SEC Division of Investment Management staff letter: Exelon Corporation

Investment Company Act of 1940 - Section 3 and 7 Exelon Corporation

September 13, 2007

RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 200789148 Exelon Corporation File No. 132-3

Based upon the facts and representations contained in your September 12, 2007 letter, we would not recommend enforcement action to the Securities and Exchange Commission against Exelon Corporation ("Exelon"), Exelon Generation Company, LLC ("Generation"), or the Decommissioning Trusts (as defined in your letter) under Section 7 of the Investment Company Act of 1940 ("Investment Company Act") if Exelon, Generation, and the Decommissioning Trusts operate in the manner described in your letter without registration as investment companies under the Investment Company Act. Because our position is based on the facts and representations in your letter, you should note that any different facts or representations may require a different conclusion. This response expresses our views on enforcement action only and does not express any legal conclusion on the issues presented.

Susan Gault-Brown Senior Counsel

Incoming Letter

The Incoming Letter is in Acrobat format.

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1735 MARKET STREET, Slsi FLOOR BAiTlMORf. M3
PHLADELPHIA, PENNSYLVANIA 19!03-7599 BE-HESDA, MD DENVEI, CD 2: 5-655.8500 LAS VEGXS. Nlr FAX: 2 15~864.8999 LO5 ANGELLS, CA WiNWBALLARDSPAHR.COM PHOENIX. AL SALT LAKE CITY. UT VODRHEES, WJ WASHINGTON. OC WILLIAM H. RHElNER YJtLMINGTON, DL

O,RECTDIAL.,215) 864-8600

PERSONAL FAX: (215) 864-9063

E-MAIL:I~~EINER@B~L'~A-;sP~HH.cc~~~

Septcmbcr 12, 2007
VIA FEDERAL EXPRESS
Office of Chief Counsel
Division of hivestn~cnt Manage~i~ent
Securities and Exchange Comn~ission
100 F Street, N.E.
Washington, DC 20549-0504
Attn: Douglas J. Scheidt, Esy., Associate Director and Chief Counsel Re: No-Aet~on Request under Section 7 of the Investment Company Act of 1940 Dear Mr. Seheidt:
We are writing to you on behalf of Exclon Corporation ("Exclon"), on behalf of itself and on behalf of its wholly owned subsidiary Exclon Gcncrarion Company, LLC ("Generation"), to respectfully reqiiest the assurance of the Staff that it will not recommend enforcement action to the Securities and Exchange Conimission ("Co~nmission") under Section 7 of the Investment Company Act of 1940 ("1940 Act") against Exelon, Generation or the Decoinmissioning Trusts (as defined below) if (i) Generation does riot treat the Decommissioning Trusts as investment companies or excluded entities (as defined herein) and (ii) Exclon, for purposes of Section 3(aj(2)(C) of the 1940 Act, trcats Generation as a majority-owncd subsidiary that is not an investment company under Section 3(a)(2)(C)(i) or an excluded entity under Section i(a)(')(C)(ii), under the circurnsta~ices and subject to the conditions described below.

1. Executive Summary
   Our no-action request relates to tlic status of Exclon, Generation and the Decommissioning Trusts under Section 3(a)(l)(C) of the 1940 Act. Our legal analysis supporting our requested no-action assurances can he suniniarized as follows:

Douglas J Scheldt, Esq
Ofiice of Chlef Counsel
Based upon applicable precedent, Generatioil and the Decominissioning Trusts should be treated as separate entities for purposes of the 1940 Act. Although they are separate entities fiom Generation, the Deeomn~issioningTrusts are riot "issuers" of securities and have no "investors" for purposes of the 1940 Act. Therefore the Decommissioning 'I'rusts are not investment compa~iiesor excluded entities. Exelon should be permitted to treat Generation as a majority-owned subsidiary that is not an investment company under Section 3(a)(2)(C)(i) or an excluded entity urlder Section 3(a)(2)(C)(ii). Generation's status does not raise any issues under the 1940 Act but for the Gerierally Accepted Accounting Principles ("GAAP") accounting conventions that require Celleration to include the value of the Decommissioning Trusts' assets on its consolidated balance sheet, and the related issue of whether Generation's interest in the Decommissioning Trusts on an unconsolidated basis should be valued oil a gross basis (in which case such valuc would presumably be equal to the value of the Decommissioning Trusts' assets) or net ofthe Generation's liability to pay the nuclear decommissioniilg costs. As ft~rtliersupport for our request, we note that the Decommissioning Trusts are subject to comprehensive Federal regulation that is designed to ensure the ability of Generation to meet its eventual decommissioning obligations of its nuclear generating facilities. We believe that such Federal regulation appropriately protects the interests of tlie public in connection with operation of the Decommissioning Trusts and that no public policy purpose would be furthered by applying the 1940 Act to the Decon~missioningl'r~tsts.
11. Background
A. Exelorz and its Subsidiuries
Exelon, a utility services holding company, operates through its principal subsidiaries:
Generation, a Pen~isylvaiiialiniited liability company; Corninonwealth Edison Compa~iy,an Illinois corporation ("CornEd"); and PECO Energy Company, a Pennsylvania corporation ("PECO). Generation's business consists principally of electric generating facilities, wholesale energy marketing operations and competitive retail sales operations. CornEd's business includes the purchase and regulated retail and wliolesale sale of electricity arid the provision of distributioli and trallsniission services in northern Illitlois, including the City of Chicago. PECO's businesses iriclude tile p~~rchaseand regulated retail sale of electricity and distribution and transn~issionservices in southeastern Pennsylvania, including the City of Philadelphia, and the purchase and regulated retail sale of natural gas and the provision of distribution services in the Pennsylvania counties surrounding the City of Philadelphia. Generation was formed iii 2000 arid began operations as a result of a corporate restructuring effective January I. 2001 in which Exelon separated its generation and other

Douglas .I. Sclleldt, Esq
Office of ChieECounsel
Septe~nher12. 2007 coriipetitive businesses from its regulated energy delivery business at ComEd and PECO. At that time Con~Ed and PECO trallsfeired owership of all of their nuclear generating facilities to Get~eratioil, illctudi~ig ail of their nuclear generation and the related nuclear decommissioning trusts. LVith 11 sites and 10 facilities, Generation operates the largest coriimercial nuclear fleet in the U.S. and one of the largest in the world. Generation represents approxitnately 20 percent of the U.S. nuclear industry's power capacity and about 3 percent of all U.S. power generation. Generation has approximately 7,700 eniployees. For the year ended Decernbcr 31. 2006, Generation had revenues of $9,143,000,000 and assets of$18,909,000,000. This includes AmcrGen Energy Company, LLC ("AmerGen"), a wholly owned subsidiary of Generation, which is the licensee for three nuclear generating facilities. CotnEd, with approximately 5,500 eniployees, senres about 3.8 rnillioil electric customers in Chicago and Northern Illinois. For the year ended December 3I, 2006, ConiEd had revenues of S6,I O 1,000,000 and assets of $17,774,000,000. PECO, with approxiniately 2,100 employees, serves about 1.6 n~illion electric customers and more than 480,000 natural gas customers ~IIPhiladelphia ;uid Southeastern Pennsylvania. For the year ended December 3 1,2006, PECO had revenues of $5,168,000,000 atid assets of $9,773.000,000. .An organizational cha1-t for Exelori and its subsidiaries and the Decommissioning Trusts is attached hereto as Exhibit A. B. Establishnient of tlze Decor~tniissionirrg Trusts After a nuclear generating facility is closed and rernoved from senrice, it must be decotx~missioned. This includes the removal and disposal of spent nuclear fuel and radioactive colnponelits and materials and the cleanup of radioactive or hazardous contarninatio~l that may remain in buildings or on the site. Exelon estimates that the amounts of required decommissioning funds for its nuclear generating facilities range from $149 to $506 million per facility. NRC regulations require that licensees of nuclear generating facilities demonstrate reasonable assurance that funds will be available in certain niini~nuni amounts at the end of the life of the facility to decommission the facility.! Licensees of nuclear generating facilities may provide reasonable assurance by setting aside fiinds for the decominissioning of such facilities in external sinking funds during operation of the facilities. Such external sinking funds must he established and maintained in an account segregated from licensee assets and outside the administrative control of the licensee and its subsidiaries or affiliates in which the total amount of funds would be sufficieilt to pay decotnmissioning costs at thc time pertnanent termination of operatioils is expected. An external sinking fund may be in the fonxi of a trust, escrow accou~lt, or Government fund, with payment by certificate of deposit,
deposit of Government or other 10 C' r R Part SO 75 1

