management, Commenters suggest that the 
Commission: (a) Amend its proposed general guidelines to except from 
the ``exclusion of affiliates provision'' investments in broad market 
indexes or other mutual funds; 74 (b) revise its rules regarding 
quarterly deposits to the Funds to allow for annual deposits except 
when annual contributions would exceed a million dollars; 75 (c) 
provide that a fiduciary's standard of care under this section is the 
same standard of care that the Commission adopts under the specific 
guidelines for Fund investments; 76 (d) state that the Final Rule 
applies only to Commission-jurisdictional Funds; 77 (e) delete the 
term ``associates'' from the investment provisions because the meaning 
is unclear; 78 and (f) state that a fiduciary (other than a 
utility) does not have any responsibility to ensure that the amount of 
monies that a Fund contains are adequate to pay for the decommissioning 
liability.79

    \74\ Northeast Utilities Comments at 15. Northeast Utilities 
states that this exception is particularly important in the case of 
a Fund for jointly-owned units, where a dozen or more different 
utilities can be owners. Id.
    \75\ Entergy Comments at 2; Nuclear Energy Comments at 3; 
Investment/Trust/Utility Companies Comments at 14.
    \76\ Investment/Trust/Utility Companies Comments at 12.
    \77\ Edison Electric Comments at 30.
    \78\ Investment/Trust/Utility Companies Comments at 12.
    \79\ Investment/Trust/Utility Companies Comments at 17.
---------------------------------------------------------------------------

    Edison Electric states that the references to tax maximization and 
minimization are unclear, and will be unnecessary if the Commission 
adopts the reasonable person investment standard with no 
restrictions.80 Edison Electric suggests, among other things, that 
the Commission change the term ``liquidity,'' used in the section of 
the proposed rules regarding after-tax earnings, to state: ``giving due 
consideration to the timing of the need for the funds.'' 81 
According to Edison Electric, this change would define the 

[[Page 34116]]
type of liquidity needed. Investment/Trust/Utility Companies suggests 
language that, it submits, would clarify the Commission's intent 
regarding obtaining optimum tax treatment for the Fund.82

    \80\ Edison Electric Comments at 29-30. Edison Electric refers 
to the ``ERISA prudent person standard,'' but it is clear from the 
context that Edison Electric is referring to proposed Alternative 
No. 2.
    \81\ Edison Electric Comments at 32.
    \82\ Investment/Trust/Utility Company Comments at 14.
---------------------------------------------------------------------------

    Investment/Trust/Utility Companies asks the Commission to define 
the term ``costs of decommissioning the nuclear power plant,'' and 
offers a definition of the term.83

    \83\ Id. at 12-13.
    Maine Yankee states that, in the case of a public utility having 
but a single asset, which is a nuclear generating unit, the Commission 
should consider that all costs associated with unwinding the affairs of 
the company are decommissioning costs.84

    \84\ Maine Yankee Comments at 5.
---------------------------------------------------------------------------

    Investment/Trust/Utility Companies suggests that the Commission 
does not intend to require that a utility establish a separate Fund for 
Commission-jurisdictional decommissioning collections, but only to set 
aside a percentage of the assets of a Fund equal to the Commission-
jurisdictional portion of the total balance of the Fund. Investment/
Trust/Utility Companies asks the Commission to explain that it is this 
portion of the Fund that the utility must administer and invest 
according to the Commission's rules.85

    \85\ Investment/Trust/Utility Companies Comments at 11.
---------------------------------------------------------------------------

    Investment/Trust/Utility Companies also asks the Commission to 
state that a utility may establish both qualified and non-qualified 
funds with respect to a utility's interest in a specific nuclear plant. 
It explains that a qualified fund is an external trust established 
under section 468A of the Internal Revenue Code (Code). It states that, 
because there are limits in Code section 468A on amounts that a utility 
can contribute to a qualified fund, many utilities also establish one 
or more external, non-qualified funds to hold additional 
decommissioning collections from customers.86 Investment/Trust/
Utility Companies recommends that the Commission state whether it 
intends the Final Rule to apply to both ``qualified'' (under Code 
section 468A) and non-qualified funds.87

    \86\ Id. at 11 and n.4.
    \87\ Id. at 16.
---------------------------------------------------------------------------

    The Michigan Commission asks that the Commission amend the proposed 
general guidelines that refer to specific investment limitations to 
provide that:

    (7) [T]he Trustee shall not invest in any securities of the 
subsidiaries, affiliates, or associates or their successors or 
assigns of the utility for which it is managing the Fund, or any 
utility, which, on the date of the investment, has a nuclear plant 
on its books. [88]

    \88\ Michigan Commission Comments at 3.
---------------------------------------------------------------------------

Commission Rulings

    Although Virginia Power suggests that public utilities might fund 
decommissioning by some mechanism other than a Fund,89 no other 
Commenter has proposed that public utilities might fund decommissioning 
in any manner other than by establishing a Fund. The NRC's regulations 
governing reporting and recordkeeping for decommissioning planning 
provide that electric utilities must certify that, upon termination of 
operations, funds will be available for decommissioning.90 
Electric utilities must supply the NRC with a copy of the financial 
instruments that support the certification.91 Electric utilities 
may give adequate assurance that funds will be available for 
decommissioning through either: (a) Prepayment; (b) an external sinking 
fund; or (c) surety, insurance or other guarantee.92 The NRC's 
regulations provide that an external sinking fund is:

    \89\ Virginia Power Comments at 1-2.
    \90\ 10 CFR 50.75(b) and (e)(1)(ii).
    \91\ 10 CFR 50.75(b).
    \92\ 10 CFR 50.75(e).
---------------------------------------------------------------------------

a fund established and maintained by setting funds aside 
periodically in an account segregated from licensee assets and 
outside the licensee's administrative control in which the total 
amount of funds would be sufficient to pay decommissioning costs at 
the time termination of operation is expected. An external sinking 
fund may be in the form of a trust, escrow account, government fund, 
certificate of deposit or deposit of government securities. 
[93]

    \93\ 10 CFR 50.75(e)(1)(ii).
---------------------------------------------------------------------------

    The Comments indicate that all of the electric utilities that have 
nuclear units have elected to furnish the requisite financial assurance 
to the NRC by establishing external sinking funds. No one suggests 
otherwise and we have no reason to believe that any public utilities 
are funding the decommissioning expense by any mechanism other than 
through an external sinking fund.
    The general guidelines governing the formation, organization and 
purpose of external Funds will apply to all public utilities that 
employ such a device. However, the guidelines will not exclude any 
options that may be theoretically possible but have not currently been 
selected by public utilities. We see no reason, then, to restrict the 
application of the guidelines. Accordingly, we will reject Virginia 
Power's recommendation that in the Final Rule we more narrowly focus 
the application of the general guidelines.94

    \94\ See Virginia Power Comments at 1-2.
---------------------------------------------------------------------------

    If public utilities are using or intend to use any of the other 
options that the NRC allows for funding the decommissioning expense, 
they should promptly bring those alternatives to our attention.
    We appreciate the Commenters' observation that, under a trust 
agreement establishing a Fund, persons other than a Trustee, such as an 
investment advisor or an investment fund manager, may invest the Fund's 
assets, either directly or by directing the Trustee's investments. To 
clarify, we will use the term ``fiduciary'' throughout the remainder of 
this Final Rule to refer to both the person(s) or institution(s) that 
perform the trustee and investment management functions, except where 
otherwise noted.
    As the Commenters have made clear, trust fiduciaries have various 
duties. The primary duty of the Trustee is custodial. The Trustee 
holds, manages, cares for and protects Fund assets, maintains records 
of the Fund's investment activities, receives and delivers securities 
in accordance with the instructions of the investment managers and 
collects interest and dividends. Another related duty of a Trustee is 
disbursement of funds. The Trustee makes distributions from the Fund 
for decommissioning costs, administrative costs and fees in accordance 
with the trust agreement, and periodically furnishes statements to the 
utility setting forth the value of the Fund. A third duty of trust 
fiduciaries is investment management; this duty may be performed by the 
Trustee or by another fiduciary. We emphasize, however, that the 
utility may not serve as investment manager. The investment manager 
must be independent of the utility and its subsidiaries, affiliates, 
and associates. As explained below, the utility may provide written 
general investment policy, but it may not engage in day-to-day 
management of the Fund. The investment manager directs and implements 
the Funds' investment program, and executes contracts, agreements and 
other documents necessary to manage and invest the Fund's 
assets.95

    \95\ Edison Electric Institute Comments at 7-8; Mellon comments 
at 1-2.
    The utility, as sponsor of the decommissioning fund, has overall 
responsibility to direct the investment program, and appoint trustees 
and investment managers. We would expect utilities to communicate 
regularly with the fiduciaries they appoint. For 

