[Federal Register Volume 62, Number 118 (Thursday, June 19, 1997)]
[Rules and Regulations]
[Pages 33342-33349]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16043]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM94-14-001; Order No. 580-A]


Nuclear Plant Decommissioning Trust Fund Guidelines; Order on 
Rehearing

Issued June 12, 1997.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Order on rehearing.

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SUMMARY: On rehearing, the Commission is amending its rules governing 
the formation, organization and operation of nuclear plant 
decommissioning trust funds (Fund) and Fund investments: To remove the 
requirement that a Fund investment manager must have a net worth of at 
least $100 million (although it is retaining the $100 million net worth 
requirement for the Trustee); and to allow public utilities with 
nuclear units to maintain nuclear decommissioning trust funds that 
include both Commission-jurisdictional and non-Commission-
jurisdictional trust fund collections. The Commission is also making 
certain corrections and providing certain clarifications, and 
confirming its conclusion that a public utility may not itself make 
individual investment decisions.

DATES: Effective: July 21, 1997. The incorporation by reference was 
approved on July 31, 1995.

FOR FURTHER INFORMATION CONTACT:
Joseph C. Lynch (Legal Information), Federal Energy Regulatory 
Commission, Office of the General Counsel, 888 First Street, NE., 
Washington, DC 20426, Telephone: (202) 208-2128
James K. Guest (Accounting Information), Office of Chief Accountant, 
888 First Street, NE., Washington, DC 20426, Telephone: (202) 219-2614.

SUPPLEMENTARY INFORMATION: In addition to publishing the full text of 
this document in the Federal Register, the Commission also provides all 
interest persons an opportunity to inspect or copy the contents of the 
document during normal business hours

[[Page 33343]]

in the Public Reference Room at 888 First Street, NE., Washington, DC 
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 if dialing locally or 1-800-856-3920 if dialing 
long distance. To access CIPS, set your communications software to 
19200, 14400, 12000, 9600, 7200, 4800, 2400 or 1200 bps, full duplex, 
no parity, 8 data bits and 1 stop bit. The full text of this order will 
be available on CIPS in ASCII and WordPerfect 6.1 format. CIPS user 
assistance is available at 202-208-2474.
    CIPS is also available on the Internet through the Fed World 
system. Telnet software is required. To access CIPS via the Internet, 
point your browser to the URL address: http//www.fedworld.gov and 
select the ``Go to the FedWorld Telnet Site'' button. When your Telnet 
software connects you, log onto the FedWorld system, scroll down and 
select FedWorld by typing: 1 at the command line then typing: /go FERC. 
FedWorld may also be accessed by Telnet at the address fedworld.gov.
    Finally, the complete text on diskette in WordPerfect format may be 
purchased from the Commission's copy contractor, La Dorn Systems 
Corporation. La Dorn Systems Corporation is also located in the Public 
Reference Room at 888 First Street, NE., Washington, DC 20426.

    Before Commissioners: Elizabeth Anne Moler, Chair; Vicky A. 
Bailey, James J. Hoecker, William L. Massey, and Donald F. Santa, 
Jr.

[Docket No. RM94-14-001]

Nuclear Plant Decommissioning Trust Fund Guidelines; Order No. 580-A; 
Order on Rehearing

    Issued June 12, 1997.

    In this order the Commission is: (a) Deleting from its regulations 
the requirement that a nuclear decommissioning trust fund investment 
manager must have a net worth of at least $100 million (although it is 
retaining the $100 million net worth requirement for the Trustee); and 
(b) allowing public utilities with nuclear units to maintain nuclear 
decommissioning trust funds that include both Commission-jurisdictional 
and non-Commission-jurisdictional decommissioning collections. It is 
also making certain corrections and providing certain 
clarifications,1 and confirming its conclusion that a public 
utility may not itself make individual investment decisions.
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    \1\ Among the changes and clarifications are the following: (a) 
the Commission is correcting the address references in 18 CFR 
35.33(a)(3) to reflect that the Commission's library is in Room 95-
01, 888 First Street, NE; (b) the Commission is deleting the 
``Effective Date Note'' found at the end of 18 CFR 35.32 (this order 
on rehearing moots the stay referred to in that note); and (c) the 
Commission is clarifying the number of copies of the financial 
report required to be filed with the Commission.
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Background