Douglas J Sche~dt,Esq
Officc of Cl11cfCout1scl
Septciilbei 12. 7007 securities, or other method acceptable to the KRC.' These sinking funds inay not be used for purposes other than deconimissioning of the applicable nuclear generating facilities. In accordance with XRC regulations, Generation has been funding its expected decommissioning costs through external sinking funds that build up money for decon~missioning gradually over the life of its nirclcar generating facilities. NRC regulations require that Generation maiiitai~iseparate decommissioning fi~ndsfor each of the nuclear generating facilities associated with tlie forn~erCoinEd met PECO units, in trust accounts separate from Generation's other assets (the '.Decommissioning Trusts")."hc Decommissioning Trusts include both "qualified" Decom~i~issioningTrusts, which satisfy the requirements of Section 468A of the Internal Revenue Code, and non-qualitied Decommissioning Trusts. Two separate Decommissioning Trnsts (one qualified and one nonqualifiedf are maintained for each of Generation's nuclear generating facilities. Under this approacii, the funds in the Decon~nlissioningTrusts build up slowly during the early years ofa nuclear generating facility's operating life, and then grow more quickly as compounded ea~nirigson the Deco~tnnissioning Trusts' investments increase. As requ~redby NKC reguldtlons, the Deco~i~rnissioi~i~ig irusts sat~sfyeach of the followmg criteria:
The Decommissioning Trusts are external trust funds held it1 the United States, established pursuant to a written agreement with an entity whose operations are regulated by Federal and state agencies. 3 We riotc that AnierCim assumed responsibility for dccommissioniilg each of its three ~rucleargenerating facilities upon the purchase of each unit in 1999, 1999 and 2000. respectively, and that NI1C regulatioiis require that AnlcrCieil maintain separate decommissioning funds for each of the .4merGco nuclear generating ficililics, in trust accounts separate fiom AnlerGen's other assets. 'The fu~idsfor the decommissionilig trusts for the A~nerGei~nuclear generating facilities have not been fuirded w~da-a ratepayer recovery program, and accordingly, AmerCien is eiitiiled io retain any funds renraiiii~igiii tl~cbi. deconunissio~lingtnists after dccomn~issioningof the AmerGen facilities has been complctcd. Because there is no mechanisiir by which AmerGen call seek to collect additional amounts from custonlers in order to pay the deconinlissioning costs of thc AmerGen facilities. if their are iiisufficieiit funds in the Decommissionii~gTrusts associaled with the AnlerGen facilities to pay for the decomn~issioningcosts for such facilities AnrerGeii is required to fund that sl~ortfjll.This fact differeirtiares the hmerGcn deconrnlissioning 1111sts ii-om those maintai~ledfor the I'I'.CO and ConlEd ficilities. Although we do not believe that this f3ct should necessarily result in a different analysis or treamlent uilder the 10.10 Act for the A~nerGendecon~n~issioningtrusts, we have determined to liniit the no-action assurance requested in this letter to the decomn~issioningtrusts nlainlained fbr the I'ECO and CornEd ficilities, for which any funds remaining after decomn~issioningare required by law to be refundcd to PECO's customers or CornEd's custonlers, as applicable.

Douglas J Sche~dt.Esq
Office of Clnef Cou~lsel
September 12. 2007
The Decomrnissioning Trust agreements prohibit trust investments in securities or other obligations oEExelo11, Generation or their affiliates, successors, or assigns. The Decommissioning Tist agreements also prohibit investnlents in any entity owning one or more nuclear generating fdcilities (except for investments tied to general iliarket indices or non-nuclear sector ~nutualfunds) and prohibit investinents in a mutual fund ill *liicli at least so0/;,of the fund is invested in the secrities of a parent company whose subsidiary is an owner of a foreign or domestic nuclear generating facility. The Decommissioning Trust agreernents stipulate that the agreements cannot be amended in any illaterial respect unless 30 working days prior written notice has been provided to the NRC, and there is no objection froln tile NRC. The Decomm~ss~otlmgTrust agreements sttpulatc that the trustee and the Investment manager4 for tile Deeon~mtsstonrngTrusts must act prudently ' The Decommissioning Trust agreements provide that no disbursements or paynients froin the Deconunissioning Trusts (other than paymerit ofroutitlc admiistrative expenses) may be made by the trustee until the trustee has first given the NRC 30 working days prior written notice and the NRC has not objected. The Decommissioning Trust agreements prohibit Exelon, Cieneration or any of their affiliates or subsidiaries from providing day-to-day management or direction of investmeilts or direction on individual investments to either the investme~~t manager or the trustee of the Decommissioning Trusts. 4 in accordance with UKC and Fcderal 1:nergy Regulatory Conimission i"FERC") regulations. the Decomniissioning I'rus~shave ail investment manager appointed by or on behalf of Generatio~i.(;cneratio!i may provide overall investnient policy to the illvestment managcr, but it rriay do so only in writing and neither Generation nor its affiliates may serve as i~ivcstmeiitrrranager or otherwise engage in day-to day nianagernent of the Dczornmissioiiillg Trusts or mandate invcsrrnent dcclsions. 10 C.I:.R. Part 50.75; 18 C.F.R. 35.22(2). 5 As required by URC and FERC regulations, the invcstnicilt manager for the Deco~nmissioni~igTrusts niust exercise the standard of care, whether iii investing or otherwise, that a prudent investor would use in the same circumstaiices. The tcrm "prudent investor" mealis a pr~idelitinvestor as described in the Restatement ofLaw (Third), 'I'tusts 6 227. i k C.F.R. 35.32(3).

Douglas J Scheidt. Esy
Office of Chief Counsel
September 12. 2007
C. Structure, findirtg artd Regulation of the Decott~ ftrissiorziizg Trrrsts

