The back-to-basics trend positioned utilities and other energy companies to lead the way out of Wall Street’s mess. Despite a perfect storm of rising costs and a weakening economy, utilities and...
Nuclear Decommissioning Trust Funds: Rethinking the Approach
Analogous to a pension fund,
a decommissioning trust suffers the same vulnerabilities. That suggests a need for termination insurance.With the growing prospect of some form of electric utility deregulation, and the possible end of rate regulation (em with no guaranteed source of income for utilities that hold licenses to operate nuclear reactors (em it's high time to reexamine the funding process for nuclear decommissioning and consider a policy alternative to ensure that funds will be available when needed to retire the nation's nuclear plants.
Investor-owned utilities with nuclear power plants are accumulating billions of dollars through the ratemaking process to fund Nuclear Decommissioning Trusts (NDTs). The U.S. Nuclear Regulatory Commission (NRC) mandates NDTs as an alternative to the two other decommissioning assurance options (em i.e., use of prepayment or surety bond.
When a nuclear plant is permanently shut down, several alternatives are available to handle decontamination, dismantling, and site restoration. But no matter what alternative is chosen, the responsibility to provide funds for future decommissioning currently falls to the nuclear plant owner (em a liability accepted as a condition of holding an operating license.
However, because the time horizon for actually settling this obligation can span many years, several public policy concerns remain. A 1993 article about the economics of decommissioning, illustrated the application of Coase's Theorem on externalities to the thorny question of how to decide, from a public policy standpoint, whether to have prompt decommissioning (DECON) or delayed decommissioning with interim safe storage (SAFSTOR).1 Among other important considerations, the article revealed the impact of the assignment of property rights and the choice of the discount rate (used to calculate the present value of the liability).
Now, a new generation of concerns that affect NDTs has emerged:
s State initiatives on electric restructuring, in California and elsewhere
s The February 7, 1996, Exposure Draft issued by the Financial Accounting Standards Board (FASB) on a proposed accounting standard for the closure and removal of long-lived assets, including nuclear plants2
s The bankruptcy of Orange County, CA (and the disclosures of massive losses by other organizations) (em due in part to so-called "derivatives" transactions
s The Notice of Proposed Rulemaking issued by the NRC in April, 1996, to examine financial assurance requirements for nuclear decommissioning.3
Any of the first three developments might warrant a look at NDTs. The NRC action forces the issue. The current climate may even suggest a more fundamental rethinking than the NRC contemplates.
Contemporary arrangements for trust-investment management seek a target rate of return. If the portfolio is risky, it can easily have a future value far greater than the plant owner's initial investment (em or far less. If far greater, then a small initial investment will suffice to pay off the future decommissioning cost. But, if the value turns out to be far less at that distant time, the plant owner may no longer be around to make up the shortfall.
The efforts now underway for electric industry restructuring and deregulation call into question implicit assumptions that underpin the establishment of the present NDT structures. The possibility of