[[Page 34117]]
example, a utility would need to supply to the fiduciary, and to 
regularly update, essential information about the nuclear unit covered 
by the Trust Fund Agreement, including its description, location, 
expected remaining useful life, the decommissioning plan that the 
utility proposes to follow, the utility's liquidity needs once 
decommissioning begins, and any other information that the fiduciary 
would need to construct and maintain, over time, a sound investment 
plan. A prudent utility would also monitor the fiduciary's performance 
and, if necessary, replace the fiduciary if the fiduciary is not 
properly performing its assigned responsibilities.
    To ensure that the fund assets are not available to creditors in 
the event of the bankruptcy of the utility, the Trust assets must be 
segregated from those of the utility and outside the utility's 
administrative control. There must be a written trust agreement and the 
fiduciary or fiduciaries, in fullfilling the various duties, must be 
completely separate and apart from the utility.\96\ The utility may 
provide general investment policies, but it may do so only in writing 
and it may not engage in the day-to-day management of the Fund or 
mandate or itself make individual investment decisions. These criteria 
accord with the NRC's regulations and the NRC Staff guidelines on the 
subject of ensuring the availability of funds for decommissioning 
nuclear reactors.\97\

    \96\ Cf. In Re: Columbia Gas Systems, Inc., et al. 997 F.2d 1039 
(3rd Cir. 1993).
    \97\ 10 CFR 50.75(e)(1)(ii); U.S. Nuclear Regulatory Commission, 
Regulatory Guide: Assuring the Availability of Funds for 
Decommissioning Nuclear Reactors (1990) at 1.159-4.
---------------------------------------------------------------------------

    The $100,000,000 net worth requirement for a fiduciary ensures that 
the fiduciary will have the necessary assets to adequately self-insure 
its performance. In calculating the $100,000,000 net worth requirement, 
we will take into account the net worth of the fiduciary's parent 
corporation and affiliates only if those entities agree to act as 
guarantors for the fiduciary with regard to its Fund responsibilities. 
If they do not, then their assets are irrelevant to the purpose of the 
$100,000,000 net worth requirement, since those assets would not be 
available to insure the fiduciary's performance.
    As an integral part of our oversight function, we will retain the 
requirement that a utility notify the Commission before auditing a Fund 
and we will retain our authority to direct a utility to audit or 
inspect the Fund. There is no need to decide Virginia Power's position 
that the provision allowing the Commission to direct a public utility 
to perform an audit or inspection of the Fund is unnecessary since we 
believe it is appropriate in any event to clearly specify this 
requirement. Even though we will receive annual statements showing all 
Fund activity, we must ensure that the statements are correct. We can 
conduct our own audits. But the Fund oversight function imposes an 
additional burden on the Commission's resources and it may be necessary 
to direct public utilities to perform the audits or inspections and 
forward the results of their monitoring to the Commission.
    We will not provide blanket authority for utilities to bill current 
and past customers for Fund shortages. We hope that there will be no 
Fund shortages and that utilities are collecting all of their wholesale 
decommissioning costs through the rates that they have on file with 
this Commission. However, the actual, total cost of decommissioning 
will not be known for years. Whether Funds' assets are sufficient, 
insufficient, or just right will not be known until that time. 
Accordingly, we will consider requests to bill current and past 
customers for Fund shortages on a case-by-case basis.
    We will not allow utilities to pay shareholders out of Fund assets. 
It is the ratepayers who are paying for decommissioning through their 
wholesale rates. Commenters have submitted no evidence that 
shareholders have contributed to meeting decommissioning expenses. 
Decommissioning expenses are costs of doing business for which public 
utilities are entitled to reimbursement from their ratepayers.
    Edison Electric asks that we allow a company to receive some 
portion of any Fund surplus resulting from superior Fund and/or 
decommissioning-cost management.\98\ Edison Electric does not explain 
what it considers to be superior Fund and/or decommissioning-cost 
management and offers no norm against which to measure such 
management.\99\ What Edison Electric overlooks is that ratepayers 
should receive the best Fund and decommissioning-cost management 
available as a matter of course. Companies should not profit from 
providing the service that they should provide in the normal course of 
conducting their business.

    \98\ Edison Electric Comments at 31-32.
    \99\ As discussed above, utilities will not manage the Funds. 
That will be the role of the independent fiduciaries.
---------------------------------------------------------------------------

    We will adopt Commenters' suggestion and not allow a company with 
multiple Funds to retain any excess in a particular Fund until there is 
no possibility of a decommissioning deficiency in another Fund of the 
same company.\100\ Companies must meet Fund deficiencies on a unit-by-
unit basis. Funds are not generic. Each Fund can only be unit-specific, 
because the fiduciary duty of Fund managers can only be to the 
ratepayers who have contributed to the cost of decommissioning the 
specific unit for which it manages the Fund. A particular fiduciary may 
administer more than one Fund, but it has a separate fiduciary 
responsibility to each Fund.

    \100\ See Indiana Michigan Comments at 12.
---------------------------------------------------------------------------

    Were a utility able to use excesses in one Fund to offset 
deficiencies in other Funds, one set of ratepayers would be required to 
subsidize other ratepayers. The remedy for a Fund deficiency is not to 
take a surplus from another Fund, but to adjust the collections for the 
Fund that is deficient.
    We reject Investment/Trust/Utility Companies' suggestion that a 
public utility need not establish a separate Fund for Commission-
jurisdictional decommissioning collections, but only set aside a 
percentage of the assets of a Fund equal to the Commission-
jurisdictional portion of the total balance of the Fund.\101\ Public 
utilities must establish a separate Fund for Commission-jurisdictional 
decommissioning collections. Although this will add to a utility's 
administrative expenses, it is the only way that we can ensure the 
integrity of Commission-jurisdictional Funds.

    \101\ See Investment/Trust/Utility Companies' Comments at 11.
---------------------------------------------------------------------------

    We will adopt Commenters' suggestion that we except investments in 
broad market indexes or other mutual funds from the ``exclusion of 
affiliates'' provision. Were we not to make this exception, the 
``exclusion of affiliates'' provision would unduly restrict investments 
in market indexes and other mutual funds, and make such investments 
inordinately difficult to place and to monitor, especially for Funds 
that pertain to jointly-owned units, when several different utilities 
are participating owners of the same nuclear unit.\102\

    \102\ See Northeast Utilities Comments at 15.
---------------------------------------------------------------------------

    The reason for the requirement that utilities make deposits to the 
Funds every quarter is to ensure that utilities promptly deposit into 
the Funds (and thus begin earning a return on) the monies that they 
collect for decommissioning. The notion that utilities might make Fund 
deposits annually, except when annual 

[[Page 34118]]
contributions would exceed a million dollars,\103\ is unacceptable. 
Such a rule could deprive Funds of earnings on large amounts of 
ratepayer-contributed monies. The purpose of collecting decommissioning 
funds through wholesale rates is solely to fund nuclear 
decommissioning. Public utilities should be using these funds for no 
other purpose and they should be depositing these monies into the Funds 
as promptly as possible. If a public utility faces special 
circumstances, it may apply for a waiver of this rule. We will consider 
requests for such waivers on a case-by-case basis.

    \103\ See Entergy Comments at 2; Nuclear Energy Comments at 3; 
Investment/Trust/Utility Companies Comments at 14.
---------------------------------------------------------------------------

    We agree with Commenters that a fiduciary's standard of care under 
the general guidelines must be the same standard of care that the 
Commission adopts under the specific guidelines for Fund 
investments.\104\ We will discuss this standard of care in the next 
section and will incorporate into the fiduciary's standard of care 
under the general guidelines the same standard of care that we adopt 
under the specific guidelines for Fund investments.

    \104\ See Investment/Trust/Utility Companies Comments at 12.
---------------------------------------------------------------------------

    We will adopt Edison Electric's recommendation 105 and provide 
that the Final Rule applies only to Commission jurisdictional Funds. 
The Final Rule will also provide that it is not the responsibility of 
the Fund's fiduciary investment manager to ensure that the amount of 
monies that a Fund contains are adequate to pay for decommissioning 
106

    \105\ See Edison Electric Comments at 30.
    \106\ See Investment/Trust/Utility Companies Comments at 17.
---------------------------------------------------------------------------

    We will not delete the term ``associates'' from the Final Rule. The 
only reason that Commenters advance for omitting this term from the 
Final Rule is that, in their view, the meaning of this term is 
unclear.\107\ By the term ``associates'' we mean any companies or 
persons that directly, or indirectly through one or more 
intermediaries, control, or are controlled by, or are under common 
control with, the utility.\108\

    \107\ See Id. at 12.
    \108\ See 18 CFR Part 101, Definition 5A.
---------------------------------------------------------------------------

    We agree with Commenters that the references to tax maximization 
and minimization in the NOPR are unclear.\109\ In the Final Rule we 
will adopt Commenters' suggested language, slightly modified, as 
follows:

    \109\ Edison Electric Comments at 29-30.

    The utility and Fiduciary shall seek to obtain the best possible 
tax treatment of amounts collected for nuclear plant 
decommissioning. In this regard, the utility and Fiduciary shall 
take maximum advantage of tax deductions and credits, when it is 
consistent with sound business practices to do so. [\110\]

    \110\ See Investment/Trust/Utility Company Comments at 14.