    On June 16, 1995, the Commission issued a Final Rule in Nuclear 
Plant Decommissioning Trust Fund Guidelines,2 setting forth 
requirements for the formation, organization and operation of nuclear 
decommissioning trust funds (Fund) and for Fund investments. The Final 
Rule provided, among other things, that:
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    \2\ Nuclear Plant Decommissioning Trust Fund Guidelines, Order 
No. 580, 60 FR 34109 (June 30, 1995), FERC Stats. & Regs. 
Regulations Preambles 1991-96 para. 31,023 (1995).
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    A. The Trustee and any other Fiduciary shall have a net worth of at 
least $100 million; 3 and
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    \3\ 18 CFR 35.32(a)(4); see FERC Stats. & Regs. Regulations 
Preambles 1991-96 at 31,360. In the Final Rule, the Commission used 
the term ``Fiduciary'' to refer to the ``person(s) or 
institutions(s) that perform the trustee and investment management 
functions * * * .'' 60 FR at 34116, FERC Stats. & Regs. Regulations 
Preambles 1991-96 at 31,359. Because a Fund investment manager 
performs an ``investment management function[],'' the Final Rule 
effectively required it to have a net worth of $100 million.
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    B. 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 affiliates or associates.4
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    \4\ 18 CFR 35.32(a)(1) and (f); see FERC Stats. & Regs. 
Regulations Preambles 1991-96 at 31,360.
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    The Commission received motions for stay and/or requests for 
rehearing and for clarification of the Final Rule from: Commonwealth 
Edison Company (Commonwealth Edison); Edison Electric Institute (EEI); 
a group of investment/trust companies and a group of public utilities 
(together: Investment/Trust/Utility Companies); 5 Indiana 
Michigan Power Company (I&M); Maine Yankee Atomic Power Company (Maine 
Yankee); New England Public Power Nuclear Customers; and Strong Capital 
Management Inc. (Strong). The requests for rehearing of Commonwealth 
Edison, EEI, Investment/Trust/Utility Companies and Strong ask the 
Commission to eliminate the requirement that a Fund investment manager 
must have a net worth of at least $100 million. Most of those 
requesting rehearing also oppose the Commission's requirement of a 
separate Fund for Commission-jurisdictional decommissioning 
collections.
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    \5\ These two groups essentially filed identical pleadings. 
Citations to their pleadings will track the page numbers of the 
investment/trust companies' filing.
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    Effective July 31, 1995, the Commission, pending further action on 
rehearing, stayed the requirement in 18 CFR 35.32(a)(4) that a Fund 
investment manager have a net worth of at least $100 million. In that 
same order, the Commission also stayed the requirement in 18 CFR 
35.32(a)(1) and (f) that public utilities establish a separate nuclear 
decommissioning trust fund for Commission-jurisdictional Fund 
collections.6 Following issuance of the stay, a number of 
entities filed comments.7
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    \6\ Nuclear Plant Decommissioning Trust Fund Guidelines, 60 FR 
39251-52 (August 2, 1995); FERC Stats. & Regs. Regulations Preambles 
1991-96 para. 31,024 (1995).
    \7\ These entities are: Association for Investment Management 
and Research (AIMR); Sanford C. Bernstein & Co. (Bernstein); Capital 
Guardian Trust Company (Capital Guardian); Carolina Power & Light 
Company (CP&L); Florida Power & Light Company (FP&L); Loomis, Sayles 
& Company, L.P.; NISA Investment Advisors, L.L.C. (NISA); Nuveen 
 Duff & Phelps Investment Advisors (Nuveen); RCM Capital 
Management (RCM Capital); W.H. Reaves & Company; Southern Companies; 
Union Electric Company.
    This decision takes into consideration all pleadings filed, both 
before and after the Commission issued the stay.
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Discussion

A. One Hundred Million Dollar Net Worth Requirement for Investment 
Managers

1. Background
    The Commission first imposed a $100 million net worth requirement 
in System Energy Resources, Inc.,8 where the Commission 
directed that ``[t]he trustee [of a Fund] shall have a net worth of at 
least $100 million.'' 9 Following passage of section 1917 of 
the Energy Policy Act of 1992,10 the Commission reaffirmed 
its then-existing guidelines for Fund organization and investment, 
including the requirement that a trustee have a net worth of $100 
million.11 In the Final Rule, the Commission extended the 
$100 million net worth requirement to Fund investment 
managers.12
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    \8\ 37 FERC para. 61,261 (1986) (SERI I), clarified, 65 FERC 
para. 61,083 (1993), order on reh'g, 67 FERC para. 61,228 (1994).
    \9\ SERI I, 37 FERC at 61,727.
    \10\ Pub. L. No. 102-486, 106 Stat. 2776, 3024-25 (1992); see 26 
U.S.C. 468(A)(e).
    \11\ System Energy Resources, Inc., 65 FERC para. 61,083 (1993) 
(SERI II), order on reh'g, 67 FERC para. 61,228 (1994).
    \12\ See supra n.2 and accompanying text.
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    The $100 million net worth requirement originally arose from the