1. Structure
   The Decommissioiling Trusts have been established through the use of trust documeiits, in accordance with 10 C.F.R. 50.75(c)(l). As recluired by NRC regulations, these trust agreements: (i) provide for the segregation of the decommissioning funds from Geiieration's other assets; (ii) ensure that the funds are outside of the administrative control of Generation; and (iii) provide safeguards against in~proper payments from the funds. The Decommissioning Trusts have been established to satisfy Generation's nuclear decommissioning obligations, and the Decom~nissioning Trust agreements provide that the filnds in the Decommissioning Trusts must be used for this purpose. As discussed below, the Decommissioning Trusts originally were funded with amounts collected from custorriers and, in certain circumsta~ices, the Dccoin~nissioi~ing Trusts will continue to be funded by fut~ire collectiosfrom custort~ers. Although the Decoinmissioiiig Trusts do not have the legal status of subsidiaries of Generation and should not be considered subsidiaries of Generation for purposes of the 1940 Act,(' GAAP accountirig conventions require that the value of the assets held by the Decommissioning Tr~ists be included on Generation's consolidated balance sheet.' However, as 6 Tlic 1940 i\ct does not define the term "subsidiary," although it does delinc the terins "majority-owned subsidiary" and wholly-owned subsidiary." Rased upon these definitions, whether the 1)ecornmissioning l'rnsts are "subsidiaries" of Generation for purposes of the 1940 Act depends upon whether or not Generation's interest in the Dccornmissiotriilg Tr~ists is a security. We do not believe tirat Generation's interest in the Decommissioning Triists should be considered a security and thesefore believe that the 1)ecoimissioning I'rtists are not s~ibsidiaries oiGcneratioi~ far pi~rposes of the 1940 Act. 1 We note that the 40% asset test set forth in Sectioir ?(a)(l)((') of the I940 Act is to bc perfi)nrreii 011 an unconsolidated basis rather than a consolidated basis and that such test coilsiders only assets arid not liabilities. Aii iicoirsolidated balance sheet for Cieneration would presumably shou <:eneratioil's intercst in tlie Deconrnlissioniiig Trusts as an asset, but not the uilderlyiilg assets held by the Dccoinnlissioning 'I'msts. It is unceixain whether Generation's interest in tile llecomnssioning I'iusts on an unconsolidated basis sl~ould be raliicd oil a gross basis (in wliicli case siicli islue would presiiinably be equal to the ialiie oftlre 1)ecomniissioning Trusts' assets) or net of Generation's liability to pay tile niiclear dccoir~ni~ssioi~iilg costs. U'e believe tliat it may be appropriate to value Cieneratioii's interest in the Dscoiumissioning Tiusts on an ui~coirsolidated basis riet of such liability because, although such liability tcchiiically is that of Getleiation rather tlian the Deconinlissioning Trusts, tlre assets licld by tiie Ilecornmissioning Trusts are inlpresscd
   witli sucli liability througir operation oilan in that such assets caniiot be irsed otller tbeir to extinguislr such liability. If such liabiiity exceeds the val~ie oi.thc 1)ecomnlissioning Trusts' assets, Generation's interest in the Decommissioning Tiusts on a net unconsolidated basis would equal zero. Although Generation believes tirat all of tlie assets Ireid by the Decommissioniilg Trusts will ultiir~ately be used to pay nuclear deconuiiissioiiing costs, the value of sucli assets niay from time to titlie exceed tlie current estimate ofsiicl~ costs (and tliercfore Generation's liability). As discussed Iiereirr, sllould the value oithe Decommissioning Trusts' assets exceed such liability, ijeneration will have a liability to CornEd and I'ECO customers. as applicable. for any such excess. For purposes of the analysis in this no-action request, (continned...)

8
Douglas J Scheidt, Esq
Office of Chief Counsel discussed below: the Decommissioning Trusts are subject to comprehensive Federal regulation that, among other things, pcnnits the assets of the Decommissioning Trusts to be used only to satisfy the liability for decommissioning costs of the ~iuclear generating facility to which they relate, aiid to pay the administrative costs and other incidental expenses, including taxes; of the Decommissioning Trusts. Therefore, Generation is not free to dispose of the assets in the Decommissioning Trusts and, as discussed below, in economic reality does riot "own" tllesc assets for purposes of the 1940 Act. Also as discussed bclo\v, the Decon~missioning Trusts are structured in a manner that is designed to protect the assets held in the Decommissioning l'rusts from Ge~ieratioii's creditors. Although certain decomn~issioning costs are currently being incurred, the majority of decommissioi~i~~g expenditures are expected to occur after the nuclear generating facilities are retired. Based on current operating licenses and anticipated license reneu,als, decornmissio~ling expenditures for facilities currently in operation are estimated to begin in 2029. To fund future decon~missioning costs, Generation held investmerits ill the Decommissioning Trusts having a current market value of $5 billion as of December 3 1, 2006. At December 31, 2006, the asset retirement obligation recorded on Generation's consolidated balance sheet related to its nuclear - generating facilities was approximately $3.55 billion.s AS explained further below, cxccss amounts in the Decommissioni~ig Trusts for the nuclear generating facilities fomierly owned by ComEd and PECO, if any, must he returned to ComEd aiid PECO customers, respectively. CorttE~l:Generation assumed responsibility for decoinrnissioning each of the fonner CornEd facilities coincident with the transfer by CoinEd of such facilities, and the Decoinmissioning Trusts associated therewith, to Generation in January 2001. The ---.........-a

(...continued) we lmvc assumed that tile value of Generation's interest iii the Decommissioiiing 'rriists on both a consolidated and an uncotisolidated basis is equal to the value oi'the underlying assets held by the I>ecolnrnissioning 'l'rusts without deduction oftlie liabilities. Tile valuatioii ofthe 53.55 billioi~ assct retirement obligation liability is determined in accordance with the Financial Accounting Statidaids Board's SFAS 143. /iccoiiwfing/?)i- A.~sezRetire~lent Oh/ig(ition.s, and represents the net present value ofthe decornmissioiiing liability, based oil a probabilistic w-eighted-average model. ?he $5 billion in fi~ilds in tiie Decomnrissioniiiy 'Trusts are valued at fair mar-ket value. 'The diffcrei~ce between these arilounts (the cxccss of assets over liabilities), with respect to tlie former Coinfd and former PEC:O Sacilitiei. is iilcludeii as a liability in Generation's balance sheet, as a payable to ComEd and PECO, for which Coniiid and PECO have coi-relatii~y regulatory liabilities to their ratepayers. Mo%vcver; it is Exelon's expectatioir that, over tiiile, tlie liability will increase to tlie point where it will be equal to the balance in the fiinds in the I>econ~missioning Trusts, and accordingly, tlirre will no longer be an excess of assets over liabilities, and likewise no ainounts due to CoinEd or PECO. In other \voids, at [he time of decomi~~issioning, Exelon expects that the asset retirement obligation liability rvill equal the funds in the Decon~missioning Trusts.

Douglas J Sche~dt, Esq.
Oftice of ChteSCounscl
Decominissioning Trusts associated with the fonner ComEd facilities have been funded with amounts collected from CornEd's customers. Pursuant to an order from the Illinois Commerce Commission, Con~Ed was pemiitted to recover up to $73 million per year through 2006 from ComEd customers to decon~missiou fomier ComEd nuclear generating facilities. Collections were limited based on the ratio of electricity purchased by ComEd to the total amount generated from those facilities. In 2006, decommissioning revenues collected from ComEd customers totaled approxiniately $66 million. CoinEd is not permitted to collect amounts for dccotli1l1issioning subsequent to 2006. Any funds remaining in the Deco~n~nissioning Trusts associated with the foriiler ComEd facilities after decommissioi1ing has been colnpleted are required by Illinois law to be refunded to ComEd's customers. If there are insufficient funds it1 the Decommissioning 'Trusts associated with the fom~er ComEd units to pay for the decornmissio11ing costs for such facilities, Generation is required to fund that shortfall, and there is no ~i~echanisn~ whereby Generation can collect additional amounts from ComEd's customers in order to do so. PECO: Generation assuilled responsibility ibr dccomn~issioning each of the fomlcr PECO units coincident with thc transfer by PECO ofst~ch units, and the Decommissioning Trusts associated therewith, to Gc11cration in January 2001. The Dcconimissioning Trusts associated with the former PECO units have been funded with arnouilts collected from PECO's customers. Nuclear decommissioning costs associated with the nuclear generating facilities fonnerly owned by PECO continue to be recovered currently through rates charged by PECO to its customers. Amounts recovered, currently $33 millio~l per year, are remitted to Generation as allowed by the Pennsylvaia Public Utility Colnmission ("PAPUC"). The PAPL'C will allow PECO to collect frorn customers and remit to Generation, anually, through the operating lives of the former PECO nuclear generating facilities. Any funds remainirrg in the I>ccornmissioni~ig 'Tri~sts associated with the formcr PEW units after decommissioning has been completed are required by order of the PAPCC to be refunded to PECO's customers. Ilthere are insufficient funds in the Decommissioning 'I'rusts associated with the fonuer PECO units to pay for the decommissioning costs for such units, PECO is allowed to collect additional amounts from its customers, subject to certain limitations as prescribed by an order fron~ the PAPUC. Generally, PECO will not be allowed to collect amounts associated with the first S50 million of any shortfall of Decommissioning Trust funds cornpared to dccomn~issioning oblizations, as well as 5% of any additional shortfalls. This initial $50 million will be bonle by Generation as required by the corporate restructuring in 2001. diccordingly, the order from the PAPUC currently allows PECO to seek additional collectioiis to fund
95% of thc shortfall, after the itiitial 550 million that is not eligible for reimbursement froin the customers.

