Nuclear Decommissioning Trust Funds: Rethinking the Approach
hedging or risk-minimizing transactions. However, as the recent, well-publicized experience of Orange County (as well as several large corporations) shows, derivatives can be structured and used in transactions that embody speculative bets on specific financial outcomes (specifically, betting on changes in interest rates) and a high degree of reliance on settlement (i.e., no default) by the counterparty.
The put option in the NDT case captures the potential for the plant owner to effectively settle the decommissioning obligation if the value of investments in the NDT at the time of decommissioning turns out to be less than the expenditures required at that time, and if the plant owner has no recourse to sufficient additional funds either through emergency ratemaking or proceeds from gap insurance. The value of a put option can never be negative, nor less than the difference, in this case, between the cost of decommissioning (the "exercise price") and the value of the NDT portfolio (and any other assets available) for settlement of the decommissioning obligation. Of course, even if there were no assets available, the value of the put here can never exceed the cost of decommissioning.
The cost of insuring against a "gap" due to (a) a portfolio
shortfall from risky investment strategy, or (b) a premature shutdown, can be formulated in terms of the value of a put option, using an option-pricing model. Figures 1 and 2, respectively, illustrate the nuclear plant owner's synthetic balance sheets, valuing the put option as an asset. When the NDT is fully funded on an actuarial basis (Figure 1), the NDT holds a put. The plant owner provides a guarantee valued as the liability G, and might own some fraction, Æ (Æ The value of the put option increases, the greater the weighting of stocks in the NDT portfolio and the amount of time available to exercise the option (i.e., time remaining before decommissioning). This fact could affect a plant owner's business strategy: The owner might wish to choose 60-year SAFSTOR rather than prompt DECON; or (as suggested above) under new competitive conditions, abandon the operation. If sufficient funding is not available when the nuclear plant is shut down, and there is no further recourse against the plant owner(s), consumers or taxpayers must make up the shortfall or endure a long period of unexpected environmental anxiety.
FASB's Proposed Statement of Financial Accounting Standards, Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets, is likely to add impetus for a change in the approach to NDT management. The Exposure Draft proposes recognizing and measuring a liability like that for decommissioning, as the obligation is incurred.11 The Exposure Draft proposes extensive, footnoted disclosures to provide information about the nature and status of any trust funds, insurance, or guarantees to cover the liability.12
The feasibility of termination gap insurance should be studied as a means of extinguishing this liability in the case of a premature shutdown. Such an event represents to some extent a controllable risk, and to some extent a poolable risk. The NRC looked into some form of termination insurance