By some measures, merchant power assets look like a bargain, selling for well below their replacement cost. But whether low prices signal a buying opportunity or a value trap depends on the...
Managing Risk: Prudence Reviews and Nuclear Projects
How to avoid the billions of dollars in costs that were disallowed during the last round of construction.
the 1970s and 1980s is that of an irreversible process in thermodynamics, one that cannot be returned to its original state once it has taken place, as opposed to a reversible process that theoretically can be undone. Prudence reviews deal with largely irreversible processes, because it is difficult to re-create and analyze nuclear power-plant construction activities and decisions that occurred many years ago. The longer the interval between changes and the more significant the changes, the more irreversible the process becomes.
Chief among the benefits derived from performing periodic prudence reviews is the ability to take corrective actions almost immediately. This is likely to reduce the cost of resolving any issue that surfaces as a result of these reviews. A contractor, for example, not installing cable trays to required seismic specifications will be asked to correct the problems before additional miles of trays are improperly erected.
Having an independent party perform these reviews also will eliminate groupthink among project participants. For example, project quality assurance and technical staff personnel may develop some familiarity with each other during the project due to repeated interaction and socialization outside of work. It is difficult for an inspector to report that a tech staff engineer is using an outdated version of a drawing after they have become friends. The independent reviewer is not encumbered by such consideration and can thereby be more objective.
Management and Investor Objectives
The objective of management and the capital markets is to ensure that the plants can be constructed as planned without having to write off significant amounts of unrecoverable costs at the conclusion of construction. By implementing multiple, independent, and objective reviews throughout the course of a project, companies can deal proactively with issues as they arise and reduce the impact of any findings from end-of-project prudence reviews.
Anyone leading the overall construction of a new nuclear power plant must be aware of the billions of dollars in disallowed costs that occurred during the last round of construction. Recognizing these risks and taking the appropriate steps—from the beginning of the project through its completion—to identify, manage, and minimize them can improve project economics significantly and facilitate operational efficiency and regulatory relationships.