July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
THERE'S A STORM coming. This tempest threatens to inundate management and shred shareholder value. It can't be avoided, only survived. Only those who batten down the hatches will survive.
The issue is nuclear plant decommissioning. While many would prefer to comfort themselves that the dark clouds on the horizon are still far off, trouble may come sooner than they think.
Of the 106 operating plants in the United States, more than half were licensed before 1978. Of the plants that have shut down so far, not one has reached the expiration of its license period. Only one, the Consumer's Energy Big Rock Point plant, has exceeded 30 years of operation before permanent shutdown, and many plants have shut down with significantly less operating history. Combined with a regulatory environment that may reduce costs of replacement power generation and result in an inability to recover certain stranded costs, many utilities may find that continuing to operate nuclear plants is too costly.
The decision could come at any moment. For example, during a planned outage, it may be determined that steam generators need to be replaced. An owner then must determine whether there's sufficient life remaining in the unit to recover the associated capital costs. Or utilities' state legislatures could pass restructuring legislation that opens local markets to retail competition and makes continued generation uneconomical.
The Odds Don't Look Good
Experience proves that a utility will have to make a snap decision to cease operations before the end of the plant's operating license; economic and political incentives make it inevitable. Opponents will argue that Nuclear Regulatory Commission concerns prompted the shutdown, that the plant was imprudently operated and that a properly run plant would be economic. Any economic viability study by the utility to support the shutdown decision will be attacked as incompetent and contrived.
Surviving the shutdown decision battle merely permits the utility to reach the eye of the storm. An even more ferocious maelstrom waits on the other side, when the utility must justify the funds it seeks to decommission the plant.
Utilities are finding the estimated costs of decommissioning are significantly larger than when they were last calculated. Low-level radioactive waste disposal costs have skyrocketed, and the U.S. Department of Energy has not begun to remove spent fuel. The sheer sticker shock associated with a decommissioning cost estimate will draw the ire of consumer advocates and state politicians and ensure a sharply contested battle before economic regulators.
Among other issues, observers should expect opponents to argue the utility has inflated the expected cost of decommissioning to generate a slush fund to cover costs associated with a history of imprudent operations. For example, if the estimate includes any amounts to clean up soil contamination, it is almost certain that opponents will argue that, but for imprudence, there would be no contamination and therefore the utility should not recover the costs of cleaning it up. Alternatively, opponents will argue that the decommissioning cost estimate is simply too inaccurate to justify a recovery of funds through electricity rates.
Another common issue in contested proceedings