[[Page 33344]]

Commission's ``overriding concern about the security of a 
decommissioning fund,'' 13 and its intention ``to ensure 
that ratepayer-contributed funds will, in fact, be available when 
decommissioning occurs.'' 14 The intent of the $100 million 
net worth requirement adopted in the Final Rule was to ``ensure[] that 
the fiduciary [in this case, the Fund investment manager] will have the 
necessary assets to adequately self-insure its performance.'' 
15 The ``performance'' to which the Commission referred was 
not market performance, but rather adherence to the prudent investor 
standard (set forth in Restatement (Third) of Trusts) that the 
Commission in the Final Rule laid down as the guiding fiduciary 
standard for Fund investment managers. 16 By imposing a $100 
million net worth requirement, we sought to ensure that a utility would 
have assets to turn to should an investment manager's performance fall 
below the prudent investor standard. As represented by the comments and 
requests for rehearing (discussed below), the public utility and 
investment communities seem willing to do without this safeguard, which 
they find unduly costly and burdensome.
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    \13\ SERI II, 65 FERC at 61,513.
    \14\ Id.
    \15\ 60 FR at 34117; FERC Stats. & Regs. Regulations Preambles 
1991-96 at 31,360.
    \16\ 60 FR at 34122; FERC Stats. & Regs. Regulations Preambles 
1991-96 at 31,369-70.
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2. Comments and Requests for Rehearing
    (a) The $100 million net worth requirement. Almost all commenters 
oppose the imposition of the $100 million net worth requirement for 
Fund investment managers; none support it. They observe that most 
investment managers do not have a net worth of $100 million. They 
submit that the $100 million net worth requirement will not only 
disqualify many investment advisors currently managing Fund assets, but 
also will pose a serious obstacle to firms that would otherwise seek to 
participate in Fund investment management. They argue that, if the 
Commission insists upon the $100 million net worth requirement, utility 
companies will lose a substantial body of experience and expertise. 
They further maintain that the requirement will force utilities to 
choose new investment managers from a small universe: those that have 
both $100 million in net worth and expertise in managing Fund assets. 
They contend that investment management fees will likely rise, since 
less robust competition and concentration of market power ordinarily 
leads to higher prices.17
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    \17\ E.g., AIMR Comments at 2; Bernstein Comments at 2; Capital 
Guardian Comments at 2; Investment/Trust/Utility Companies Request 
for Rehearing at 9; Maine Yankee Request for Reconsideration at 3; 
NISA Comments at 4; Southern Company Comments at 8-9; Strong 
Comments at 3; Strong Request for Rehearing at 10-11.
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    The commenters fear that with management of Commission-
jurisdictional decommissioning collections concentrated in the hands of 
a relatively few institutions, there will be a diminution of investment 
flexibility for Fund assets.18 They further raise the 
possibilities of: (a) ``large investment losses'' 19 
resulting from entry into the market of investment managers who have 
the requisite net worth but who are not experienced with the unique 
features of Fund investment management; 20 and (b) a 
``forced liquidation effect'' if replacement investment managers change 
the composition of the Funds' investment portfolios. 21 
Commonwealth Edison argues that, although ``the $100 million net worth 
requirement, as it relates to nuclear decommissioning trustees, is 
appropriate[,] * * * this requirement is unnecessary with respect to 
investment managers who direct the investment of the assets, but who do 
not exercise control over these assets as the trustees do.'' 
22
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    \18\ Investment/Trust/Utility Companies Request for Rehearing at 
9; Strong Request for Rehearing at 10.
    \19\ Id.
    \20\ The commenters state that Fund investment management is 
very different from managing tax-sheltered assets for pensions 
funds, or even taxable assets for individuals. It involves a 
complicated investment problem: assuring the funding of an unusual 
liability while contending with complex tax, regulatory and legal 
constraints. For example, a Fund manager must not only comply with 
the requirements of the Securities and Exchange Commission, but also 
with the requirements of this Commission, the Nuclear Regulatory 
Commission, and state public service commissions. The Fund manager 
must also correctly interpret and comply with section 468A of the 
Internal Revenue Code. See NISA Comments on Rehearing at 4; Nuveen 
Comments on Rehearing at 2-3.
    \21\ E.g., Investment/Trust/Utility Companies Request for 
Rehearing at 9; Strong Request for Rehearing at 10.
    \22\ Commonwealth Edison Request for Rehearing at 4. See also 
Maine Yankee Request for Rehearing at 2; Union Electric Comments at 
2-3.
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    (b) Alternative proposals. Several commenters suggest that, in lieu 
of the $100 million net worth requirement, the Commission might insist 
that utilities select to manage their Fund investments only investment 
managers that conform to certain criteria. Among the criteria that 
these commenters suggest are: (a) A certain minimum amount of assets 
(for example, $1 billion) under management; (b) a minimum number of 
years (for example, ten) in the investment-management field; (c) a 
fidelity bond and errors and omissions insurance (for example, $1 
million of insurance for every $5 million of Commission-jurisdictional 
funds under management); 23 registration with the Securities 
and Exchange Commission (SEC) under the Investment Advisors Act of 
1940; (d) membership in a recognized investment industry organization; 
and (e) conformance with that organization's rules.24 The 
commenters' believe that insistence upon these criteria may provide 
sufficient assurance that utilities will select responsible Fund 
investment managers.
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    \23\ Several parties, most notably RCM Capital, mentioned such 
insurance. A fidelity bond protects against theft of assets; errors 
and omissions insurance protects against a breach of fiduciary duty.
    \24\ See e.g., AIMR Comments at 3; Bernstein Comments at 1-2; 
Loomis Sayles Comments at 1; Maine Yankee Comments at 2-3; NISA 
Comments at 5; RCM Capital Comments at 6, 11-14; Southern Companies 
Comments at 3; Strong Comments at 4-5. The criteria discussed above 
are a composite from the comments; not every commenter suggested 
each criterion.
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3. Commission Response
    (a) $100 million net worth requirement. While we do not agree with 
everything that they have said, the Commenters have raised an important 
issue. Were we to insist on the $100 million net worth requirement for 
Fund investment managers, public utilities with nuclear units would 
have to replace those investment managers currently in place who do not 
have the requisite net worth. Obviously, there would be a cost 
associated with searching for a new investment manager. This cost would 
affect a Fund's future compound earnings. And it is true, as earlier 
observed, that a change in investment managers could well result in a 
redirection in portfolio investment strategy (which, in turn, could 
have tax ramifications 25).
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    \25\ One would expect an investment manager to take such tax 
consequences into account when making decisions to sell Fund 
investments such as stock.
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    Also, there is much force to the argument that utilities should not 
be forced to forego Fund investment managers who otherwise are capable, 
experienced and well-regarded, whom they have carefully selected, with 
whom they have worked for many years and who understand the regulatory 
environment in which Funds exist, simply because those investment 
managers do not have a particular stated net worth. The argument that 
the $100 million net worth requirement would result in a lack of 
flexibility in Fund

