In 1992, the Energy Policy Act repealed the investment restrictions on tax-qualified nuclear decommissioning trusts. Yet, two years later, electric utilities still have the investment portfolios of their decommissioning trusts dangerously concentrated in fixed-income securities. Why?
In spite of the legislation, the Federal Energy Regulatory Commission, which has regulatory authority over some 200 investor-owned utilities, ruled the companies under its purview have to continue to follow the so-called Black Lung guidelines for investing nuclear decommissioning trusts. These misguided rules restrict investments to non-corporate fixed-income instruments, such as U.S. debt securities, state or local government obligations or bank or insured credit union deposits.
As a result of these continuing restrictions, for example, Independence, Ohio-based Centerion Energy Corp. has its tax-qualified nuclear decommissioning fund in municipal securities in order to maintain reduced-tax status for its trust, despite its executives desire to diversify the portfolio into equities. "Nuclear decommissioning funds are long-lived assets," notes Greg Tropf, Centerion senior investment analyst.
"Over 40 years" - the time it takes before some new nuclear reactors need decommissioning - "you can take some risk with equities. Bonds don't give you inflation protection. You don't have that problem with equities. The way nuclear decommissioning costs are escalating, you need inflation protection."
The FERC, after complaints by utilities, shows some willingness to change. On June 1, it published for comment in the Federal Register a proposal suggesting the adoption of one of three investment policy guidelines: 1) continuation of the current Black Lung rules; 2) a reasonable person standard; or 3) a limited reasonable person standard, restricting investment discretion.
The proposed relaxation of rules by the FERC is long overdue. Its existing restrictions have cost utilities, and ultimately the customers, millions of dollars in opportunity losses from investing in lower-returning fixed-income instruments.
The obvious choice among any reasonable person should be for the unrestricted prudent person standard. The FERC is unqualified to determine how a trust fund ought to be invested, or to judge the reasonableness of any investment.
But rather than secure funding for decommissioning, the Black Lung rules more likely will lead to a financial meltdown of the trusts, their assets eroded by inflation, if not investment risks. Municipal bonds aren't risk-free. Unfortunately it's not the first time a government authority has disregarded decades of portfolio research and experience to overreach its knowledge to produce bad public policy.
Among other examples Pensions & Investments has criticized, in West Virginia an attorney general, asserting state statute, overturned the pension plan's investments in equities; and in Indiana, politicians declined to aggressively push an amendment to overturn a constitutional prohibition against the state pension funds' investment in equities.
The money the FERC wants to ensure is available at the time of decommissioning has a higher risk of not being there unless the commission ends its investment restrictions. Otherwise, customers will bear unnecessary higher costs and, worse, if enough the money isn't there, face having a cut-rate reactor disposal.