    This modification obviates the need to redefine the word 
``liquidity'' to mean ``giving due consideration to the timing of the 
need for the funds[]'' as Edison Electric recommends.\111\

    \111\ See Edison Electric Comments at 32.
---------------------------------------------------------------------------

    Investment/Trust/Utility Companies asks the Commission to define 
the term ``costs of decommissioning the nuclear power plant,'' and 
offers the following definition of the term:

    The term ``cost of decommissioning'' means all expenses to be 
incurred in connection with the entombment, decontamination, 
dismantlement, removal and disposal of the structures, systems and 
components of a nuclear power plant that has permanently ceased the 
production of electric energy, including all costs necessary to 
bring the plant site to ``greenfield'' status and any other type of 
cost included in a study accepted by the Commission as a basis for 
determining the amount to be included in rates charged to customers. 
Such term includes all expenses incurred in connection with the 
preparation for decommissioning, such as engineering and other 
planning expenses, and all expenses to be incurred after the actual 
dismantlement occurs, such as physical security and radiation 
monitoring expenses. The term also includes costs of spent fuel 
storage, disposal and removal and low level waste storage, disposal 
and removal. For a single asset company, the term includes the 
winding up costs of the company. The term includes costs whether 
they are treated as capital items or expense items for regulatory, 
financial, or tax accounting purposes. [\112\]

    \112\ Investment/Trust/Utility Companies' Comments at 12-13.

    Decommissioning nuclear plants and recognition and measurement of 
the related costs is complex.\113\ The Commission has had little 
experience in examining the actual expenditures required in connection 
with decommissioning a nuclear power plant. For this reason it would 
not be appropriate to adopt at this time any definition, either that 
proposed by Investment/Trust/Utility Companies or otherwise. If we were 
to do so, we are afraid that costs legitimately part of decommissioning 
would be excluded because such costs failed to fall within the 
categories provided by the definition. For the purposes of the Final 
Rule, we need only define the amounts that are subject to the Final 
Guidelines that we are adopting. In that regard, the Final Rule 
provides that all amounts approved by the Commission as decommissioning 
expenses in public utilities' rates are subject to the Fund 
requirements of the Final Rule.

    \113\ We note that the Financial Accounting Standards Board 
presently has under consideration a project to address the 
accounting for nuclear plant decommissioning.
    However, we do not agree that, in the case of a public utility 
having but a single asset, which is a nuclear generating unit, all 
costs associated with winding up the affairs of the company are 
necessary decommissioning costs.114 In any event, this issue is 
best addressed on a case-by-case basis.

    \114\ See Maine Yankee Comments at 5.
---------------------------------------------------------------------------

    Several commenters pointed out that public utilities may establish 
both qualified and non-qualified Funds with respect to a utility's 
interest in a specific nuclear plant. The Final Rule will apply to both 
``qualified'' (under Code section 468A) and non-qualified 
Funds.115

    \115\ See Investment/Trust/Utility Companies Comments at 11 and 
n.4, and 16.
---------------------------------------------------------------------------

    We will partially adopt Michigan Commission's suggestion and 
provide that fiduciaries shall not invest in any securities of the 
subsidiaries, affiliates, or associates or their successors or assigns 
of the utility for which they manage the Fund.116 The only 
exception to this restriction will be for investments in mutual funds 
or in broad market indexes, since such a restriction would virtually 
preclude such investments.

    \116\ See Michigan Commission Comments at 3.
---------------------------------------------------------------------------

VIII. Reports

    In the NOPR, the Commission proposed that the utility must submit 
to the Commission by June 30 of each year a copy of the financial 
report that the fiduciary furnishes to the utility for the most recent 
12-month period, showing assets and liabilities and various other 
information.117 Indiana Michigan asks the Commission to: (a) 
change the wording ``the most recent 12-month period'' to ``the prior 
calendar year;'' and (b) eliminate the word ``liabilities,'' since the 
Fund should have only assets. Indiana Michigan also asks the Commission 
to consider allowing the companies to maintain the fiduciary's reports 
available for inspection by Commission auditors, rather than file the 
reports with the Commission.118

    \117\ 59 FR 28302 (June 1, 1994), IV FERC Stats. & Regs., 
Proposed Regulations at 32,856-58.
    \118\ Indiana Michigan Comments at 14.
---------------------------------------------------------------------------

    Edison Electric requests that the provision for the filing of 
reports specify that the reports due by June 30th are or may be for the 
preceding calendar year rather than for the most recent 12-month 
period. Edison Electric also suggests that the Commission consider 
allowing 

[[Page 34119]]
companies to keep the reports on file and open to Commission 
inspection, rather than requiring the companies to file the reports 
with the Commission.119

    \119\ Edison Electric Comments at 25.
---------------------------------------------------------------------------

    Consolidated Edison suggests that the Commission consider allowing 
utilities to file the Fund annual report as part of the utility's FERC 
Form No. 1.120

    \120\ Consolidated Edison Comments at 5.
---------------------------------------------------------------------------

    Investment/Trust/Utility Companies asks the Commission to state 
that the required financial report should include only the assets of 
the Fund (e.g., obligations held by or on behalf of the Fund) and only 
the liabilities of the Fund (e.g., accrued but unpaid taxes or 
fiduciaries' fees), and not the liability for decommissioning, which is 
a liability of the utility, not of the Fund. Investment/Trust/Utility 
Companies also asks the Commission to specify that the term ``most 
recent 12 months'' refers to the most recently-completed annual 
accounting period that the Fund uses.121

    \121\ Investment/Trust/Utility Companies at 9.
---------------------------------------------------------------------------

    Duke maintains that the Commission's proposed reporting 
requirements are an additional, unnecessary burden. Duke submits that 
the Commission could obtain the same information during its routine 
audits of the utilities.122 The Louisiana Commission recommends a 
comprehensive set of reporting requirements to promote ``a dialogue 
between consumer representatives * * * and * * * utilities on 
investment and fund management practices.'' 123 In addition to 
financial statements, identification of fiduciaries, the manner of 
their selection, and a statement of their fees, the Louisiana 
Commission would require, among other things, a comparison of asset 
returns with the returns of the Standard & Poor's 500 and a narrative 
description of the Fund's investment strategy.124

    \122\ Duke Comments at 5.
    \123\ Louisiana Commission Comments at 10.
    \124\ Louisiana Commission Comments, Appendix A at 15-16.
---------------------------------------------------------------------------

Commission Rulings

    We will adopt Edison Electric's suggestion to report the prior 
calendar year performance. This will permit the Commission to monitor 
how a Fund is performing in relation to other Funds and will permit 
ready identification over time of Funds that may be significantly 
under-performing. Allowing Funds to report on different time periods 
would complicate such analysis.125 We will require utilities to 
file the reports by March 31 of each year, with the first report due 
April 1, 1996 (March 31 of that year being a Sunday). This will afford 
sufficient time for any changes necessary in current reporting 
systems.126

    \125\ We believe, however, that any comparisons of Fund 
performances must be based on several years' data.
    \126\ For this reason we reject Nuclear Energy's suggestion that 
the utility decide the reporting period based on its reporting 
responsibilities to the Commission, State regulators and the NRC. 
See Nuclear Energy Comments at 3.
---------------------------------------------------------------------------

    We will also maintain the requirement that utilities submit the 
annual Fund reports to the Commission, rather than simply retain them, 
open for inspection. Having to go to each utility to review the Funds' 
annual reports would unnecessarily burden the Commission's resources.
    We will not make the Funds' annual reports part of FERC Form No. 1. 
To do so would require development and use of a structured format 
particularly for purposes of our electronic filing requirements for 
that form. The submission of a copy of the financial reports provided 
by the Fund fiduciaries will be administratively less burdensome and 
will be sufficient for our purposes.
    We will not omit from the reporting requirements the word 
``liabilities.'' We must know if Funds incur liabilities and the 
amounts of those liabilities or our oversight would be 
incomplete.127

    \127\ For example, each fund will probably have unpaid 
fiduciaries' fees.
---------------------------------------------------------------------------

    We disagree with Duke that the reporting requirement is 
unnecessary. Duke's thesis is that the Commission can obtain the 
required information during its routine audits of the utilities. 
However, the Commission does not audit each public utility annually. 
The information will not always coincide with our scheduled audit 
activity. Moreover, an annual filing requirement will provide the 
Commission greater flexibility to monitor Funds. The Commission has a 
responsibility to routinely monitor the Funds in order to protect 
ratepayer interests.
    We reject Louisiana Commission's proposed reporting requirements as 
unnecessary. The reporting requirements that we adopt are sufficient 
for our purposes.128

    \128\ Of course, the Louisiana Commission can impose whatever 
reporting requirements are lawful under its authorities on Funds for 
retail customers.
---------------------------------------------------------------------------

    We will adopt the recommendation of Investment/Trust/Utility 
Companies and provide that the required financial report should include 
only the assets and liabilities of the Fund and not the liability for 
decommissioning. Investment/Trust/Utility Companies are correct that 
the decommissioning expense is a liability of the utility and not of 
the Fund.

