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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.

Fortnightly Magazine - February 2006

project execution. In addition, project managers’ qualifications will have to include a high degree of computer literacy and proficiency with other control tools not expected during, for example, the South Texas Project (STP) prudence review performed almost 20 years ago.

The project management tools and techniques that are to be used to build and manage the construction of the new generation of nuclear power plants are likely to be borrowed from many other industries, including nuclear power-plant projects abroad and projects from capital-intensive industries such as oil and gas, automotive, and pharmaceuticals. Unlike the domestic nuclear industry, these have not suffered from a self-imposed moratorium. They have continued to devise and adopt more effective project management tools and techniques to complete their capital-intensive, complex projects on time and on budget.

Upcoming Prudence Reviews

As individual utilities and consortia embark on new nuclear construction programs, they likely will face the prospect of prudence reviews as they attempt to recoup their investment. While factors such as breach of contract, a dissatisfied minority owner, or gross negligence may trigger an assessment of nuclear power-plant construction, a primary management focus should be on imprudent costs incurred during the construction process. These costs are historically significant and very manageable if the underlying symptoms are proactively addressed.

Within the past several years, three utilities and a consortium of eight utilities—driven by the growth of demand (particularly in the Southeast), incentives provided by the Energy Policy Act of 2005, and environmental concerns—have developed and submitted to the Nuclear Regulatory Commission (NRC):

  • Early site permit (ESP) applications for building new nuclear power plants at existing sites;
  • Combined operating license (COL) applications for building new plants at new sites.

In 2001, Exelon, Entergy, and Dominion applied for ESPs. In 2004, Dominion and Nustart, a consortium of eight utilities, applied for COLs. The NRC is expected to approve these applications in the 2006-2007 time frame.

Addressing the Disallowance Risk

A company must address the project-cost disallowance risks from a prudence review or stand to lose several million dollars. Entities considering the construction of nuclear power plants at existing or new sites should implement the following two-pronged approach to mitigate or eliminate the risk of cost disallowance in a prudence review:

1) Throughout all project phases, companies should acquire and implement innovative and effective project-management technologies and processes, and adequate human resources. Innovative project-management methodologies and tools can be adopted from industries that have continued to successfully complete large capital projects while nuclear power-plant construction projects were dormant in the United States.

2) Companies should review project activities and expenditures throughout the nuclear power-plant planning, licensing, construction, and start-up phases. These project reviews should be performed independently of the project managers and contractors. Effective project-management tools and techniques alone are not sufficient to ensure successful project completion. They must be augmented by the periodic project reviews performed by an independent party to maintain the objectivity and effectiveness of the review process and to address issues up front rather than at the end of the project.

An instructive analogy to the prudence reviews of