Douglas J Scheidt, Fsq
Office of Ch~ef Counscl
Scptcniber 12, 2007
The Decotnmissioliing Trusts are subject to comprehensive regulation by the NRC, the Federal Energy Regulatory Cornmission ("FERC") and the Lntenial Re~enue Service ("IRS"). Certain of these regulations are discussed in greater detail under IV. below.
111. Legal Analysis
A. Repeal of Public Utility fialrlilrg Conipany Act qf 1935 arzrl Backguorrrtd of Nu￾Action Reqrresf The consurnniation of the share exchange between PECO and Exelon and the merger of ComEd's parent, Uniconi Corporation, with and into Exelon on October 20, 2000 caused Exelon to bccotne subject to regulation and registration as a registered holding company under the Public Utility Holding Company Act of 1935 ("PUHCA"). As such, Exelon and its subsidiaries, includi~ig Generation," were exempt from registration under the 1940 Act by Section 3(c)(8) of the 1940 .Act and neither Exeloil nor Generation needed to be conce~ned about their status under
Section 3(a)(l)(C) of the 1940 Act (discussed bclow). However, PUHCA was repealed,
effective on February 8, 2006$ pursuant to the Energy Policy Act of 2005. Therefore, Exelon and Generation can no longer rely on the Section 3(c)(8) exemption, which by its temx is limited to holding companies subject to regulation under POHCA. Section 3(c)(8) has not been aniended following the repeal of PUHCA and the statute that replaced PUHCA, the Public Utility Holding Compaliy Act of 2005, does not provide any exemption from investment company registration for holding companies that are subject to its regulatio~~. Our no-action request relates to Generation's status under Section 3(a)(l)(C) of the 1940 Act. Our no-action request also relates to Exelon's status under Section 3(a)(l)(C) ofthe 1910 Act and, in that regard, the status of Generation is relevant in detemiining Exelon's status under 10 . . the 1940 Act. Section 3(a)(l)(C) generally defines as an investment company any issuer which is engaged in the business of investing, reinvesting, holding, owning, or trading securities and owns or proposes to acquire illvestment securities haviiig a value exceeding 40% of its total assets (exclusiue of Govenrrnellt securities and cash items) on ail unconsolidated basis (the "40% asset test"). Section 3(a)(2) of the 1940 Act broadly defines "invcstment securities" to include virtually all securities, but Section 3(a)(2)(C) specifically excludes from this definition securities issued by a majority-owned subsidiary of the issucr ~inder certain circumstances. Accor(iing to legislative history, this exclusion embodies Congress' view that the 1940 Act was not intended to Generation was forilled as part ofa restructuring of lixelon's competitive generation business tliat was completed in Jarniary 2001 I0 Sectio~~2(a)(22) of the 1940 Act defines "issuer" as "every person who issues or proposes to issue any security, or has outstailding any security which it has issued." 9

13
Douglas J. Scherdt, Esq
Oftice of Ch~ef Counsel
Sepietnber 13, 2007
Page I0
9 3 apply to bona tide holding conipanies.' , However, to prevent an issuer from circumventing the 1940 Act by using a majority-owned subsidiary to carny on a11 investment company business,
Section 3(a)(2)(C) provides that a majority-owned subsidiary is not excluded if the subsidiary
itself is either an investment company (Section 3(a)(2)(C)(i)) or an entity relying on the exclusio~i from the definition of irivestnient company in Section 3(e)(l) or 3(c)(7) (Section 3(a)j2)(C)(ii)) (sucl~ entities are hereinafter referred to as "excluded e~ltities").'~ Since the repeal of PUI-ICA on February 8, 2006 and the resulting inability of Exclon and Generation to rely on the Section 3(c)(8) exemptioii contained in the 1940 Act, each of Exelon and Generation have been able to meet the 400.b asset test. However, we expect that the market value of the assets held by tile Decommissioning Trusts will corltinue to increase relative to tlie book value of Generation's and Exelon's total assets as s11ow11 on their co~isolidatcd balance sheet^.'^ We therefore anticipate that at some point in the future Generation may not be able to meet the 40% asset test if either the value of Generation's interest in the Decommissioning Trusts, or the value of the assets held by the Decornmissioniug Trusts, are considered "bad assets" for purposes of this test. B. Generrztiort artd fht.Decontrrrissiortirzg Trusts are Sqarute E~tities Based on the statutory provisions discussed above, the initial issue presented is the status of Generation, a wholly-owned subsidiary of Exelon, for purposes of Sections 3(a)(l )(C) and 3(a)(2)(C) of the 1940 Act. Based on applicable precedent, we believe it is appropriate to treat Generation and the Dcco~nrliissioning Trusts as separate entities for purposes of the 1940 hct." I I See Ilearings on S, 3580 Bei'ore a Subconunittee ofthe Senate C:ornmittce on Banking and (:oninierce. 76th Cong., 3d Srss, 177 (1940) (\vhere David Schenker. C:hicfCouiisei to thc Investment Trust Study. stated that "We are not eveti reniotely interested in holdirrg companies."). I2 Section 3(c)(l) ofthe 1940 Act generally excludes froiil the detinition of' an investment compaily any issuer whose otitstaildirig securities are owned by nor more than one liundrrd persons and which is not making a public offeriilg of its securities; Section 3(c)(7) of the 1940 Act geiicrally excludes any issuer whose outstanding securities are owned exclusively by ceitairr qualified purchasers and which is not making a public offering. We note in this regard that it is very difficult to accurately value Generation's iiuclear generating facility assets aiid their hook value as shown oil Gei~cmtion's halance sheer may not be reflective of their tnie market value. I4 Separate creatmeilt is supported by four Con~niission precedents in particular: ( 1) Prtiiienriiil Ir~.si~r~~iici~ (ij oif'Aniericii v SEC: 326 F.2d 383. ar 387-88 (3rd Cir. 1964),@'g 117 ihe .Varier idPruiieniiir1 /n.suro17ic Co. ofAmericii, 41 S.E.C. 335 (1963),cerr. tit<?mied377 C.S. 953 (1964) ("Pri~ilcnfirii"); (2)Comdisco, inc., SEC No-Action Letter (Oct. 25, 2000) ("Comrlirco"); (3) Tuition Plan Consortium, I.I.C, SEC No￾Action Letter (Feb. 4, 2003) ("TPC'); and (4) First Data Co~poration, SEC No-~tction
Lettei(Jan, 13,
2004) ("First aliir'').