IX. The Alternatives

A. Alternative No. 1: No Change in Present Guidelines, I.E., 
Continuation of Black Lung Restrictions

    No Commenter favors adoption of Alternative No. 1 and most parties 
oppose its adoption. Commenters recognize the need to ensure that the 
requisite funds will be available at decommissioning. But Commenters 
argue, among other things, that Black Lung investments are not 
necessarily as safe as they seem, and that they disadvantage 
ratepayers, because they do not keep up with inflation and necessitate 
higher collections to meet the projected decommissioning 
liability.129 Commenters also argue that the Black Lung Guidelines 
are not required, because prudent investment principles and the 
standard that applies to fiduciaries for private pension plans under 
section 404 of the Employee Retirement Income Security Act of 1974 
(``ERISA'')(29 U.S.C. Sec. 1104) (the ERISA standard) provide ample, 
tested, and federally-sanctioned protection to ratepayers.130 But 
Edison Electric cautions that, if the Commission selects a guideline 
that allows for investments in other than Black Lung instruments, the 
Commission should make it clear that investment in a Black Lung 
instrument is not proscribed, so long as the investment is prudent 
under the circumstances.131 While Indiana Michigan opposes the 
Commission's limiting Fund investments to Black Lung instruments, it 
states that the Commission should make it clear that Black Lung 
instruments may form part of a Fund's portfolio depending on the Fund 
Manager's evaluation of the risk and rewards of such 
investment.132

    \129\ See Bernstein Comments at 2; Consolidated Edison Comments 
at 3; Consumers Power Comments at 3; Cooperatives Comments at 6-7; 
Duke Comments at 2; Edison Electric Comments at 14-15; Investment/
Trust/Utility Companies Comments at 3; Louisiana Commission Comments 
at 4-6; New York State Comments at 4-5; Northeast Utilities Comments 
at 6-8; Pennsylvania Commission Comments at 3, 13, and 20; Wisconsin 
Power Comments at 1-2.
    \130\ See Consumers Power Comments at 4.
    \131\ Edison Electric Comments at 15.
    \132\ Indiana Michigan Comments at 2.
---------------------------------------------------------------------------

    New York State maintains that certain criticisms of the Black Lung 
Guidelines are unfounded. First, in its view, arguments that the Black 
Lung Guidelines are not a guarantee against loss are inapposite. New 
York State recognizes that, while Black Lung instruments are 
conservative investments, they are not guaranteed against loss. But New 
York State notes that Black Lung investments are very low risk, and, 
barring a national 

[[Page 34120]]
catastrophe, would be expected to provide a full return of interest and 
principal. Second, according to New York State, the criticism that the 
use of Black Lung investments increases the risk that the returns will 
be insufficient to meet the decommissioning obligation is unfounded. 
While agreeing that Black Lung investments provide lower returns than 
investments associated with higher risk, New York State submits that 
the predictability of the return on Black Lung investments makes it 
highly unlikely that returns will be insufficient to meet 
decommissioning obligations. New York State points out that one can 
more readily project amounts placed in Funds that invest exclusively in 
Black Lung instruments. According to New York State, less predictable 
returns are a greater threat to meeting decommissioning obligations, 
since there is a greater opportunity for lost investment.133

    \133\ New York State Comments at 4.
---------------------------------------------------------------------------

    New York State recognizes that Black Lung investments may yield 
returns lower than inflation, and that poorly managed Black Lung 
investments may incur a loss, because the investments may need to be 
sold at a discount to face value if their maturities are not carefully 
timed and interest rates increase subsequent to their purchase.134

    \134\ Id.
---------------------------------------------------------------------------

    New York State concludes that continuing the Black Lung Guidelines 
is ill-advised. New York State submits that Black Lung investments are 
contrary to modern investment theory.
B. Alternative No. 2: A Reasonable Person Standard With No Restrictions

    All but three of the Commenters support adoption of Alternative No. 
2.135 The Commenters urging the Commission to adopt Alternative 
No. 2 argue that this Alternative will permit Funds to tailor their 
investment strategies to financial and market conditions during the 
term of the decommissioning liability as well as to diversify 
investments into a broad range of asset classes, and provide higher 
long-term returns. According to these Commenters, by maximizing returns 
consistent with acceptable risk, Alternative No. 2 will allow the 
funding of the decommissioning of nuclear units with less contribution 
from ratepayers than would be the case either under a continuation of 
the current guidelines (Alternative No. 1) or under a reasonable person 
standard with express constraints (Alternative No. 3).136 These 
Commenters submit that the flexibility that Alternative No. 2 offers 
will provide the greatest assurance that adequate funds will be 
available at the time of decommissioning, at the minimum possible cost 
to ratepayers.137

    \135\ New England Power and the Public Utility Commissions of 
Michigan and Pennsylvania support Alternative No. 3.
    \136\ E.g., Carolina Power & Light Comments at 3.
    \137\ E.g., Carolina Power & Light Comments at 4; Edison 
Electric Comments at 2-4, 6, 9, 11-13; Consolidated Edison Comments 
at 5; Cooperatives Comments at 9-14; Duke Comments at 4; Florida 
Commission Comments at 2; New Hampshire Committee Comments at 1; 
NARUC Comments at 5, 12; Nuclear Energy Comments at 1-2; Nuveen 
Comments at 2-10; South Carolina E&G Comments at 1-2.
---------------------------------------------------------------------------

    In the NOPR, the Commission asked whether the ``reasonable person'' 
standard should encompass the ``prudent person'' standard, which has 
long governed trust investment,138 or whether it should, for 
example, embody the ``prudent investor'' standard.139 The 
Commission pointed out that the two standards are different. The 
prudent person standard focuses on each investment individually and 
proscribes certain investments as too risky.140 The prudent 
investor standard, in contrast, does not focus on any single 
investment, but rather insists on evaluating the entire portfolio (and 
thus allows more risk for individual investments within a 
portfolio).141 The Commission also requested comments on the use 
of other standards to govern Fund investments.142

    \138\ See Restatements (Second) of Trusts Sec. 227 (1959).
    \139\ See Restatement (Third) of Trusts Sec. 227 (1992).
    \140\ See Restatements (Second) of Trusts Sec. 227 & comments a 
through o (1959).
    \141\ See Restatement (Third) of Trusts Sec. 227 (1992).
    \142\ 59 FR at 28300, IV FERC Stats. & Regs., Proposed 
Regulations at 32,854.
---------------------------------------------------------------------------

    Several Commenters recommending that the Commission adopt 
Alternative No. 2 ask the Commission to adopt the ERISA standard. These 
Commenters support the ERISA standard because it has a precise, 
statutory definition, has served policymakers well for 20 years, has 
widespread applicability, has a body of case law that clearly defines 
its parameters, and is familiar to investors, investment managers and 
fiduciaries throughout the country.143

    \143\ E.g., Bernstein Comments at 2; Edison Electric Comments at 
11-12; Duke Comments at 3-4; Investment/Trust/Utility Companies 
Comments at 5-6; NISA Comments at 1-2; Wisconsin Electric Comments 
at 1-2. According to Carolina Power & Light, at the end of 1993, the 
ERISA standard governed the management of about $1.2 trillion in 
corporate pension fund assets. Carolina Power & Light Comments at 5.
---------------------------------------------------------------------------

    These Commenters submit that, because the ERISA standard focuses on 
the entire investment portfolio over which the fiduciary has authority, 
it is superior to a standard that views reasonableness on an 
investment-by-investment basis.144 They note that the ERISA 
standard imposes a duty to diversify the type of investments. They 
maintain that this duty is fundamental to prudent investment, because 
it permits a fiduciary to tailor portfolios to meet the needs and 
circumstances of each trust. They argue that this perspective is 
critical to Fund investment, given the variety of variables to consider 
in connection with implementing a long-term investment program for a 
nuclear power plant decommissioning fund.145 They maintain that, 
for any given level of assumed risk, one may obtain a higher return by 
investing in different classes of assets than by investing in a single 
asset class. They contend that, because of the long time span of 
decommissioning and the inflation sensitivity of decommissioning costs, 
Funds should invest in common stocks as well as in fixed-income 
securities.146

    \144\ E.g., Bernstein Comments at 2; Edison Electric Comments at 
2-6; Investment/Trust/Utility Companies Comments at 5-6.
    \145\ E.g., Bernstein Comments at 2.
    \146\ E.g., Bernstein Comments at 2; Carolina Power & Light 
Comments at 8; Cooperatives Comments at 8-12; Edison Electric 
Comments at 4-7, 9-12; Investment/Trust/Utility Companies Comments 
at 4-6.
---------------------------------------------------------------------------

    These Commenters acknowledge that equities are more risky than 
fixed-income investments, because the return the investor may receive 
in any given year can vary significantly from the average 
return.147 But they submit that, because the value of a fixed-
income security declines as interest rates rise, over time, increases 
in interest rates and inflation can cause the real return (nominal 
return minus inflation) of a fixed-income portfolio to decline. 
Commenters submit that, to meet or exceed the rate of inflation, an 
investment portfolio should offset the lack of inflation protection in 
fixed-income securities with the inflation protection inherent in 
common stock investments. That is, a Fund should participate in both 
classes of investments.148

