[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.
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\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