Douglas J. Scheidt, Esq.
Office of Chef Counsel
September 12. 2007
If Generation is an investment company or an "excluded entity," then Exelon's ownership itltercst in Generation might be considered an "investment security" for purposes of determining Exelon's status under Section 3(a)(l)(C). For the reasons discussed below. it is our opinion that Generation is not an investment company or an excluded entity. Therefore, Exelon should be allowed to treat Generation as a majority-owned subsidiary that is not an investirlent company under Section 3(a)(2)(C)(i) or an excluded entity untler Section 3(a)(2)(C)(ii), under the circumstances and subject to the conditions described belo~v. In Pruder~tictl,the leading authority in this area, the Third Circuit affinned the Commission's view that it was appropriate for 1940.4ct purposes to analyze the status of a variable annuity separate account separately from its sponsoring insurance company. Under Prudential, it is appropriate to analyze the status of a pool of assets within an operating company separately where: (i) the operating company causes interests to be issued in a pool of assets that is legally segregated from the company's other assets; (ii) the assets in the pool are held primarily for the benefit of interest holders as the sole nieasure of their investment participation; and (iii) the interests in the pool do not corifer significant rights i11other assets of the operating company. In Ci/milisc.o, the Staff responded favorably to a no-action request by a11operating company which relied on t'nrtlerztial to conclude that its issuance of certain "tracking stock" did not result in the creation ofa separate issuer for purposes of the 1940 Act. In TPC, the Staff responded favorably to a no-action request by a consortium of colleges and universities that had established a prepaid tuition program that cited Przlcleritictl to support their view that the status of the trust which held the prepaid tnition payments should be analyzed separately for 1940 Act purposes. Most recently, in First Dtrtil, the Staff responded favorably to a no-action request by the operator of an official check business that was required to maintain the proceeds of such checks in a segregated portfolio of limited types of inve~tments.'~ Like the instant matter, I'ru~lei~tiitl,Co~mlisco,TPC and Fir.sr llatil all deal with structures not specifically contemplated by Congress in 1940. Under the rationale of Przttlet~ti~l, COIIZSCO, TPCl and, most notably, First Diiin, we believe that Generation and the Decommissioning Trusts should be treated as separate entities, and the assets ofthe Decommissioning Trusts should not be attributed to Generation for 1940 .4ct purposes. Notwithstanding GAAP accounting covcntions, the legal and practical realities demonstrate that the Decommissioning Trusts sho~ild be treated as separate entities. In particular, as discussed in ll.B. above and IV. below. the Deeom~nissioning Trusts are segregated Itom Generation's other assets, and the assets in the
Decommissioning Trusts are held for a specific purpose - namely, to fund future nuclear deeotnmissioning costs -and not for the benefit We believe that t11c facts; circumstances and tcgal analysis in tire instant matter are sribstantiaily similar to those in Firsr Datii. We note, hoiuever. that the Staffs respunse in Fir.sr Da/a specifically noted tliat because of tile very fact-specific nature of First Data's request, the Staffs position in First Darn applies only to First Data and no other issuer may rely on the Staffs position stated therein. As we are unable to rely on First Dniir. ive are submitting tliis no-action request.

Douglas J Sclic~dt, Esq
Office of Ch~ef Counscl
Septen~ber 12, 2007 of Exelon or Gerleration or their public security holders. Also, Generation is not entitled to any funds remaining in the Decon~missiolling Trusts after all decon~rnissioning costs have been paid. Therefore, separate treatment is co~lsistent wit11 the econornic reality of tlie relationship between Generation and the Decon~missioning Trusts, as well as wit11 how Federal and state regulators view that relationship. Notably, for Federal income tax purposes, the Deco~nn~issioning Trsts are required to file their own tax returns and are treated as entities separate from Generation. Regarding the first cleme~lt OFF',-uderrriiil, the Staff noted specifically in Lbrn(fi.sco that a pool of assets woi~ld be viewed as "legally segregated" from an operating company ifthe pool of assets is insulated by legal means (rather than lnercly by accounting or other conventions), including tliro~tgh a trust document. .4s discussed in 1I.C. above, the Decon~missioi~ing Trusts are legally organized as trusts and governed by trust documents. Moreover. other aspects of the Federal regulation of Generation and the Decomn~issioning Trusts reinforce the separation between the entities. While the second and third parts of the Puicilenticzl test are not directly applicable to the instant matter, analogous arguments can be made. As to the second Prz~(let1ticil element, the assets in the Decomnlissio~ling Trusts are held for a specific purpose - namely, to fund future nuclear decommissioning costs -and not for the benefit of the Exelon or Generation or their public security holders. As to thc third I'rzidentii~l element, the public security holders of Exelon and Gerleration have no rights to the fu~lds in thc Decom~nissioning Trusts or any such funds remaining after nuclear decomniissioning llas been con~pleted. Also as to the third Pt,ude~ztiul element, the gerieral public, who tilay be argued benefit from the nuclear decommissioning, possess no rights with respect to any assets of Generation. These three facts support an argument for separate treatnlent of Generatioil and the Decommissioning Trusts for the purposes of the 1940 Act. As stated abovel Section i(a)(2)(C) provides that a security issued by a majority-owned s~lbsidiary is not excluded fiom the definition of"invcstment security" ifthe subsidiary itself is either an investment company or an excluded entity. In con~lectioil with our analysis of the status of Exelon and Generation under the 1940 Act. we bclieve that it is also aoorooriate to .I 2 review of the status of the Decomlnissioni~lg Trusts under Section 3(a)(2)(C). This approach is consistent with the views of the Commission, the courts, and the Staffwhich, on a number of occasions, have concluded that a segregated pool of assets within a company should be treated as a separate entity for 1940 .4ct purposes if those who own interests in the pool look primarily to the investment performa~lce of the pool to obtain financial gains (or
losses).~" Thus, even though the Decolnmissioning Trusts do not have the legal status of subsidiaries of Generation and we believe that Generatio~l's interest in the Deconimissioning Trusts should not be considered a security, we believe that the unique relationship between them and Generation makes it appropriate to examine the status of the Decommissioning Trusts as majority-owned subsidiarics i6 See, eg, Prtferitiizl and Fi~..st Dririi, s1~pr.ais. 14. This approach also is consistent wiih ihe intent of Sections 3(a)(2)(C)(i) and (ii). which clearly reflect Congress' view that an issuer cannot seek to avoid the 1940 Act by engaging in ail investment c olsspany business through a majority-owned subsidiary.

17
Douglas J. Scheldt, Esq
Office of Chief Couiiscl if the Deco~nmissioning Trusts themselves are irivest~nent compa~nies or excluded entities. However, as discussed in 1II.C. below, it is our opinion that the Decommissioni~lg Trusts are not iiivestment companies or excluded entities because they are not "issuers" for 1940 Act purposes. Furthennore, as discussed in IV. below, we believe that no public policy purpose would be furthered by applying tlie 1940 Act to the Dccom~nissioning Trusts because they and Ge~leration are subject to coniprehensive existing Federal regulatiol~.
C. The Decorttrrtissiortirr,~ Trusts ure trot I~tvest~terrt Cornpatties or Excluded
Etztiries
The Decommissioning Trusts are neither investment companies nor excluded entities. Although the Decommissionit~g Trusts, like traditional irivestnicnt companies, consist of pools of securities, we note that they otherwise lack the key elerrlents of investment companies that the 1940 Act is designed to address. In particular, as discussed below, the Deco~n~nissioning Trusts are not "issuers" of securities for purposes of the 1940 Act because the Decotnmissioniiig Trusts do not aggregate funds from participants who participate in the investment experience of the pools of assets. Thus. the Deco~nmissioning Tr-usts have no "investors" in the 1940 Act sense. Moreover, as discussed in IV. below. to the extent that tile Decommissioning Trusts' pools of liquid assets raise concerns, we believe that comprehensive Federal regolation of Gerleration and the Deco~nmissiotiing Trusts, which requires that the funds be used to for nuclear decommissioning costs, adequately protects the public interest." The Staff has on numerous occasions constdered the status of pools of lrquid assets representing payments for prepaid goods or services as Investment cornpanres, most notably in We also rrcognize tllat the l)econinlissioning Triists could address any question about their status under
Section 3(a)(l)(C) by i~ivesting all of their assets in cash or Govertrnlent securities, which are excluded
from the definition of "investment securities" by Section 3(a)(2)(A). llowever, tliis approach is not practical from an ecolromic sia~idpoiiit because, dependilig on current market conditions, these types of investments may be relatively unatlractive. .4lso, this approach w-ouid be inconsistel~t with the purpose of the Decon~missioiling Trusts - to provide reasonable assurance that the funds invested therein would grou sufiicicntly over time to provide f\li the toss of the decommissioning of thc applicable nuclear generating facilities. Further. it would be incolisistent with Congressional intent. In the Energy I'olicy Act of 1992, Congress approved two riiajor changes intendcd to help conlpailics build up nuclear decoinmission~ng tlust funds more rapidly: (I) the Federal tax on tlie Euiids was lowered in steps: from 54 percent to 22 percent in 1994 and to 20 percent in 1996; and (2) companies were permitted greater flexibility in the types of iirvestn~eiits and no longer requi~ed to irlvest decolnniissioniiig funds only in lower-earriiiig tax-exempt municipal bonds, Federal government securities and bank time deposits. 'I'tie Conin~ission recogliized that when companies invest certain proceeds only in cash and Govenmiciit securities to avoid triggering the definition of investment conipany, tile effect is to restrict the company's ability to fund future operations because of tlie lower yields. See Release No. lC-25835 (Nov. 26, 2002) (proposing Rule 3a-X to allow research and dcvelopiiient coiiipanies greater flexibility to raise and invest capital pending its use in researcll, deveiopnieiit and other operations).