    \147\ E.g., Carolina Power & Light Comments at 9; New York State 
Comments at 4; Nuveen Comments at 9 (``[C]ommon stocks are generally 
regarded as the riskiest asset class.'').
    \148\ E.g., Carolina Power & Light Comments at 8; Cooperatives 
Comments at 10-12; Edison Electric Comments at 11-15; New York State 
Comments at 4-7; Nuveen Comments at 3-10.
---------------------------------------------------------------------------

    These commenters submit that it is fundamental to prudent 
investment policies and practices that a fiduciary should invest 
according to the risk and return objectives reasonably suited to the 
Fund; accordingly, they maintain, the standard of prudence should apply 


[[Page 34121]]
to the overall investment portfolio rather than to any single 
investment.149

    \149\ E.g., Carolina Power & Light Comments at 10; Cooperatives 
Comments at 9; Edison Electric Comments at 2, 4, 13.
---------------------------------------------------------------------------

    Wisconsin Electric submits that the Commission should adopt the 
ERISA standard because that standard provides the flexibility to 
efficiently manage Fund assets at the lowest possible cost to utility 
customers, balancing risk and reward, while taking into account such 
factors as general economic conditions, the expected operating life of 
the plant, and the expected timing of the cash requirements associated 
with decommissioning.150

    \150\ Wisconsin Electric Comments at 2.
---------------------------------------------------------------------------

    While these Commenters refer to the ERISA standard, it is clear 
that they are really asking the Commission to adopt the ``prudent 
investor'' standard as delineated in the Restatement (Third) of Trusts 
(1992). This is obvious because, when these Commenters refer to the 
ERISA standard, many of them refer to managing risk by focusing on the 
entire portfolio (the signature characteristic of the prudent investor 
standard) 151 rather than by examining individual investments (the 
hallmark of the prudent person standard). For example, Edison Electric 
submits that, ``[t]he concept of a prudent portfolio has replaced the 
concept of a prudent investment.'' 152

    \151\ E.g., Bernstein Comments at 2; Carolina Power & Light 
Comments at 10; Duke Comments at 4; Investment/Trust/Utility 
Companies Comments at 5; Wisconsin P&L Comments at 1.
    \152\ Edison Electric Comments at 6, citing, Hagin, Modern 
Portfolio Theory (1979) 12.
    Edison Electric states that ``[T]he ERISA * * *  standard is * * *  
based upon the same rationale as the ``prudent investor'' standard of 
the Restatement (Third) of the Law of Trusts * * *  Sec. 227. * * * '' 
153 And certain Commenters advocating adoption of the ERISA 
standard refer to investments by a ``prudent investor,''154 a 
``prudent investment manager''155 or even by a ``prudent 
expert.''156

    \153\ Edison Electric Comments at 4 (underscoring deleted).
    \154\ New Hampshire Committee Comments at 1; Nuclear Energy 
Comments at 2 (``prudent implementation of modern investment 
practices'').
    \155\ Nuveen Comments at 9.
    \156\ Carolina P&L Comments at 10.
---------------------------------------------------------------------------

    Other Commenters advocating adoption of Alternative No. 2 refer 
directly to the prudent investor standard as it appears in the 
Restatement (Third) of Trusts,157 or to ``prudent investment 
principles''158 without referring to the ERISA standard. It is 
clear from all of these references that those advocating adoption of 
Alternative No. 2 are seeking Commission adoption of the ``prudent 
investor'' standard.

    \157\ Cooperatives Comments at 7-12; New York State Comments at 
6 n.4.
    \158\ Consumers Power Comments at 3.
---------------------------------------------------------------------------

C. Alternative No. 3: A Reasonable Person Standard With Certain 
Restrictions on the Quality and Quantity of Fund Investments

    Three Commenters support Alternative No. 3.159 The remaining 
Commenters oppose this Alternative, arguing that the express 
limitations are contrary to modern investment practices and reduce the 
flexibility of fiduciaries. The Commenters opposing Alternative No. 3 
maintain that the end of a units's licensed life is not necessarily the 
appropriate measuring point for determining the need for cash to pay 
for decommissioning costs. They submit that, depending on the method of 
decommissioning and the availability of a national spent nuclear fuel 
repository, many Funds may expend substantial amounts for 
decommissioning costs long after the expiration of the operating 
license.160 They criticize the proposed market capitalization and 
minimum credit rating standards as unrealistically eliminating from 
investment consideration more than 60 percent of the stocks listed in 
the Standard & Poor's 500, as well as large over-the-counter, domestic 
small capitalization, international and preferred stocks. They also 
maintain that the proposed single-company and single-industry 
limitations are too tight.161

    \159\ As noted, these Commenters are New England Power and the 
Michigan and Pennsylvania Commissions.
    \160\ See supra n.36.
    \161\ E.g., Bernstein Comments at 3-4; Consolidated Edison 
Comments at 3-5; Consumers Power Comments at 5; Edison Electric 
Comments at 2-3, 16, 19-20; Duke Comments at 5; Entergy Comments at 
4; Indiana Michigan Comments at 8; Investment/Trust/Utility 
Companies Comments at 7-8; Northeast Utilities Comments at 11-13; 
Nuveen Comments at 11-12; Wisconsin Electric Comments at 2-3; 
Wisconsin Power Comments at 2.
---------------------------------------------------------------------------

    Edison Electric maintains that if the Commission adopts the prudent 
investor standard, there will be no need for express guidelines, since 
modern investment practices and modern investment guidelines allow 
fiduciaries the flexibility to address specific situations that Funds 
will face.162

    \162\ Edison Electric Comments at 17-18.
---------------------------------------------------------------------------

    Cooperatives and New York State express a similar thought. They 
criticize Alternative No. 3 not for the restrictions that it contains, 
``but, rather, because it contains requirements at all.''163 They 
submit that the prudent investor rule would not function efficiently if 
the Commission were to restrict the quality and type of investments 
that a fiduciary may make. 164

    \163\ New York State Comments at 7-8.
    \164\ Cooperatives Comments at 13.
---------------------------------------------------------------------------

    Of those favoring the adoption of Alternative No. 3, New England 
Power supports the Alternative outright, without modification. New 
England Power maintains that Alternative No. 3 strikes a reasonable 
balance between the goals of ensuring sufficient funds to safely 
decommission nuclear power plants and minimizing the cost to the 
customers.165 New England Power states that Alternative No. 3 
allows for sufficient diversification in investments to provide returns 
over time that would exceed those derived from investments made under 
the Black Lung investment guidelines, and will, accordingly, reduce 
customer contributions for decommissioning. New England Power argues 
that Alternative No. 3 improves upon Alternative No. 2, by establishing 
quality and quantity guidelines that would limit the risk associated 
with various possible investments.166

    \165\ New England Power Comments at 3.
    \166\ Id. at 4.
---------------------------------------------------------------------------

    The Michigan Commission supports the Adoption of Alternative No. 3 
with certain constraints on management fees and certain additions 
regarding the Fund's risk-adjusted yield and unit-cost. The Michigan 
Commission would also require that the fiduciary document the reasons 
for making various investments. The Michigan Commission also recommends 
that the aggregate value and Standard & Poor's rating requirements 
should not apply to investments in index funds.167

    \167\ Michigan Commission Comments at 1-3.
---------------------------------------------------------------------------

    The Pennsylvania Commission recommends that, under Alternative No. 
3, the Commission allow a fiduciary to speculate with not more than 25 
percent of the corpus of the Fund. The Pennsylvania Commission 
recommends that the Commission require that the remaining portion of 
the Fund's assets remain in Black Lung grade investments.168

    \168\ Pennsylvania Commission Comments at 16.
---------------------------------------------------------------------------

Commission Rulings

    We agree with the majority of commenters that Alternative No. 3: a 
reasonable person standard with certain restrictions on the quality and 
quantity of Fund investments, unduly reduces investment flexibility. As 
Northeast Utilities points out, there is no single set of investment 
limitations that will adequately take into account the factors 
affecting decommissioning of each nuclear generating plant. A Fund 
manager must have sufficient leeway to address a Fund's needs under a 
variety 

[[Page 34122]]
of circumstances and to balance Fund security while obtaining the 
maximum possible return under the circumstances.169 Accordingly, 
we will not adopt Alternative No. 3.