[[Page 33345]]

market investments also carries some weight. Having a greater number of 
investment fund managers available would allow a utility to employ 
several investment managers to manage various asset classes and to 
blend investment strategies for optimum Fund performance.26
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    \26\ See Capital Guardian Comments at 3; FP&L Comments at 4.
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    We also recognize, as Commenters observe, that the $100 million net 
worth requirement reduces the number of available investment managers 
based on a net worth calculation that is not necessarily related to a 
manager's skill and performance.27 Reducing the number of 
investment managers and concentrating Fund investments in the hands of 
a comparatively few institutions would reduce competition for the 
opportunity to manage Funds. Also, it could force several nuclear 
utilities to use the same investment manager, with the result that poor 
performance by one investment manager could affect a number of 
utilities with nuclear units.28
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    \27\ See Carolina Power & Light Comments at 5; FP&L Comments at 
2; Southern Companies Comments at 3 (``there is no established link 
between performance and net worth.'').
    \28\ See FP&L Comments at 3.
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    Nor is there an obvious correlation between the $100 million figure 
and sufficient assurance that a utility will be able to fund the 
decommissioning of its nuclear unit. In certain instances, a lesser net 
worth might well be adequate.29 On balance, then, the 
commenters have persuaded us that the disadvantages attendant upon a 
$100 million net worth requirement for Fund investment managers 
outweigh its benefit as a recourse in the event of an investment 
manager's failure to adhere to the prudent investor standard. We will, 
therefore, delete this requirement. However, we will continue to impose 
this requirement for the Trustee. As we stated in the Final Rule, the 
Trustee's primary duty is custodial.30 We continue to 
believe it appropriate that the individual who holds the funds have a 
net worth requirement of $100 million.
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    \29\ See Commonwealth Edison Comments at 4 (its annual 
Commission-jurisdictional decommissioning collections are currently 
$340,000).
    \30\ 60 FR at 34116; FERC Stats. & Regs. Regulations Preambles 
1991-1996 at 31,359.
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    (b) Other proposed requirements. While we agree with commenters 
that the alternative criteria they propose may be useful and we 
encourage public utilities to consider them (and others that they 
believe are appropriate) in their selection of Fund managers, we 
decline to incorporate them into the Final Rule, because each criterion 
may not be appropriate in every instance. We prefer instead to rely on 
public utilities to choose their investment managers with the care and 
caution that the situation demands and to allow them flexibility in 
choosing the appropriate investment manager(s) in each individual case.
    Although we are granting public utilities greater freedom in 
selecting their Fund investment managers than we initially adopted in 
the Final Rule, we, nevertheless, will hold public utilities to their 
duty to protect the ratepayers who are contributing the underlying 
principal that makes Fund investments possible. We will continue to 
insist that public utilities with nuclear units ensure that all of 
their fiduciaries, including their Fund investment managers, adhere to 
the prudent investor standard that we established in the Final Rule.

