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Navigating Nuclear Risks

New approaches to contracting in a post-turnkey world.

Fortnightly Magazine - July 2008

indices can be adopted to create defined limits on escalation.

Similarly, owners can modify the usual EPC model to an EPCM model where greater scope and direct performance or management responsibility is assumed by the owner for a defined scope of work. The terms and conditions within the contract also can offer a mechanism for mitigating risks through the specific delineation of responsibilities, evaluation mechanisms and performance commitments. Finally, owner’s rights can be spelled out more comprehensively and directly in the contract to provide for ongoing close management of the EPC firm.

Project Management Models: The role that the owner assumes in managing the project is vital to its success. Many owners, across all types of mega-project construction, assume that the contract itself will suffice as a means to secure contractor performance and to preserve their interests. However, this is not the case, particularly with projects that have the visibility of new nuclear and where prudence standards subsequently might be applied. One of the principal lessons learned from the first wave of nuclear construction is that the role of the owner grossly was underestimated. The level of owner resources dedicated to projects vastly changed over the course of the project as the complexity became more apparent and the outcomes more at risk.

Owners of the next wave of projects need to plan for resource levels well beyond the current level of thinking both to achieve desired project visibility and control and preserve their interests. In addition, owners can create management concepts and adopt project models that assume certain performance responsibilities, e.g., project controls, or provide for direct resource oversight within an EPCM model in critical areas, such as procurement or construction.

Finally, the project management model should be conceived to evolve over the course of the project as complexities increase. For this next wave of construction, foresight with respect to understanding project management requirements has incalculable value and exemplifies the requirements of development. Close owner involvement and hands-on management are requisites for successful project outcomes.

Regulatory Strategies: The ability to achieve intended project outcomes relies heavily on the adequate support of regulators through their policies and decisions. The last wave of nuclear construction suffered through a process that only accommodated ex post resolution of project issues. This time around, the stakes are too high for such open-ended determinations, and they mandate a more timely and defined approach to outcome definition. Several areas are ripe for policy determination including: the treatment of development costs, use of incentive provisions, recognition of incurred costs (CWIP), depreciation recovery, abandonment cost treatment and the definition of the prudence standard. Clarity around the treatment of these issues, preferably through legislation, would provide greater certainty both to the owner and to the financing community around the risks of regulatory outcomes. Moreover, joint agreement on the standard of performance to be applied for determining prudence provides an early yardstick for owners to incorporate into their planning. In addition, owners can seek to develop alternative ratemaking treatments for cost recovery, such as levelization to mitigate rate impacts that traditionally