    \169\ Northeast Utilities Comments at 10-11.
---------------------------------------------------------------------------

    Nor will we adopt Alternative No. 1: continuation of Black Lung 
restrictions. Commenters have persuaded us that public utilities' 
decommissioning requirements can best be funded by permitting 
investment of ratepayers funds according to Alternative No. 2, a 
reasonable person standard with no specified investment restrictions. 
We agree that it is possible to protect the integrity of an investment 
portfolio as a whole by investing in various classes of assets with 
offsetting risks. This strategy will allow investment managers to 
adjust quickly to financial and market conditions and should, over 
time, produce higher returns than Black Lung investments and lower the 
amount of ratepayer funds necessary for decommissioning.
    The reasonable person standard, with its emphasis on a balanced 
portfolio and offsetting risks, is a very sophisticated investment 
approach, requiring considerable expertise to implement successfully. 
Public utilities must choose trained, experienced, professional 
investment managers who are skilled in the art of offsetting risk, and 
must ensure that they act with the level of skill, care, diligence and 
caution expected of a professional planner in light of the purposes, 
terms, distribution requirements, and other circumstances of the Fund.
    Several Commenters observe that Black Lung investments have a place 
in a balanced portfolio under appropriate circumstances.\170\ They 
state that it would be reasonable for a prudent investor to use these 
more conservative investments to offset the higher risk of other 
investments. And Commenters recognize that, as the date at which the 
utility must meet decommissioning expenses comes closer, greater 
liquidity and more conservative investments should be the norm of the 
portfolio balance.\171\ We agree that Black Lung investments still have 
a place in a Fund's investment portfolio under the unconstrained, 
reasonable person investment approach. We also agree that a reasonable 
approach would be to decrease the percentage of equity investment in a 
portfolio, and increase the amount of lower risk investments, as the 
time for expending the funds approaches.

    \170\ E.g., Carolina Power & Light Comments at 8 (Because of 
long time-horizon and sensitivity to inflation, Funds should invest 
in common stocks as well as in fixed-income securities); 
Cooperatives Comments at 9 (A diversified portfolio should have its 
assets dispersed among a variety of equities and fixed-income 
investments); Indiana Michigan Comments at 2 (Black Lung or other 
conservative investments are always acceptable components of the 
Fund); Northeast Utilities Comments, Exhibit C at 1 (trust to 
maintain a balanced portfolio consisting of equity and fixed-income 
securities); Nuveen Comments at 3 (Fund portfolio should contain a 
targeted range of fixed-income and equity securities to manage 
market risk).
    Edison Electric goes further than this and insists that Black 
Lung investments are not imprudent and continue to be an accepted 
investment alternative. Edison Electric Comments at 15.
    \171\ E.g., Duke Comments at 5 (``[I]t would be logical to have 
higher equity exposure in the early years of the Fund than in the 
concluding years. . . .''); Entergy Comments at 3 (Equity phase-down 
should begin five years before expected license termination); New 
York State Comments at 6; Northeast Utilities Comments at 12 and 
Exhibit C at 1 (Under normal circumstances equity percentage of Fund 
portfolio should decrease as decommissioning cash outflow approaches 
[12]; Phase-out of equity investments to begin five years before the 
expected need for significant decommissioning expenditures [Exhibit 
C at 1]); Nuveen Comments at 11 (Percentage of equity investment 
should decline as date of expenditure of substantial portion of Fund 
assets approaches); Pennsylvania Commission Comments at 12, Reply 
Comments at 9 (returns and invested principal should be moved back 
into relatively secure instruments before decommissioning); 
Wisconsin Power & Light Comments at 2 (The expected liquidity needs 
of the Fund should determine the reduction in equity exposure.).
---------------------------------------------------------------------------

    The Alternative that we are adopting in the Final Rule dictates our 
choice of the precise definition and content of the reasonable person 
standard. We will define a ``reasonable person'' as a ``prudent 
investor.'' We choose the prudent investor standard because it does not 
focus on any single investment but rather insists on an evaluation of 
the entire portfolio.172 This is consistent with the unconstrained 
reasonable person investment approach. If investment managers are to 
properly implement the reasonable person investment strategy, without 
restrictions, they are going to need the flexibility that the prudent 
investor standard provides.

    \172\ See Restatement (Third) of Trusts Sec. 227 (1992).
---------------------------------------------------------------------------

    We see no need to incorporate the ERISA standard into this 
proceeding. ERISA deals with a fundamentally different liability. 
Rather, we will adopt Edison Electric's, Cooperatives', and 
Pennsylvania Commission's recommendation and base the prudent investor 
standard on the principles set forth in Sec. 227 of the Restatement 
(Third) of Trusts (1992).173 This will accomplish the objective of 
allowing for flexibility of Fund investment, without importing into 
Fund investment standards all of the law surrounding employee pension 
funds.

    \173\ See Edison Electric Comments at 4-5; Cooperatives Comments 
at 7-12; Pennsylvania Commission Comments at 15 and Reply Comments 
at 14.
---------------------------------------------------------------------------

    Also, it is unclear that the ERISA standard is sufficiently exact 
to adequately address the contingencies of nuclear plant 
decommissioning. ERISA requires of a fiduciary ``familiarity'' not 
``expertise'' and requires diversification of investment assets not to 
prevent but merely to ``minimize'' the risk of large losses to the 
fund. The Restatement (Third) of Trusts is more rigorous in its demands 
on a fiduciary.174

    \174\ For example, Section 227 of the Restatement (Third) of 
Trusts includes ``passive strategies'' as a practical investment 
alternative that Trustees must consider. The Restatement points out 
that investing in index funds that track major stock exchanges or 
widely published lists of publicly traded stocks offers pricing 
security and economies of purchase in essentially efficient markets. 
See Restatement (Third) of Trusts, Sec. 227, comment h., Prudent 
Investment: Theories and Strategies (1992).
---------------------------------------------------------------------------

    The prudent person standard, which we also considered in the NOPR, 
focuses on each investment individually and proscribes certain 
investments as too risky.175 This standard is inconsistent with an 
investment strategy of offsetting risk, which is at the heart of the 
reasonable person investment approach.

    \175\ See Restatement (Second) of Trusts Sec. 227 & comments a 
through o (1959). In the NOPR, the Commission also referenced the 
standard that it uses to determine the prudence of specific costs, 
citing New England Power, supra. See 59 FR 28,300, IV FERC Stats. & 
Regs, Proposed Regulations 32,853-54. In the NOPR, we recognized 
``that what we are concerned with here is a different factual 
setting.'' Id. We agree with Edison Electric that ``pursuing a 
prudent investment strategy is not necessarily the same thing as 
incurring a prudent cost.'' Edison Electric Comments at 16.
---------------------------------------------------------------------------

    The prudent person investment standard would not allow fiduciaries 
to rapidly adjust to ever changing market and financial conditions as 
they must if they are to correctly manage the Fund portfolio as a 
whole.

X. Conclusion Regarding Selection of Alternative

    For the reasons given immediately above, we are adopting for Fund 
investments Alternative No. 2, the reasonable person standard, without 
constraints. We define a ``reasonable person'' as a prudent investor, 
as delineated in the Restatement (Third) of Trusts (1992).

XI. Environmental Statement

    Commission regulations require that an environmental assessment or 
an environmental impact statement be prepared for any Commission action 
that may have a significant adverse effect on the human 
environment.176 

[[Page 34123]]
The Commission has categorically excluded certain actions from this 
requirement as not having a significant effect on the human 
environment--such as electric rate filings under sections 205 and 206 
of the FPA and the establishment of just and reasonable rates.177 
The Final Rule, regarding the collection and subsequent investment of 
monies to fund nuclear plant decommissioning, involves such matters. 
Accordingly, no environmental consideration is necessary.

    \176\ Regulations Implementing the National Environmental Policy 
Act, Order No. 486, 52 FR 47987 (Dec. 17, 1987), FERC Stats. & 
Regs., Regulations Preambles 1986-1990 para. 30,783 (1987)) 
(codified at 18 CFR Part 380).
    \177\ 18 CFR 380.4(a)(15).
---------------------------------------------------------------------------

XII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act 178 requires rulemakings to 
either contain a description and analysis of the effect that the 
proposed rule will have on small entities or to contain a certification 
that the rule will not have a substantial economic impact on a 
substantial number of small entities. Most public utilities to which 
the proposed rule would apply do not fall within the definition of 
small entity.179 Consequently, the Commission certifies that this 
proposed rule will not have ``a significant economic impact on a 
substantial number of small entities.''

    \178\ 5 U.S.C. 601-612.
    \179\ See 5 U.S.C. 601(3), citing to section 3 of the Small 
Business Act, 15 U.S.C. 632, which defines ``small business 
concern'' as a business that is independently owned and operated and 
that is not dominant in its field of operation.
XIII. Information Collection Statement

    The Office of Management and Budget's (OMB) regulations 180 
require that OMB approve certain information collection requirements 
imposed by an agency. The information collection requirements in this 
proposed rule are contained in FERC-516 ``Electric Rate Filings'' 
(1902-0096).

    \180\ 5 CFR 1320.13.
---------------------------------------------------------------------------

    The Commission uses the data collected in these information 
requirements to carry out its regulatory responsibilities under the FPA 
and the Energy Policy Act of 1992. The Commission's Office of Electric 
Power Regulation uses the data for determination of electric rate 
filings submitted by industry. The Office of the Chief Accountant uses 
the data to ensure that jurisdictional companies comply with the 
Uniform System of Accounts.
    Interested persons may send comments regarding collection of 
information to the Federal Energy Regulatory Commission, 825 North 
Capitol Street, N.E., Washington, D.C. 20426 [Attention: Michael 
Miller, (202) 208-1415]; and to the Office of Management and Budget, 
Washington, D.C. 20503 [Attention: Desk Officer for the Federal Energy 
Regulatory Commission--(202) 395-3087; FAX: (202) 395-5167].