B. Requirement of Separate Fund for Commission-Jurisdictional 
Collections

1. The Final Rule
    To ensure that Fund assets would not be available to creditors in 
the event of the bankruptcy of a utility, the Final Rule provided that:

    [T]he 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 
fulfilling the various duties, must be completely separate and apart 
from the utility. 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 * * *.[\31\]

    \31\ 60 FR at 34117; FERC Stats. & Regs. Regulations Preambles 
1991-96 at 31,360 (footnote omitted).
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    The Commission noted that these criteria accord with the 
regulations and guidelines that the Nuclear Regulatory Commission uses 
to ensure the availability of funds for decommissioning nuclear 
reactors.
2. Comments and Requests for Rehearing
    Several commenters explain that, in most cases, public utilities 
that have nuclear generating units have already established for each 
generating unit both a qualified Fund (to which the public utility can 
make currently-deductible contributions under section 468A of the 
Internal Revenue Code (Tax Code)), and a non-qualified Fund. They 
further state that most of these public utilities have deposited in 
each Fund monies that they have collected from both interstate, 
wholesale (Commission-jurisdictional) sales and intrastate, retail 
(State-jurisdictional) sales and that in most (but not all) cases they 
have established separate accounts within each Fund to identify the 
different jurisdictional components (Commission- or state-
jurisdictional) of the contributions to the Fund. \32\
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    \32\ E.g., Investment/Trust/Utility Companies Request for 
Rehearing at 3; Strong Request for Rehearing at 3.
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    These commenters argue that, if, as they believe we intended, we 
were to force public utilities to transfer assets from an existing, 
qualified Fund, containing both wholesale (Commission-jurisdictional) 
and retail (State-jurisdictional) collections, to a new Fund containing 
only Commission-jurisdictional collections, they may suffer adverse tax 
consequences.\33\
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    \33\ E.g., Investment/Trust/Utility Companies Request for 
Rehearing at 2-4; Strong Request for Rehearing at 4.
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    Various commenters also note that, in general, a public utility can 
maintain only one qualified Fund with respect to a nuclear unit.\34\ 
There is an exception for nuclear units that are:

    \34\ See 26 CFR 1.468-A-5(a)(iii).
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    Subject to the ratemaking jurisdiction of two or more public 
utility commissions * * * [when] any such * * * commission requires 
a separate fund to be maintained for the benefit of ratepayers whose 
rates are established or approved by the public utility commission * 
* *.[\35\]

    \35\Id.
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    Under this exception, ``the separate funds maintained for such a 
plant (whether or not established and maintained pursuant to a single 
trust agreement) * * * [are] considered a single [qualified Fund] for 
purposes'' of Tax Code section 468A and the underlying Treasury 
regulations.\36\
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    \36\Id.
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    Several commenters contend that the exception does allow public 
utilities to establish a new, separate Fund to hold Commission-
jurisdictional decommissioning collections, but only from the effective 
date of the Commission's Final Rule (July 31, 1995) and to treat the 
resulting two Funds (the existing Fund and the new, Commission-
jurisdictional-only Fund) as a single qualified Fund for Federal income 
tax purposes only from that date forward. For example, Investment/
Trust/Utility Companies submit that the exception allows public 
utilities to establish a separate Fund for Commission-jurisdictional 
collections only on a ``going-forward'' basis.\37\
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    \37\ Investment/Trust/Utility Companies Request for Rehearing at 
5. See also Strong Request for Rehearing at 5.
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    Since the exception does not explicitly permit the transfer of 
assets from an existing qualified Fund to a

