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PUC plan would put trust funds at risk

About $6 billion set aside for decommissioning two nuclear plants would be subject to looser, riskier investment rules. Derivatives and hedge funds, anyone?

December 16, 2012|Michael Hiltzik
  • California Public Utilities Commissioner Timothy A. Simon wants to allow the trust funds to invest in derivatives, real estate, hedge funds and other risky categories.
California Public Utilities Commissioner Timothy A. Simon wants to allow… (www.cpuc.ca.gov )

Even the most inattentive 401(k) owner surely understands today that the markets can bite you where it hurts, that promises of long-term investment gains can evaporate in the blink of a short-term crash and that the less understandable an investment scheme is, the more dangerous it is.

Why, then, is California Public Utilities Commissioner Timothy A. Simon pressing so hard to subject billions of dollars of public trust fund money earmarked for the decommissioning of the state's two major nuclear plants to the same sorts of risks?

Simon's initiative is on the PUC agenda for Thursday — the commission's last meeting of the year and, as it happens, Simon's last as commissioner. He returns to the private sector at the end of the year.

If this is to be his legacy, it's a curious one. The trust funds he wants to monkey with contain about $6 billion raised from ratepayers' bills and conservative investments in stocks and bonds. Simon's proposal laments that the money is invested in an "ultra-conservative" way, as though that's a bad thing in an era when non-conservative investing has produced non-trivial losses.

Simon's alternative is to broaden the permissible investments to include derivatives, real estate, hedge funds and other wild and crazy categories. He favors allowing the utilities to turn over more of the funds to investment managers whose performance, as a group, is none too impressive — and to double or even quadruple the maximum fees those managers can be paid.

His idea is for the trust funds to harvest the higher investment yields that more aggressive investing can produce over the long term.

But it's not certain that Diablo Canyon and San Onofre, the state's two big nuclear plants, will be with us for the long term. Originally it was assumed that they would both operate until their federal licenses expire in the early 2020s, when they would obtain routine 20-year extensions.

But Pacific Gas & Electric recently suspended its application for a license extension for Diablo Canyon, pending a seismic study inspired by the 2011 earthquake and tsunami that wrecked Japan's Fukushima nuclear plant. And San Onofre has been offline almost all year, thanks to a botched generator upgrade that has raised doubts whether it will ever operate again.

The trust funds are calculated to be 90% on their way to covering their needs, assuming average investment earnings in the future. That puts a lot at stake in changing the investment rules, which is why ratepayer advocates are unnerved at the prospect.

"With a great deal of uncertainty about the continuing life of Diablo Canyon and San Onofre, this is not the time to decide we're going to take on additional risk to pump up our returns," Truman Burns, a program supervisor at the PUC's Division of Ratepayer Advocates, told me.

Here's the background:

Under PUC rules dating back to the 1980s, the state's three major utilities must accumulate trust funds out of customer rates to pay for the eventual dismantling and cleanup of Diablo Canyon and San Onofre.

These are big jobs. They involve disassembling the plants, excavating and decontaminating the soil and finding some way to dispose of radioactive equipment and spent fuel — especially since federal plans to store spent fuel in a central depository have come to nought.

The whole process, including hanging on to spent fuel until it cools down, can take 30 years. As a result, estimates of the cost range widely, depending on forecasts of investment returns, inflation and the time and complexity of the job. Estimates on San Onofre from Southern California Edison, its majority owner (San Diego Gas & Electric owns a small piece), have run from a little less than $4 billion to nearly $9 billion.

Since the plants went into operation, the utilities have placed a decommissioning charge on every bill and paid the money into the trust funds, which are kept separate from their general corporate coffers. Edison customers currently pay about $24 million a year.

That brings us to what to do with the trust-fund money until it's needed. The rules have been conservative — though not conservative enough to avoid a hit in 2008. No more than 60% can be in stocks and no more than 20% in foreign stocks. At least 50% of the stock portfolio must invested in low-cost index funds.

Bonds have to be investment grade, not junk. No "alternative" investments like derivatives and real estate, which really cratered go-go portfolios in the crash, are permitted. And overall fees to investment managers can't be more than 0.3% of the portfolio value.

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