Douglas J. Seheidt, Esq.

Office of Ch~ef Co~i~isel

September 12. 2007

the area of prepaid tuition plans and prepaid funeral contracts." Where such plans or contracts do not allow participants to participate in the invest~nent experience ofthe pool, the Staff has granted no-action relief based on the argument that no "issuer" exists for purposes of the 1940 Act because no security has been issued.'" Such is the case with the Decornmissioning Trusts, which have no "participants" and offer no instrume~its for the purpose of sharing in the i~lvest~llent experience of the pools of assets. The Decommissioning Trusts, in this regard, are similar to the segregated portfolio in First DLI~~, which offered no instruments that allowed bank customers or payees to participate, directly or indirectly, in the investinent experience of the segregated portfolio."' The operation of the Decommissioning Trusts demonstrates that they are not issuers for 1940 Act purposes. Unlike the situation in Pnrtfet~iicrl,the leading decision on the definition of an issuer under the 1940 Act, the Decornrnissioning Trusts do not pool monies contributed by purchasers of securities wlio look to the performance of the Decommissioning Trusts for their gains (or losses). Instead, the Decornmissioning T~usts merely serve, in effect, as a temporary (albeit lengthy) l~olding mechanism ibr funds that will be used to retire a known future liability in an unknown anlount. This function, we note, is similar to that played by the segregated portfolio in Fit-si L)cltrz and the prepaid tuition trust in TPC'. Because the Decornmissioning Trusts do riot issue securities, they have no "investors." As the Commission has recognized, the "essence" of the 1940 Act is to protect "investors" who contribute their monies to "a pool of equity capital managed and invested in securities at his risk."" The argument that the Decomnlissioning Trusts have no "investors" is further supported i 8 See. eg., Fleet National Bank. SliC No-Action Letter (Sept. 5, 1990): Funeral Services of lowa, Inc.. SEC No-Action Letter (Oct. 14. 1987); Michigan Fuileral Directors Association, SEC So-Action Letter (Sept. 28, 19871 (funeral services guaranteed regardless of price at the time of need. contracts proceeds pooled in a trust in which buyers have no cspectation ofprofit; contracts not vicwcd as a security); Quincy College; SEC No-Action Letter i1)eceniber 15, 1986); and t-lEM.4R Education Corporation of America. SIX No￾Action Letter (Juilc I I, 1990) (prepaid tuition plalis involving single institutioii and niultiple institutions, respectively, not issuers of securities because participating studenls were not affected by the success or failure of the pooled tuition plan funds). 1 9 lii In SECv.f/ofiowey (ii,328 G.S. 293, at 298-299 (1946) i"lioxey",; the Supreme Court stated that ail "investment contract" is a transaction whereby a person im.ests money in a conlnion ciiteiyrise with the expectation of profit solely throilgli the efforts of a third party. See Ffrst Dati~, .siii,ra n. 14 'I /{I
the jVl~fiirrer. (!fPriiiieiiiiu/ lr~suriirice Co. of'lrrierica. 41 S.E.C. 335. 340 (I 963). See uiro IIR. Rep. 'So.
2639. 76111 Cong.. 3d Sess. at 6 (1940) (the 1940 Act is dcsigncd to deal with "large liquid pools ofthe
public's savings entnisted to managemerit to be iilvested); SEC'v. liiriirble -imluify Life/ririrrrir~ce (i~iiipiirry,359 U.S. 65, 80 (1959) (noting that thc 1933 axid 1940 Acts were iilte~ided to "proieci peoplc entrusting their money to otiicrs to be invested on an equity basis"). In this regard, Section l(b) of the 1940 Act specifics that the inierests of "investors" are adversely affected by various practices set forth in that provision. 20

Douglas J Scheidt, Esq
OSfice of Clitef Counsel
Page IS
by the fact that the assets in the Deconlmissioning Tnlsts are held for a specific purpose - namely, to fund future nuclear decommissioning costs -and not for the benefit of tlie Exelon or Generation or their public security holders. Although we note thal there are three groups that may be argued to have an economic interest relating to the Decomn~issioningTrusts - (I) customers of CornEd and PECO and the general public; (2) Generation and its public note holder^;^' and (3) Exelon and its public s1tareholders"- none of them has an interest that even remotely resembles that of a11 "investor" it1 an investment company. The General Public and Customers of ComEd and PECO - It may be argued that the general public benefit from the nuclear deconirnissioning and have at1 interest in Generation's ability to meet its future nuclear decommissioning obligations because the general ublic would otherwise bear the burden of future nuclear decommissioning costs.' However, tlie membeii of the general public make no "iinvestme~lt"at all and havc no expectation of profit. Because customers of ComEd and PECO are a subset of the general public, it also may be argued that they benefit from the tiuclear decommissioning and havc an interest in Generation's ability to meet its future nuclear decommissioning obligations. Even though customers, who will have indirectly paid for a substantial portion of the decommissioning costs over time through monthly charges by their electricity provider, are entitled by law to receive back any funds in excess of actual decornmissio~~ingcosts, such participation does not equate to tlie experience of sharing in the "profits" from a pool of investments; as they are merely receiving a refund of past payments for expenses that were never incurred. Moreover, customers make no "investment" of money in the Decomn~issioningTrusts, nor does there exist a common enterprise. As discussed under 1I.B.above, customers merely pay a tnollthly cltarge to their electric provider, who in turn passes the funds to Generation for contributioll to the Decomiitissioning Trusts. 22 (;eneralion has an interest ii~the Decommissioiiing Trusts because the Deconunissioniiig l'rusts' success iil meeting Suture paynierlt obligations is relevant to Cirneration's finaiicial coildition. Geileration has not issued any eql~itysecurities to the public, but it does have public holders of its debt. Such public noteholders arguably have an indirect interest in the Deconlrnissioiiing '1-rusts through their debt ownership (i.e.,the Decomrnissior~ing'I'rusts' success in meeting future payinrnt obligations is relevant to Generatioii's financial condition). 21 Exelon has an economic interest in the Deconm~issioningTriists by virtue of its ownership of Generatioil, and Exclon's public shareholders arguably have an indirect interest in tlic Decommissioning l'rusts through their share owiiership (I.<.. tire Ileco~nn~issioningTrusts' success in n~eetiiigfuture payment obligations is
relcvairt to Geiieration's. aitd therefore Exelon's, fi~iancialcondition). 24 In this regard, the requireriieirt of the Federal goveii~ineiithat Cieneratlon and other operators oi'1iucicar generating facilities set aside sufficient Stinds to pay their deconin~issioi~ingcosts is an exaillple of allocatii~gthe cost of a public benefit.

