WASHINGTON -- Although the new energy law is expected to drive nuclear decommissioning trust funds away from municipal bonds, the exodus won't begin immediately and won't be a complete departure, analysts say.

"Muni people should not give up hope," said Tom Tuschen, vice president of National Investment Services of America. "There will be a lot of times where munis might be the right investment."

John Pawlik, vice president of institutional advisory with John Nuveen & Co., said "I don't think there is going to be a wholesale, total elimination of municipals" as an investment choice by the funds.

Under previous law, trust funds set up to defray the costs of decommissioning nuclear power plants were permitted to invest only in U.S. Treasury securities, tax-exempt municipal bonds, or bank deposits. But energy legislation enacted Oct. 24 waives those restrictions and lowers the funds' 34% tax rate, to 22% in 1994 and 20% in 1996.

Currently, the 100 or so trust funds that exist contain between $5 billion and $7 billion, with approximately 80% of that amount invested in municipals, according to various estimates.

The new law is bad news for municipal market participants in two ways. First, a large portion of the amount now invested in municipals will probably be shifted into other investments over time, market analysts said.

More importantly, the law means a missed opportunity for the municipal market to share in the expected sharp growth of the funds over the next 20 years. Tuschen estimated that early in the next century, $75 billion could be invested in the funds.

One fund manager described a substantial change in plans for a new fund that a utility is creating for a nuclear power plant expected to be decommissioned in 2025.

Before the law changed, "we were basically going to be 100% in munis," said the fund manager, who asked that his name and his firm not be identified. "At this point we're thinking 65% equities and 35% fixed-income," with the fixed-income portion divided between municipals and other securities.

The official, who is in the municipal department of a financial advisory firm, said he was originally in charge of the fund. But now that the law has changed, "I'm not even going to manage the fund anymore," he said.

But even though funds will shift away from tax-exempts, municipal market participants should not consider nuclear funds a completely lost cause, the analysts and fund managers said.

First, the move away from municipals will not begin immediately. Although the provision loosening investment restrictions went into effect Oct. 24, the big impetus to shifting to other securities will not come until the tax rate cuts become effective.

"You really don't even have to get in position for that change until at least the summer of next year, so I don't think you'll see a lot of shifting in the very near future," said an investment adviser who manages several nuclear trust funds and who asked to remain anonymous.

Even after 1966, trust funds will still keep a small percentage of their funds in municipals for several reasons, sources said.

One reason is that the drop in the tax rate under the new law does not apply to about 20% of the funds because they are classified as so-called grantor funds.

"Those trusts would continue to look at municipals because they are taxed essentially on the marginal rate of the utility" that sponsors them, according to Tuschen, whose firm manages several nuclear trust funds.

For the remaining 80%, which are known as "qualified" funds, there will be times when the tax rate drop will be offset by other market conditions that cause the funds to move small amounts of their money into municipals.

For that reason, "we expect some funds to continue to buy munis," said George Friedlander, managing director for fixed-income securities with Smith Barney, Harris Upham & Co.

Tuschen also pointed out that in states that levy income taxes, municipal bonds exempt from those taxes could be attractive to the funds. In those situations, "I may be very happy with munis" as an investment, he said.

Still another reason for the funds to keep some of their money in municipals is that laws remain in many states that restrict investments by nuclear trust funds.

"It pays to remember that this is just the lifting of federal regulations," said Pawlik, whose firm manages about a dozen nuclear trust funds. "There will be a bit of regulatory lag in some states." Pawlik did not have a figure for how many states regulate nuclear trust fund investments.

Fund managers must also consider the issue of credit quality, several sources said. Representatives from Moody's Investor Service and Standard & Poor's Corp. said they doubted fund managers would become high rollers.

"I would be surprised if the attitude became really aggressive with those funds," said David Ambler, a vice president with Moody's Investments Service, "I would expect they would remain fairly prudent and not [turn into] high-risk portfolios."

That concern about credit quality means "there still should be a reasonable holding of munis," Tuschen said. "When you get into non-Treasury taxables, these trust [managers] get nervous."

The energy legislation originally had contained a provision that was designed to offset some of the loss in demand expected to result from the changes in the nuclear funds' investment practices. The provision would have made municipals more attractive to banks by easing restrictions on bank deductibility. But that provision was dropped from the final bill and added to the tax bill President Bush is expected to veto.

Congress' failure to make sure the energy bill contained some protection for the municipal market from the effects of the nuclear fund provision shows that "we can never let down our guard on buy-side issues," said Micah S. Green, executive vice president of the Public Securities Association.

"This is yet another loss of demand, albeit inconclusive as to how severe an effect it will have, but still a loss of demand that we in the marketplace will monitor and [use to] remind policymakers there is a cost," Green said.

The expectation that demand for municipals from nuclear trust funds will decline "will help us (fuel our arguments next year to encourage positive measures to broaden this marketplace," Green added.

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