[[Page 33346]]

newly-established, separate Fund, commenters are concerned that the 
Internal Revenue Service (IRS) might treat the transfer of assets as a 
withdrawal, and as a taxable event. They point out that, should the IRS 
treat the transfer of assets as a withdrawal, and as a taxable event, 
the IRS would recognize gains or losses on the transferred assets, 
include the value of the transferred assets in the public utility's 
income in the current year for Federal income tax purposes and deny a 
current deduction for the contribution of the transferred assets to the 
newly-established, separate Fund. \38\
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    \38\ Investment/Trust/Utility Companies Request for Rehearing at 
5-6; Strong Request for Rehearing at 5-7. Tax Code section 468A(b) 
limits the amount that a public utility may contribute to a 
qualified Fund and currently deduct in a given year to the amount of 
decommissioning costs that the public utility includes in its cost 
of service for ratemaking purposes for that year. Were the IRS to 
consider a transfer from a previously-established Fund to a new Fund 
a withdrawal, and a taxable event, the IRS would deny a current 
deduction to the extent that the transferred assets exceed the 
amount of allowable contribution to the new Fund in the current 
year.
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3. Commission response
    Having considered the commenters' concerns, we agree that a 
separate Fund for Commission-jurisdictional collections is not 
necessary to our properly monitoring Commission-jurisdictional 
collections for decommissioning, so long as public utilities establish 
clearly identifiable separate accounts within a single Fund to identify 
Commission-jurisdictional and state-jurisdictional components of the 
Fund. This accounting would allow decommissioning collections to remain 
consolidated in a single trust, while separately identifying 
Commission- and state-jurisdictional assets. It would also avoid the 
additional expenses associated with establishing and maintaining 
separate trusts.\39\
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    \39\ See Union Electric Company Comments at 2.
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    The Final Rule provides that the Trustee or Investment Manager 
shall keep accurate and detailed accounts of all investments, receipts, 
disbursements and transactions of the Fund. \40\ This requirement 
incorporates the necessity of distinguishing between Commission-and 
state-jurisdictional collections, and we shall carefully monitor Funds' 
compliance with this requirement. Consistent with this discussion, we 
also are modifying 18 CFR 35.32(a)(1) to expressly provide that if a 
Fund includes monies collected in both Commission-jurisdictional and 
non-Commission-jurisdictional rates, then a separate account of the 
Commission-jurisdictional monies shall be maintained.
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    \40\ 18 CFR 35.32(a)(5).
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C. Other matters

1. Fund Balances
    a. Request for rehearing. I&M asks that we modify the Final Rule to 
allow a public utility to: (a) completely decommission all of its 
nuclear plants before making any refunds to ratepayers of excess 
balances and (b) to use a surplus from one Fund to make up for a 
shortfall in another Fund. I&M argues that forcing each Fund to stand 
entirely on its own may result in excessive Fund balances to ensure 
that each Fund is adequate to support the decommissioning of the 
nuclear unit to which it relates. \41\
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    \41\ I&M Request for Rehearing at 2-5.
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    b. Commission response. We decline to make this change in the Final 
Rule. I&M is correct when it observes that, ``a rule that requires 
refunds from individual Funds * * * is a requirement that each Fund 
must stand entirely on its own.'' \42\ As we noted in the Final Rule, 
Funds are not generic. Each Fund does stand on its own. Public 
utilities with multiple nuclear units must collect unit-by-unit amounts 
to decommission each unit and must meet deficiencies on a unit-by-unit 
basis. \43\ To do otherwise would allow utilities to speculate with the 
solvency of individual Funds through a form of risk management, 
``offsetting favorable and unfavorable assumptions regarding each plant 
or unit * * * [and so obtaining] the advantage of diversification of 
risk through aggregation * * * .'' \44\ Such risk balancing could put 
individual funds at risk.
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    \42\ Id. at 3.
    \43\ 60 FR at 34,117; FERC Stats. & Regs. Regulations Preambles 
1991-96 at 31,361.
    \44\ I&M Request for Rehearing at 3-4.
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    What I&M also overlooks is that Fund investment managers are 
fiduciaries. Each Fund is unit-specific because the fiduciary duty of 
each Fund investment manager is to the ratepayers who have contributed 
to the cost of decommissioning the specific unit for which it manages 
the Fund. While a particular fiduciary may administer more than one 
Fund, it has a separate fiduciary responsibility to the ratepayers 
contributing to each Fund. A fiduciary should not be allowed to violate 
its duty to the ratepayers who contributed to the Fund it manages in 
order to make available monies for the decommissioning of other units.
    We will not allow public utilities with multiple nuclear units to 
use excesses in one Fund to offset deficiencies in another Fund and so 
force one set of ratepayers to subsidize another. I&M, however, 
speculates that the same customer group may be associated with both 
Funds.45 Even were this the case, and I&M has not 
demonstrated that it is, still, the customer group is contributing to 
the decommissioning of two units and has the right to be secure that 
the separate collections for each unit will be used to decommission 
that unit. As we stated in the Final Rule:
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    \45\ Id. at 3.