Douglas J Schcrdt, Esq
Office of Cli~efCounscl
Furthennore, those custorncrs \vho pay the monthly charges are unlikely to be the actual beneficiaries of any f~rndsin excess of actual dccommissioning costs because the identity of the custonlers changes over time. Finally, customers do not look to Generation for the potential to earn profits from the investment success of the Decornruissioning Trusts. Generation and its Koteholders - Generation and its public noteholdcrs have an irltercst in the Decoinmissioning Trusts having sufticient assets to satisfy Generation's future tluclear deconimissioi~i~lgobligations. This is because, to the extent that the Decon~missioningTrusts do not have sufficient assets to satisfy Generation's future nuclear dccommissioning obligations, Generatio11is required to fund some or all of that shortfall (as discussed urlder 1I.C.1. above). However, neither Generation nor its public notellolders make an "investment" in the Decomn~issioning~r~ists.'~ In this regard, wc note that all of the funds in the DccomiissioniilgTrusts came kom sources other than my "ivestment"by Generation's public noteholders. In addition, neither Generation nor its public noteholders have any legal claim on the funds in the Decommissioning Trusts, which funds are dedicated to paying the costs of future nuclear generating facility decommissioning. Fillally, neither Gcneration nor its public noteholders can get access to the assets in the Decomtnissioning Trusts for general business purposes. An argument may be made that Generation and its public noteholders have an inchoate interest in such funds in that Generation could have a potentially higher contingelit liability in the future to the extent that the Deco~~~r~iissioning Trusts do not have sufficient assets to satisfy Generation's future nuclear decommissioning obligations. However, neither the Commission, the Staffnor the courts have identified this type of inchoate and contingeilt interest as ihe type of "investment" that would create an "issuer" for 1940 Act purposes. Exefon and its Sliarehofders - Exeloil and its public shareholders have an interest in the Decommissioning Trusts having sufficient assets to satisfy Generation's future nuclear decommissioning obligations. This is because, to the extent that the Decommissioning Trusts do not have sufficient assets to satisfy Generation's future tluclear decommissioning obligations, Generation is required to fund some or all of that shortfall (as discussed under II.C.1. above), which would have a detrimeiltal financial impact on its parent company Exelon. However, neither Exelon nor its public shareholders make an "investment" in the 25 Ihis argument is silpporred by the practical reality of the situation - that Cieneration's interest iii thc Decommissioning Tn~stsis a result of NRC regulations that require licensees of nuclear generating facilities to demonstrate reasonable assurance that funds will be available ill certain minimum amounts for decommissioning costs - rather than any
profit motive on the part of Generation.

Douglas J Sche~dt, Esq.
Office of Chlef Coi~nscl
Pagc 17
Decommissioning ~rusts.'" In this regard, we iiote that all of the funds in the Deeommissioni~ig Trusts canie from sources other thari any "investment" by Exelon's public shareholders. In addition, neither Exelon nor its public shareholders have any legal claim on thc futids in the Dccomniissioning Trusts, which fiiiids are dedicated to paying the costs of future ~iuclear generating facility decornmissioning. Finally, neither Exel011 nor its public sliarcholders can get access to the assets in the Decornmissioning Tri~sts Sor general business purposes. An argurnent may be made that Exclon and its public sliarcholders have an inchoate interest in such funds in that Generation (and therefore its parent company Exelon) could have a potentially higher contingent liability in the future to the extent that the Decornmissioning Trusts do not have sufficient assets to satisfy Generation's future nuclear decommissioning obligations. However, neither the Cornmission, tlie Staffor the courts have identified this type of inchoate and contingent interest as the type of "investnient" that would create an "issuer" for 1940 Act purposes. Accordingly, because tlie Decommissioni~ig Trusts are not "issuers," they do nor have any "investors" who need thc protections of the 1940 Act. Further support for our view that the Decon~niissioning Trusts are not "issuers" i~itc~ided to be regulated under the 1940 Act can be found in Justice Breiitian's concurring opinion in SEC'
v. Variirhle Ai11z~iity Life J~ISLI~(IIIC~ Cuizpfzny ("K4J,JCn'), where the Supreme Court concluded
that variable annuity contracts should be regulated undcr the Federal securities laws.27 In support of the Court's view, Justice Brcinian noted that state rcgulatio~i of insurzice companies did not deal with matters critical to the interests of variable annuity investors, such as investrncnt policies and investment strategies, but rather focused on traditional insurance law concerns, such as reserves, solveiicy, and the tcmis of the contract. Such is ~iot the case in the instant matter, however, as Federal regulation focuses directly on ensuring that tlie Decommissioning Trusts maintain sufficient assets to satisfy Generation's future dccoiniiiissioning obligations. Unlike in VXJ,JC, in this case there is no regulatory "gap" to be filled by the application ofthe 1940 Act. D. Generutiorr is rtof art Irtvestrrte~tt Conrpurij~ or an Excluded Erttitj it is our opinion that Generation is not an "investnie~it company," as defined in either
Section 3(a)(l )(A) or Section 3(a)(l)(C) of the 1940 Act, or an excluded entity.2x But for the
2li Generation also is not an investment company for purposes of' Section 3(a)(l )(B), which generally defines investment conlpany as an issuer that is engaged or proposes to engage in the busii~ess of issuing face￾arnount certificates. as defined in Section 2(a)(l5). Generation docs not issue hce-amount certificates.

Douglas J Schcldt, Esq
Office of C'lucf Counsel
September 12.2007
GAAP accoi~ntiiig con~eiitions that require Generation to include the value of the Deconnnissioning Trusts' assets on its collsolidated balance sheet and the related issue of whether Generation's interest in the Decommissioning Trusts on an unconsolidated basis should be valued on a gross basis (in which case such value \vould presumably be equal to the value of the Deconirnissioning Trusts' assets) or net of Generation's liability to pay the nuclear decom~nissioning costs, Generation's status does not raise any issues under thc 1940 Act.
Section 3(a)(l)(A) defines as an investment company any issuer which is or holds itself
out to be engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities.'" Generation is not, and does not hold itself out to be, engaged primarily in the business of investing, reinvesting or trading in securities, as provided in
Section 3(a)(l)(A). Generation's primary business activities consist of electrical power
generation and energy marketing, and all of Generation's public statenlents arc consistent with the nature of its business. While Generation may trade or invest in securities, such activities are ancillary to its core business and Generation is not engaged primarily and does not propose to engage primarily in such activities. In this regard, Generation is in the same position as the consortium of colleges and universities that spotisored the prepaid tuition trust in TF'C, whicli the Staff concluded was engaged primarily in the business of operating a prepaid tuition plan and not in the business of investing, reinvesting or trading in ~ecurities.~~' Similarly, Generation is in the same position as Integrated Payment Systems Inc. ("IPS") with respect to the segregated portfolio in First Drirci, in which the Staff agreed that IPS was engaged primarily in the official check business and not in the business of investing, reinvesting or trading in securities." Similarly, Generation is not an illvestlneilt company for purposes of Section 3(a)(l)(C), which generally includes any issuer which is engaged in the business of investing, reinvesting, owning, holding, or trading securities and owns or proposes to acquire investment securities having a value exceeding 40% of its total assets on an unconsolidated basis. As discussed above, Generation is primarily engaged in the business of electrical power generation and energy marketing, and not in the business of investing, reinvesting, or trading in securities. Furthemlore, although GAAP accounting conventions require Generation to show the Decommissioning Trusts' assets on its consolidated balance sheet, Generation is not engaged in the business of "owning" or "holding" thosc assets for 1940 Act purposes because, among othcr things, the assets are required by Federal regulations to be segregated and accrued to offset a Z ') In this case. Generation is an "issuer." hccause it has securities outstanding, including equity interests. ail of wbicli are held by Exelon. and certain public debt (S699.975,000 Exchange Notes due 201 1 and $499,985,000 Exchange Notes due 2014). However. as discussed in the text, even assuming Generation is an issuer for 1940 Act purposes, it lacks the othcr elenlents of an iilvestment company. ' See PC supw n. 13. 3 I .Tee Fi~w[>(I~(I,.s~ipriz11. 14.

