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Preparing for a Nuclear Exchange

Three ways to value nuclear power plants for buyers and sellers.
Fortnightly Magazine - May 2004

should be as similar as possible.

The income approach, as mentioned above, is the method buyers and sellers rely upon to make a decision. Buyers and sellers make the market, and appraisers only reflect that market. Participants in the market develop several income approaches in preparation for negotiating a price, because they cannot forecast the future with any degree of certainty. Now, appraisers use the results of buyers and sellers in the sales comparison approach and try to mimic them by developing an income indicator of value based on projections and an industry-based discount rate.

Application of the income approach can be very volatile based on very minor changes in the forecast. Although the income approach is a useful valuation tool, it should be supported by either the cost or sales comparison approach to value.

The cost approach is especially useful for unique property where sales do not exist and an income approach is not possible. This approach develops the current cost of the property being valued, less all forms of depreciation and obsolescence, plus land value. One problem, however, is that the appraiser must be knowledgeable of the industry's economics and technology. Preparing a complete and detailed cost indicator of value is very time consuming, but it produces the most subject-specific detail of any of the three indicators of value.

The most supportable appraisal, a complete appraisal, uses all three indicators of value. In a perfect world, they all support the same value conclusion, or at least a narrow range. All three indicators reflect the market. The market is defined by buyers and sellers: the market for electricity, fuel costs, operating expenses, the current cost of equity and debt, and the market for current construction costs, new technology, and industry economics.

Nuclear plants have not been constructed in the United States for many years, but the current administration supports the construction of new plants. Nuclear plants are environmentally friendly; they do not pollute the air, the water, or the soil. Once the federal government opens the Yucca Mountain long-term used fuel storage facility, the problem of "what to do with spent fuel" finally will be solved. At present, operating plants in need of additional storage are building dry storage facilities to temporarily store used fuel. These large concrete facilities are expensive and contribute little or no value to an operating plant. The federal government, not the nuclear plants, is responsible for long-term fuel storage.

In 2003, the DOE worked to understand the business risks associated with the design, development, and operation of new nuclear plants. The United States Senate plans to reauthorize the Price-Anderson Act, which limits the liability insurance coverage for plant owners.

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