    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.46
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    \46\ 60 FR at 34117; FERC Stats. & Regs. Regulations Preambles 
1991-96 at 31,361.
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2. Audits and Inspections of Accounts
    a. Request for rehearing. I&M challenges our authority to direct a 
public utility with nuclear units to conduct an audit or inspection of 
the accounts, books and/or records of a Fund and to participate in such 
an audit or inspection.47 It asks that we delete the 
following language from the Final Rule:
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    \47\ I&M Request for Rehearing at 5.

    The utility or its designee must notify the Commission prior to 
performing * * * [an] inspection or audit. The Commission may direct 
the utility to conduct an audit or inspection.48
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    \48\ 18 CFR 35.32(a)(5).

    b. Commission response. Our authority to order public utilities to 
audit or inspect the accounts, books and records and to forward the 
results of that examination to us, (and our authority to participate in 
those audits should we choose to do so) derives from our authority to 
ensure that public utilities' accounts are correct and conform to the 
Commission's Uniform System of Accounts.49 It also derives 
from our authority to determine, under sections 205 and 206 of the 
Federal Power Act (FPA),50 whether, how, and to what extent 
a public utility may recover decommissioning funds through wholesale 
rates, just as we have the authority to regulate the recovery of all 
other costs of service through wholesale rates.
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    \49\ The Commission's authority to prescribe a uniform system of 
accounts and to require jurisdictional utilities to keep accounts is 
well settled. See Kansas City Gas and Electric Company, 43 FERC 
para.61,248 at 61,675 (1988) and cases there cited.
    \50\ 16 U.S.C. 824d, 824e.
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    As we noted in the Final Rule, the inclusion in rates of amounts to 
cover future decommissioning expenditures would not be just and 
reasonable if we did not concomitantly provide the necessary safeguards 
to ensure that

[[Page 33347]]

public utilities will use the collections for their intended 
purpose.51 One of these necessary safeguards is our ability 
to order public utilities to audit or inspect Fund accounts, books and 
records and to forward the results to us for our inspection (and for us 
to participate in those audits if we choose). In the Final Rule we 
stated that:
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    \51\ 60 FR 34112-13; FERC Stats. & Regs. Regulations Preambles 
1991-96 at 31,352-353.

    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 cost of 
decommissioning.52
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    \52\ 60 FR 34113; FERC Stats. & Regs. Regulations Preambles 
1991-96 at 31,353.

    Accordingly, we will not delete the challenged language from the 
regulations.
3. Reports
    a. Request for clarification. New England Public Power Nuclear 
Customers ask the Commission to specify whether Fund annual reports 
will be public documents. They also ask the Commission to direct that 
public utilities serve Fund annual reports on all wholesale customers. 
They reason that directing public utilities to serve Fund annual 
reports on all wholesale customers would be consistent with the 
Commission's requirements at 18 CFR 35.2(d), 35.3(a) and 35.8(a), that 
public utilities serve changes in rate schedules on all wholesale 
customers, and

would enable wholesale customers to keep themselves and their 
customers informed, to bring problems to the Commission's attention 
when necessary, and to negotiate more effectively with public 
utilities over decommissioning rates and related 
matters.53
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    \53\ New England Public Power Customers at 4.

    b. Commission response. A Fund annual report is not a rate 
schedule. Nevertheless, we agree that ratepayers and other interested 
entities should have access to Funds' annual reports. These reports are 
public documents and will, of course, be available in the Commission's 
Public Reference Room at 888 First Street, NE., Washington, DC 20426. 
In addition, we will require Funds to mail a copy of their annual 
report to anyone who requests it. This will make the information 
available to anyone who requests it, while at the same time avoiding 
the needless expense of mailing copies of the annual report to those 
who have no wish to see them.54
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    \54\ We will also revise 18 CFR 35.33(d) to provide that the 
utility submit to the Commission each year an original and 3 
conformed copies of the financial report furnished to the utility by 
the Fund's Trustee.
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4. Investments
    a. Request for clarification. Maine Yankee inquires whether the 
provision in the Final Rule prohibiting a utility from ``engag[ing] in 
day-to-day management of the Fund or mandat[ing] individual investment 
decisions'' 55 would prohibit Maine Yankee from itself 
investing a portion of its Fund in an equity index mutual fund that 
replicates the Standard & Poor 500 index. Maine Yankee submits that the 
decision to select a mutual fund is akin to a decision regarding 
general investment objectives and the selection of an investment 
manager. Maine Yankee maintains that:
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    \55\ 18 CFR 35.32(a)(2).

