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Nuclear Standoff - Nuclear Breach

Federal failure to fulfill spent-fuel obligations creates expensive risks.

Fortnightly Magazine - December 2009

as DOE reasonably is expected to assume custody. Boston Edison determined it needed to add $86.2 million more to Pilgrim’s decommissioning trust to pay for additional SNF storage costs arising from DOE’s breach. The utility also sought $2.4 million for additional racks installed in the spent-fuel pool to provide interim storage. Finally, the company claimed it received $36.4 million less for Pilgrim due to price reductions made by Entergy to account for risks associated with the prospect of indefinite storage of SNF not otherwise addressed in the decommissioning trust-fund transfer.

Boston Edison’s claimed damages total $125 million. In a decision rendered Feb. 20, 2008, CoFC awarded Boston Edison $40.03 million in damages plus payment for the cost of the lawsuit. Of this total, CoFC awarded less than half the funds Edison added to the decommissioning trust, and nothing for the additional storage racks. CoFC also concluded Boston Edison failed to establish Pilgrim’s purchase price was diminished by any given amount due to DOE’s breach. Thus, of the $125 million claimed by the utility, CoFC awarded just under one-third, shorting Boston Edison’s stockholders $84.7 million on their damages claim.

Risk Premiums & Valuations

As the NSP and Boston Edison decisions make clear, damages awarded are often a fraction of damages claimed—and damages claimed usually are less than costs actually incurred. Risk is among the more important costs not captured in damage claims and awards. In the NSP decision, for example, cost of capital for SNF modifications was simply barred. In the Boston Edison decision, the company claimed only a portion of the diminution of value suffered due to SNF risk, and even that amount was rejected. 

Unfortunately, risk isn’t without cost. The world is fundamentally uncertain and the cost of that uncertainty is reflected in risk premiums. Risky investments, such as bonds, evidence the cost of risk through higher discount rates demanded by capital markets. So-called junk bonds, considered below investment grade in quality and posing greater risk of default, pay comparatively high returns.

Companies owning or purchasing nuclear power plants incur greater risks than companies holding only non-nuclear base-load generation. This nuclear risk premium is some hundreds of basis points, and reflects the operator’s exposure to safety regulations and the intrinsic risks of nuclear technology, which present the potential for extended shutdown or even premature retirement. Nuclear plants with special exposures might experience even higher risk premiums. For example, purchasers of plants sold early in the wave of nuclear sales in the mid-late 1990s were known to have priced the capital investment at discount rates above comparably sized fossil units.

Further, a high discount rate exceeding a company’s cost of capital is common for high-risk capital projects. Hurdle rates used for capital planning purposes are distinctly higher than equity holders’ average rates of return, and much higher than the return on debt. This practice is evident in other high-risk investments where risk premiums commonly reach or exceed 1,000-basis points or more above a company’s weighted average cost of capital.

The Boston Edison decision illustrates how actual costs can exceed damages claimed. CoFC