Douglas J Scherdt, Esq
Office of Ch~ef Coullscl
Septe~nber 12,1007 known future liability, rather than assets Generation "oans" atid is free to use or dispose of as it u~ishcs." For the same reasons, Generation does not othcnvise own or propose to acquire investment securities ha-ing a value exceeding 30%of its total assets on an unconsolidated basis. We note that, while the 40% asset test is perfomled using the company's bala~lce sheet, the balance sheet test has created problems for some issuers who, while showing investment securities on their balance sheet, are not in tlie business of owning or holding such ass el^.^^ We also note that, as discussed previously, GAAP accounting conventions require Generation to show the Decommissioning Trusts' assets on its consolidated balance sheet and the 40% asset test is performed on an unco~lsolidated basis. In this regard, Generation would only have a status issue under Section 3(a)(l)(C) if its interest in the Decom~nissioning Trusts on an unconsolidated basis is valued on a gross basis (in which case such value would prcsuniably be equal to the value of the Decommissioning Trusts' assets) rather than net of Generation's liability to pay the nuclear deconinlissioning costs. If Generatioti is not an investnient company as defined in Sections 3(a)(l)(A) or 3(a)(l)(C), it would not need to rely on tlie exclusions froin those provisioi1s in Sections 3(c)(l) or 3(c)(7). Thus, Generation is not an excluded entity for purposes of Section 3(a)(2)(C)(ii). Because we conclude that Generation is not an investment company or an excluded entity, Exelon should bc pcrt~iitted to treat Generation as a majority-owncd subsidiary that is not an investment conipaiiy under Section 3(a)(2)(C)(i) or an excluded entity under Section 3(a)(2)(C)(ii).
IV. Federal Regulation of the Decommissioning Trusts
As further support for our request, we note that the Deco~nmissioning Trusts are subject to comprehensive Federal regulatioli that is designed to ensure the ability of Generatio11 to meet its eventual decon~missionil~g obligations. Though, as discussed above, there are no "investors" in the Deco~nmissioning Trusts, we iievcrtheless recognize that it is ill the public interest to consider whether tlie interests ofthe public in a pool of liquid assets like the Decomn~issioning Trusts are protected from potential abuses. As discussed below, we believe that Federal regulation appropriately protects the interests of the public in connection with the operation of Decommissioning Trusts and that no public policy purpose would be furthered by applying the 1940 Act to the Decomniissioning Trusts. -3 2 See Frankel, The Regu1;ition of Money Ma~~agcrs at $ 5.03jRj (Aspen Law & Uusiiiess 2007) ("'Owncrsliip' in Section 3(a)(l)(Cj should he tested according to \viietiier the assets of ihr conrpilriy are committed to investruent at risk, in the hope of profits. since the purpose of Section 3(a)(l)(C) is to include in the deijziition coinpanics that lay out a slihstanrial pal-t of'ilii.ir. nr,wtr for investrnent in securities. Therefore, a con~pany lioiding securities in trust or nlercly conuolling securities is not an 'owner'...") (citations omitted). Sic Investineiit Colnpaiiy Aci Rclease No. 19566 (July 'I. 1993) (proposing Rule 32,-8 for ceisni~i resrarch and development coinpailies). 33

Douglas J. Scheidt, Esq.
Office of Ch~efCounsel
The Federal government imposes regulatory requirements on the Decon~missioning Trusts. This regulation is designed to protect the interests of the general public by ensuring that Generation maintains sufficient assets in the Dccomn~issioningTrusts to meet its future decommissioning obligations. Moreover, the activities of Generation and the Decon~missioiiing Trusts do not raise the types of investor protection concerns that the 1930 Act is designed to address, as set fonh in tlie tieciaration of the policy and purposes ofthe 1930 Act in Section I(b) therein. Federal regulat~onsImpose the follow~ngrequirements on the Decommlss~ontngTrusts, Investment Standard The investment manager of the Decommissioning Trusts, pursuant to FERC regulations, must exercise the standard of care, whether investing or otherwise, that a prudent investor would use in the same circumstances.'" Restriction on Uses of Funds. Under the provisions of the Internal Revenue Code and FERC's regulations, the assets of the Deco~nmissioningTrusts are only permitted to be used to satisfy the liability for decommissioning costs of the nuclear generating facility to which they relate, and to pay the administrative costs and other incidental expenses, ii~cludingtaxes. of the Decommissioning Tr~tsts.'~ Protection from Creditors. FERC's regulations require the Decommissionirig Trusts to be established pursuant to a written trust agreement and that it be independent of Gcncration, its subsidiaries, afiiliates and associates."~~such, the assets held by the Decon~missioningTrusts are protected from Generation's creditors. Periodic Reporting. Generation is required to deliver various financial reports concerning the activities and status of the Dccon~missioningTrusts periodically to the NRC and ~l2RC.j~ 31 See 26 U.S.C.A. $ 468.4(e)(4) and 18 C.F.R. $ 35.33(b). Illinois law also restricts the use ofthc assets of the Decommissioiiing Trusts for the iiuclear generating facilities formerly owned by ConiEd. See 220 II,CS 5%-508.1(c)(3)(i). 30 18 C.F.R. g ?5.33(a)(l) 37 See 10 C.F.R. 9 50.75(0 and 18 C.F.R. $ 35.33td). Witli respect to the Deconur~issioningI'rusts for the nuclear generating facilities fonnerly owned by Comtid, Illii~oislaw also rsquires Griieration to deliver financial reports to the Illinois Board of I'ublic Utilities. See 220 ILCS 5:X-508.l(c)(3)(i).

Douglas J. Sclie~dt,Esq.
Office of Chief Couitsel
September 12.2007
Page 2 1
V. Conclusion
111sulilmary, Exelon and Generation believe that the rcqucsrcd no-action relief is reasonable and appropriate under the circumstances. 1n particular, we note that the following significant limitations are designed to ensure that the requested relief is limited to the unique relationship between Generation and the Deeotnmissionil~gTrusts. Specifically, for purposcs of dcter~iiiningits status u~idertlie 1940 Act, Generation will:
. Rely upon the requested no-action relief only if the activities of Generatioil and the Decommissioliing Trusts continue to he regulated under existing Federal law substai~tiallyin the manner described above; and Rely upon the requested no-actlon rellef only if the to Deeomm~ss~on~ng Trusts do not in the future act as "issuers" for purposes of tile 1940 Act Generation may establish decommissioiii~lgtrusts in addition the Decommissioning Trusts described in this letter. Generation proposes to treat ariy such decommissioning trusts in the saine manner as the Decoinnlissioning Tri~stsdcscribed in this letter, provided that there are no material differences in how such additional dccoinmissioniiig trusts operate and are regulated. For the reasons set forth above, we request that the Staff advise us that it would not recommend that the Coinmissioil take enforcement action under Section 7 of the 1940 Act against Exelon, Generation or the Decommissioning Trusts if (i) Generation does not treat the Decommissioning Trusts (as defined below) as investment coiivpanies or excl~rdedentities (as defined herein) and (ii) Exelon, for purposes of Section 3(a)(2)(C) of the 1940 Act, treats Generation as a majority-owned subsidiary that is not an irlvestment company under Section 3(a)(2)(C)(i) or an excluded entity under Section 3(a)(2)(C)(ii). We thank the Staff in advance for its consideration of tile conclusions and supporting analysis coritailied in this letter. We are available to discuss ally of the issues raised herein at any time, ifthe Staffshould consider such f~irllierdiscussion necessary or desirable. If you have any questions or need any additional information coiieerning this request, please call me at (215) 864-8600 or Christian A. Szautner at (215) 864-8602.

EXHIBIT A

Orgailizational Chart

CORPORATION
("EXELON")
PEC'O COMMONWEA1,TH -
EXELON
ENERGY EDISON COMPANY GENERATION,
COMPANY ("COMED") ("GENEMTION")
("PECO")
-7

PIICO AN11 COMIX)

I)ECOMh4ISSIONING

I'RIlSTS

but remains oblizated to retom
I
Generatio11 depositsied funds remitted by and CornEd. respectively. in dccomn~issioning trusts for each of the former PtiCO and C'omlid lluclcar gcileratillg facilities. Any excess 111 decommissioning trust funds aftcr paymcnts of all deconimissioingliz~hiliticsis required to hc Cicneration depositsied funds i rett~rned to f'l;C(.f's or CornEd's customers, as 1)cconlinissionlng lrusl funds for An~erGcn facilities not covered by ratc recovery plat, and any excess in decoxnissionir~g tiust funds aftcr paynlent of all dcconirnissiol~lng liabilillcs not required to be returned ro