XIV. Effective Date

    This rule is effective July 31, 1995.

List of Subjects in 18 CFR Part 35

    Electric power rates, Electric utilities, Incorporation by 
reference, Reporting and recordkeeping requirements.

    By the Commission. Commissioners Hoecker and Massey concurred 
with a separate statement attached.
Linwood A. Watson, Jr.,
Acting Secretary.

    In consideration of the foregoing, the Commission amends Part 35, 
Chapter I, Title 18, Code of Federal Regulations, as set forth below.
PART 35--FILING OF RATE SCHEDULES

    1. The authority citation for Part 35 continues to read as follows:

    Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 
U.S.C. 7101-7352.

    2. 18 CFR Part 35 is amended by adding Subpart E--Regulations 
Governing Nuclear Plant Decommissioning Trust Funds, consisting of 
Sec. 35.32 and Sec. 35.33, to read as follows:

Subpart E--Regulations Governing Nuclear Plant Decommissioning 
Trust Funds

Sec.
35.32  General Provisions
35.33  Specific Provisions


Sec. 35.32  General provisions

    (a) If a public utility has elected to provide for the 
decommissioning of a nuclear power plant through a nuclear plant 
decommissioning trust fund (Fund), the Fund must meet the following 
criteria:
    (1) The Fund must be an external trust fund in the United States, 
established pursuant to a written trust agreement, that is independent 
of the utility, its subsidiaries, affiliates or associates.
    (2) The utility may provide overall investment policy to the 
Trustee or Investment Manager, but it may do so only in writing, and 
neither the utility nor its subsidiaries, affiliates or associates may 
serve as Investment Manager or otherwise engage in day-to-day 
management of the Fund or mandate individual investment decisions.
    (3) The Fund's Investment Manager must exercise the standard of 
care, whether in investing or otherwise, that a prudent investor would 
use in the same circumstances. The term ``prudent investor'' means a 
prudent investor as described in Restatement of the Law (Third), Trusts 
Sec. 227 including general comments and reporter's notes, pages 8-101. 
St. Paul, MN: American Law Institute Publishers, (1992). ISBN 0-314-
84246-2. This incorporation by reference was approved by the Director 
of the Federal Register in accordance with 5 U.S.C. 552(a) and 1 CFR 
part 51. Copies may be obtained from the American Law Institute, 4025 
Chestnut Street, Philadelphia, PA 19104, and are also available in 
local law libraries. Copies may be inspected at the Federal Energy 
Regulatory Commission's Library, Room 8502, 825 North Capitol St., 
N.E., Washington, D.C. or at the Office of the Federal Register, 400 
North Capitol St., N.W., Room 700, Washington, D.C.
    (4) The Trustee and any other Fiduciary shall have a net worth of 
at least $100 million. In calculating the $100 million net worth 
requirement, the net worth of the Fiduciary's parent corporation and/or 
affiliates may be taken into account only if such entities guarantee 
the Fiduciary's responsibilities to the Fund.
    (5) The Trustee or Investment Manager shall keep accurate and 
detailed accounts of all investments, receipts, disbursements and 
transactions of the Fund. All accounts, books and records relating to 
the Fund shall be open to inspection and audit at reasonable times by 
the utility or its designee or by the Commission or its designee. The 
utility or its designee must notify the Commission prior to performing 
any such inspection or audit. The Commission may direct the utility to 
conduct an audit or inspection.
    (6) Absent the express authorization of the Commission, no part of 
the assets of the Fund may be used for, or diverted to, any purpose 
other than to fund the costs of decommissioning the nuclear power plant 
to which the Fund relates, and to pay administrative costs and other 
incidental expenses, including taxes, of the Fund.
    (7) If the Fund balances exceed the amount actually expended for 
decommissioning after decommissioning has been completed, the utility 
shall return the excess jurisdictional amount to ratepayers, in a 
manner the Commission determines.
    (8) Except for investments tied to market indexes or other mutual 
funds, the Investment Manager shall not invest in any securities of the 
utility for which 

[[Page 34124]]
it manages the funds or in that utility's subsidiaries, affiliates, or 
associates or their successors or assigns.
    (9) The utility and the Fiduciary shall seek to obtain the best 
possible tax treatment of amounts collected for nuclear plant 
decommissioning. In this regard, the utility and the Fiduciary shall 
take maximum advantage of tax deductions and credits, when it is 
consistent with sound business practices to do so.
    (10) Each utility shall deposit in the Fund at least quarterly all 
amounts included in Commission-jurisdictional rates to fund nuclear 
power plant decommissioning.
    (b) The establishment, organization, and maintenance of the Fund 
shall not relieve the utility or its subsidiaries, affiliates or 
associates of any obligations it may have as to the decommissioning of 
the nuclear power plant. It is not the responsibility of the Fiduciary 
to ensure that the amount of monies that a Fund contains are adequate 
to pay for a nuclear unit's decommissioning.
    (c) A utility may establish both qualified and non-qualified Funds 
with respect to a utility's interest in a specific nuclear plant. This 
section applies to both ``qualified'' (under Internal Revenue Code (26 
U.S.C. 468A) or any successor section) and non-qualified Funds.
    (d) A utility must regularly supply to the Fund's Investment 
Manager, and regularly update, essential information about the nuclear 
unit covered by the Trust Fund Agreement, including its description, 
location, expected remaining useful life, the decommissioning plan the 
utility proposes to follow, the utility's liquidity needs once 
decommissioning begins, and any other information that the Fund's 
Investment Manager would need to construct and maintain, over time, a 
sound investment plan.
    (e) A utility should monitor the performance of all Fidiciaries of 
the Fund and, if necessary, replace them if they are not properly 
performing assigned responsibilities.
    (f) These regulations apply only to Commission-jurisdictional 
funds.


Sec. 35.33  Specific provisions.

    (a) In addition to the general provisions of Sec. 35.32, the 
Trustee must observe the provisions of paragraph (b) of this section.
    (b) The Trustee may use Fund assets only to:
    (1) Satisfy the liability of a utility for decommissioning costs of 
the nuclear power plant to which the Fund relates as provided by 
Sec. 35.32; and
    (2) Pay administrative costs and other incidental expenses, 
including taxes, of the Fund as provided by Sec. 35.32;
    (3) To the extent that the Trustee does not currently require the 
assets of the Fund for the purposes described in paragraphs (b)(1) and 
(b)(2) of this section, the Investment Manager, when investing Fund 
assets, must exercise the same standard of care that a reasonable 
person would exercise in the same circumstances. In this context, a 
``reasonable person'' means a prudent investor as described in 
Restatement of the Law, (Third), Trusts Sec. 227, and including general 
comments and reporter's notes, pages 8-101. St. Paul, MN: American Law 
Institute Publishers, 1992. ISBN 0-314-84246-2. This incorporation by 
reference was approved by the Director of the Federal Register in 
accordance with 5 U.S.C. 552(a) and 1 CFR part 51. Copies may be 
obtained from the American Law Institute, 4025 Chestnut Street, 
Philadelphia, PA 19104, and are also available in local law libraries. 
Copies may be inspected at the Federal Energy Regulatory Commission's 
Library, Room 8502, 825 North Capitol St., NE., Washington, DC or at 
the Office of the Federal Register, 400 North Capitol St., NW., Room 
700, Washington, DC.
    (c) The utility must submit to the Commission by April 1, 1996 and 
by March 31 of each year thereafter, a copy of the financial report 
furnished to the utility by the Fund's Trustee that shows for the 
previous calendar year:
    (1) Fund assets and liabilities at the beginning of the period;
    (2) activity of the Fund during the period, including amounts 
received from the utility, purchases and sales of investments, gains 
and losses from investment activity, disbursements from the Fund for 
decommissioning activity and payment of Fund expenses, including taxes; 
and
    (3) Fund assets and liabilities at the end of the period. The 
report should not include the liability for decommissioning.
    (d) If an independent public accountant has expressed an opinion on 
the report or on any portion of the report, then that opinion must 
accompany the report.
Appendix A

Investment/Trust/Utility Companies

Ark Asset Management Co., Inc.
Bank of New York
Delaware Investment Advisers
Fidelity Management Trust Co.
J.P. Morgan Co.
Loomis, Sayles & Company
MD SASS Investors Services, Inc.
Mellon Bank
National Investment Services of America, Inc.
NBD Bank, NA
Nuveen Duff & Phelps Investment Company
Payden & Rygel
Pittsburgh National Bank
PNC Bank
Sanford Bernstein & Company, Inc.
Scudder, Stevens & Clark, Inc.
State Street Bank and Trust Company
T. Rowe Price Associates
Wellington Management Co.