    In selecting a mutual fund, the utility is adopting an 
investment policy of paralleling market performance and is achieving 
this performance at a low cost. The utility engages in no individual 
fund management and no investment decision. The mutual fund manager 
serves in the role of investment manager.56
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    \56\ Maine Yankee Request for Clarification at 4.
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    b. Commission response.
    In the Final Rule we stated that:

    The utility may provide general investment policies, but * * * 
may not engage in the day-to-day management of the Fund or * * * 
itself make individual investment decisions.57
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    \57\ 60 FR at 34117; FERC Stats. & Regs. Regulations Preambles 
1991-96 at 31,360.

    We disagree with Maine Yankee that the decision to invest a portion 
of Maine Yankee's Fund in a specific mutual fund is akin to the 
selection of a Fund investment manager. The mutual fund manager manages 
the mutual fund on behalf of all of the customers of the mutual fund; 
it does not make investment decisions solely on Maine Yankee's behalf. 
We also disagree with Maine Yankee that in selecting a mutual fund 
``[t]he utility engages in * * * no investment decision.'' 
58 The decision to invest a portion of Maine Yankee's Fund 
in a mutual fund would be an individual investment decision, and a 
``utility may not * * * itself make individual investment decisions.'' 
59
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    \58\ Maine Yankee Request for Clarification at 4.
    \59\ 60 FR at 34117; FERC Stats. & Regs. Regulations Preambles 
1991-96 at 31,360.
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    Individual investment decisions are solely the province of the Fund 
investment manager, who ``directs and implements the Fund's investment 
program * * *.'' 60 Maine Yankee has the responsibility to 
select ``trained, experienced, professional investment managers who are 
skilled in the art of offsetting risk,'' 61 but the Fund 
manager makes individual Fund investment decisions. Maine Yankee may 
not itself invest a portion of its Fund portfolio in a mutual fund.
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    \60\ 60 FR at 34116; FERC Stats. & Regs. Regulations Preambles 
1991-96 at 31,359.
    \61\ 60 FR at 34122; FERC Stats. & Regs. Regulations Preambles 
1991-96 at 31,369.
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Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act 62 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.63 Consequently, the Commission certifies that 
this final rule will not have a significant economic impact on a 
substantial number of small entities.
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    \62\ 5 U.S.C. 601-612.
    \63\ 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.
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Effective Date and Congressional Notification

    This rule is effective July 21, 1997. The Commission has 
determined, with the concurrence of the Administrator of the Office of 
Information and Regulatory Affairs of the Office of Management and 
Budget, that this order on rehearing is not a major rule within the 
meaning of section 351 of the Small Business Regulatory Enforcement Act 
of 1996.64 The Commission is submitting the order on 
rehearing to both Houses of Congress and to the Comptroller General.
---------------------------------------------------------------------------

    \64\ 5 U.S.C. 804(2).
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List of Subjects in 18 CFR Part 35

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

    By the Commission.
Lois D. Cashell,
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:


[[Page 33348]]


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

    2. Sections 35.32 and 35.33 are revised to read as follows:


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. If the 
trust fund includes monies collected both in Commission-jurisdictional 
rates and in non-Commission-jurisdictional rates, then a separate 
account of the Commission-jurisdictional monies shall be maintained.
    (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 95-01, 888 First Street, NE. 
Washington, DC or at the Office of the Federal Register, 800 North 
Capitol St., NW., Room 700, Washington, DC.
    (4) The Trustee shall have a net worth of at least $100 million. In 
calculating the $100 million net worth requirement, the net worth of 
the Trustee's parent corporation and/or affiliates may be taken into 
account only if such entities guarantee the Trustee'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 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 the 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 Fiduciaries of 
the Fund and, if necessary, replace them if they are not properly 
performing assigned responsibilities.


Sec. 35.33  Specific provisions.

    (a) In addition to the general provisions of Sec. 35.32, the 
Trustee must observe the provisions 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.
    (c) 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, 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 95-01, 888 First Street, NE. Washington, DC or at the 
Office of the Federal Register, 800 North Capitol St., NW., Room 700, 
Washington, DC.
    (d) The utility must submit to the Commission by March 31 of each 
year, one original and three conformed copies 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

[[Page 33349]]

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.
    (e) The utility must also mail a copy of the financial report 
provided to the Commission pursuant to paragraph (d) of this section to 
anyone who requests it.
    (f) 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.

[FR Doc. 97-16043 Filed 6-18-97; 8:45 am]
BILLING CODE 6717-01-P