Appendix B

Utility Companies

Arizona Public Service Co.
Arkansas Power & Light Co.
Carolina Power & Light Co.
Central Power and Light Co.
Cleveland Electric Illuminating Co.
Commonwealth Edison Co.
Connecticut Light & Power Co.
Connecticut Yankee Atomic Power Co.
Delmarva Power & Light Co.
Detroit Edison Co.
Duke Power Co.
Florida Power & Light Co.
Florida Power Corp.
Gulf States Utilities Co.
Houston Lighting & Power Co.
Illinois Power Co.
Indiana Michigan Power Co.
Iowa Electric Light and Power Co.
Jersey Central Power & Light Co.
Louisiana Power & Light Co.
Madison Gas and Electric Co.
Maine Yankee Atomic Power Co.
Metropolitan Edison Co.
Niagara Mohawk Power Corp.
North Atlantic Energy Co.
Northern States Power Co.
Ohio Edison Co.
Pacific Gas & Electric Co.
Pennsylvania Electric Co.
Pennsylvania Power & Light Co.
Pennsylvania Power Co.
Philadelphia Electric Co.
Public Service Co. of New Hampshire
Public Service Electric and Gas Co.
Rochester Gas and Electric Co.
Southern California Edison Co.
System Energy Resources, Inc.
Texas Utilities Electric Co.
Toledo Edison Co.
Union Electric Co.
Vermont Yankee Nuclear Power Corp.
Virginia Electric Power Co.
Western Massachusetts Electric Co.
Western Resources, Inc.
Wisconsin Electric Power Co.
Wisconsin Power and Light Co.
Wisconsin Public Service Corp.

[[Page 34125]]


Appendix C

                             Nuclear Decommissioning Funds--12/31/93 Funding Status                             
                                [Dollars in millions--Ranking by 12/31/93 funds]                                
----------------------------------------------------------------------------------------------------------------
                                                                                  Decom cost est by             
                                                                        MW             company                  
                    Company                      License exp (avg.   Nuclear  ------------------------  12-31-93
                                                       years)        capacity   Amt. (base                fund  
                                                                                  year)      Amt./KW            
----------------------------------------------------------------------------------------------------------------
Commonwealth Ed................................      2008-2026(22)     11,638   $4,060(93)       $349        914
SCECorp........................................      2004-2028(21)      2,560    1,000(93)        390        853
Pacific G&E....................................      2015-2016(21)      2,253    1,000(93)        443        576
FPL Group......................................      2007-2023(21)      2,885      935(93)        324        445
Duke Power.....................................      2013-2026(26)      5,078      995(90)        188        319
Northern State Power...........................      2010-2014(18)      1,640      750(93)        457        302
Northeast Utilities............................      2010-2026(24)      2,738    1,127(93)        408        238
Wisconsin Energy...............................      2010-2013(18)        970      280(93)        289        232
Dominion Resources.............................      2012-2020(22)      3,200    1,000(93)        312        226
Carolina P&L...................................      2010-2026(24)      2,711      999(93)        368        222
GPU............................................      2009-2014(18)      2,369    1,044(93)        441        219
Entergy........................................      2014-2024(25)      4,646        1,339        288        193
San Diego G&E..................................      2004-2013(15)        517      322(93)        623        191
Southern Company...............................      2014-2029(28)      3,524    1,123(91)        319        185
PS Enterprise Group............................      2008-2026(23)      2,842      681(90)        240        175
CMS Energy.....................................      2000-2007(10)        846      607(93)        717        171
Am Elec Pi.....................................      2014-2017(22)      2,130    1,100(91)        516        170
PEPCO Energy...................................      2008-2029(24)      3,958      643(93)        162        160
Connecticut Yankee.............................           2007(13)        582      309(92)        530        140
Consolidated Ed................................           2013(19)      1,124      600(93)        534        137
Florida Progress...............................           2016(22)        703      308(93)        438        118
Niagara Mohawk.................................      2009-2026(24)      1,053      541(93)        514        114
Vermont Yankee.................................           2012(18)        528      240(92)        454        100
Yankee Atomic..................................            2000(6)        175      247(92)      1,411         98
Baltimore G&E..................................      2014-2016(21)      1,650      703(92)        428         93
Pennsylvania P&L...............................      2022-2024(29)      1,890          725        384         83
Centerior Energy...............................      2017-2027(28)      1,843      615(92)        334         74
Maine Yankee...................................           2008(14)        900      317(93)        352         69
Boston Edison..................................           2012(18)        670      400(91)        597         66
Rochester G&E..................................      2009-2026(23)        621      185(93)        298         63
Wisconsin PS...................................           2013(19)        220      149(93)        677         61
IES Industries.................................           2014(20)        396      223(93)        563         51
Altantic Energy................................      2008-2026(23)        374       65(87)        175         46
Union Electric.................................           2024(30)      1,150      372(93)        323         46
Pinnacle West..................................      2024-2026(32)      1,109      407(93)        367         45
WPL Holdings...................................           2013(19)        219      149(93)        677         45
Iowa ILL G&E...................................           2012(18)        394      173(93)        439         40
Texas Utilities................................      2030-2032(37)      2,300      599(92)        260         38
El Paso Elec...................................      2024-2027(32)        603      221(93)        366         30
Ohio Edison....................................      2016-2027(28)      1,255      382(92)        304         30
Delmarva P&L...................................      2008-2020(20)        321      117(93)        364         29
Madison G&E....................................           2013(19)         95       61(92)        642         25
Scana Corp.....................................           2022(28)        593      152(93)        256         25
Detroit Ed.....................................           2025(31)      1,100      471(93)        428         24
Houston Ind....................................      2027-2028(33)        770      146(89)        190         19
DOE Inc........................................      2016-2027(28)        712      240(92)        337         18
Illinois Power.................................           2026(32)        823      344(93)        418         17
Central & SW...................................      2027-2028(33)        630       85(86)        135         15
Kansas City P&L................................           2025(31)        540      174(93)        322         14
Western Resources..............................           2025(31)        540      174(93)        322         13
PS New Mexico..................................      2024-2026(32)        390      142(93)        384         11
Long Island Lighting...........................           2026(32)        194       80(93)        412          7
NY State E&G...................................           2026(32)        194       74(93)        381          6
Central Hudson G&E.............................           2027(33)         97       38(93)        392         5 
----------------------------------------------------------------------------------------------------------------
Source: Nuveen Comments, Exhibit X.                                                                             

Appendix D--Concurring Statements

    HOECKER and MASSEY, Commissioners, concurring:
    We support today's order. However, the order's reliance on the 
``prudent investor'' standard does not spell out sufficiently certain 
important principles to which we think investment management 
fiduciaries must adhere. By selecting Alternative 2, which maximizes 
the investment flexibility of the fiduciary, over Alternative 3, which 
might specifically limit the investment manager's discretion in some 
respects, the Commission does not imply that ``anything goes'' in 
structuring and handling an investment portfolio. The comments make 
clear, for example, that 

[[Page 34126]]
indeed certain fundamentals are always followed by prudent 
investors.\1\

    \1\ See, e.g., Order, slip op. at 65 n.175 and accompanying 
text.
---------------------------------------------------------------------------

    The financial marketplace offers investors many different 
strategies. Some of these strategies would satisfy the prudent investor 
standard; others would not. Neither we nor the Commission can 
anticipate each possible strategy or investment option and decide 
whether it is prudent. But, a failure to invest in accordance with 
widely-held and time-honored practices may be irresponsible, if not 
imprudent. In that regard, we believe implementation of the following 
two strategies is, in broad terms, required of all investment 
management fiduciaries.
    First, as the time nears when fund assets will be spent on 
decommissioning work, assets should be phased out of equity investments 
and into less volatile and more conservative investments. Many 
commenters endorsed this principle.\2\ Similarly, Maine Yankee Atomic 
Company attached to its comments a financial advisor's report 
recommending a five-year phase out of equity investments just before 
the fund assets would be spent on decommissioning work. Today's order 
acknowledges the validity of this principle.\3\ While nuclear plant 
owners may choose different decommissioning strategies and thus have 
different timelines for spending fund assets, an appropriately-timed 
equity phase-out would always appear to be prudent.

    \2\ See Id., at 65 n.177.
    \3\ Id., at 66.
---------------------------------------------------------------------------

    Second, just as a prudent investor would invest little or no part 
of its portfolio in penny stocks and junk bonds, a prudent investor 
would limit the extent of its investments in derivatives. Derivatives 
may serve a useful role in offsetting the risk of other investments. 
For example, if a portfolio contains government or corporate bonds, 
perhaps the sensitivity of these bonds to interest rate fluctuations 
could be offset by hedging in derivatives. A prudent investor would, in 
our view, limit investments in derivatives, if any, solely to such 
risk-reducing uses.
    With these additional thoughts, we concur in today's order.
James J. Hoecker,
Commissioner.

William L. Massey,
Commissioner.
[FR Doc. 95-15303 Filed 6-29-95; 8:45 am]
BILLING CODE 6717-01-P