S&Ls won damages when the feds reneged on promises. Utilities could do the same.

It's tough to be a utility CFO these days. For decades, electric utilities have served both as target and conscripted agent of government policy. Utilities pay disproportionately high taxes. Utility rate structures further distort market forces with subsidies flowing from business to residential. These policies actually defeat market forces. To large measure, many of these market failures arise from reconciling the hangover from uneconomic policy initiatives.

Nevertheless, electric utilities certainly are not the only companies routinely buffeted by capricious government policy. When financial markets boomed in the 1980s, savings and loan associations fell victim to government policies devised for a simpler time. Only when many S&Ls faced imminent demise did the Reagan Administration induce stronger S&Ls to harvest the weak in consideration for relaxing the constraints on entering new markets.

The S&L experience also demonstrated how public policy can sometimes play out like a contact sport. S&Ls who climbed out on the limb got caught in the cross-fire as Congress chopped off the Administration's deregulation changes without warning. Many thrifts plunged immediately into receivership (em victimized by doing a deal with the government. Taxpayers picked up some of the tab for this partisan "gamesmanship."

Commercial nuclear power has seen its share of policy swings over the years. Government induced many utilities to invest heavily in the technology, promising a stable regulatory environment, capital recovery, a reasonable rate of return and custodial services for the spent nuclear fuel.

As with the S&Ls, utilities, too, put their capital on the line, only to look on helplessly as the federal government often failed to deliver on its commitments. With each reneged promise, ever greater uncertainty chipped away at nuclear power plant valuation. With each new uncertainty, the tally for stranded investment rose, complicating the move to fully competitive power markets.

Vindication may be at hand, however, if not a substantial dowry. It may come from a recent U.S. Supreme Court decision, United States v. Winstar, which allowed S&Ls to sue the government for damages. If the Winstar doctrine means what it says, it could pave the way for electric utilities to seek damages from the Department of Energy for its refusal to deal responsibly with spent nuclear fuel.

DOE's Failed Responsibility

Custody of spent nuclear fuel marks perhaps the most significant uncertainty and unkept promise in the long history of utility regulation. This highly radioactive waste has been accumulating at nuclear reactors for decades at an annual rate of about 30 metric tons per reactor.

When the plants were built, spent fuel pools seemed an afterthought, a convenient temporary storage for those "few years" required for the federal government to develop a high-level nuclear waste program. Now, convenient storage is bursting at the seams. The lack of any additional on-site storage capacity threatens to shorten the useful lives of nuclear plants.

Congress thought it solved the problem in 1982 with the Nuclear Waste Policy Act. The act provided a standard contract for each utility. The U.S. DOE would collect a fee for accepting spent nuclear fuel by Jan. 1, 1998. The Nuclear Waste Fund (NWF), a separate fund of the U.S. Treasury, was established by Congress to cover nuclear waste disposal costs. NWPA set the fee at 1 mill per kilowatt-hour.

Like clockwork, the money went into the NWA. And, like Social Security, money not committed to these activities went into government securities. The nuclear fund is starting to look like Social Security in many other ways.

By the end of 1996, close to $13 billion had been collected, while more than $6 billion was spent to develop a repository at Yucca Mountain, Nevada. The fund still counts another $2 billion as a receivable. Yet, development of the repository stalled for reasons ranging from the geological (salt dome stability) to the theological (certain Native Americans consider the site sacred). With each delay, the January 1998 deadline slips further and further away. Meanwhile, the spent fuel pools filled up.

DOE finally admitted in 1993 it would miss the deadline. But DOE also broke new legal ground by claiming no legal duty to take the spent fuel in 1998 if the repository was not ready. Of course, DOE said utilities were still responsible for paying the one-mill levy. To make matters worse, those NWF government securities slipped over into government assets for deficit reduction purposes (em a novel accounting approach, not to mention innovative tax policy.

The government might duck responsibilities and divert money, but utilities have businesses to run. Facing expropriation on such a grand scale (em and approximately 36,000 metric tons of spent nuclear fuel (em Northern States Power Co. and Consolidated Edison Co. initiated a legal campaign to hold DOE's feet to the fire. Eventually joined by almost half the nuclear industry, the utilities achieved a remarkable victory in 1996 in Indiana-Michigan Power Co. v. Dept. of Energy, 88 F.3d 1272 (D.C.Cir.), handed down on May 30 of last year.

Fortunately for the stockholders, the court ruled a contract is a contract: Utilities were paying fees so DOE had a duty to accept the fuel. Which brings us to the present.

Since the DOE trucks will not roll this January, there will be damages. DOE has said it will not start accepting fuel until 2010 to 2015, which means the damages will continue for a long time. The longer the utilities are denied relief, the longer DOE receives its money and the longer the utilities receive nothing in return. So, we're talking Big Damages.

This past January, 36 nuclear utilities went back to the U.S. Court of Appeals asking for relief from having to continue paying into the Nuclear Waste Fund. The utilities also asked the court to enjoin DOE from taking action for suspending further payment. And, perhaps most important, the utilities asked the court to order DOE to develop a plan to begin taking custody of spent fuel.

Presently, utilities are not seeking recission damages (em the $13 billion. They simply want to see DOE perform as promised. As for the $6 billion, which, for all practical purposes, has been siphoned off for unrelated deficit reduction purposes, it must be put back.

The immediate damages are also significant. Each reactor faces costs of $50 million to $60 million for dry cask storage. With more than 100 reactors in the U.S. fleet, casks alone total more than $5 billion. Unfortunately, not every reactor can put dry cask storage on site. Those plants must shut down when their spent fuel pools reach capacity, which will occur long before their scheduled decommissioning dates.

Utilities also face increased decommissioning costs. Plants unable to license dry casks will also suffer lost revenues for premature closure of plants that reach "full date," employee termination costs and lost investment opportunities. Utilities can make a legitimate claim that these costs lie within the responsibility of the federal government as a result of a breach of contract.

The Right to Force Action

Fortunately for ratepayers and stockholders, there is an important precedent for recovery of damages. When Congress drove scores of S&Ls into the abyss, at least one S&L took the matter to court. The case was ultimately decided by the U.S. Supreme Court in United States v. Winstar. The court found the government breached its contract with the S&Ls (em just like Indiana-Michigan.

Winstar permits S&Ls to bring damage suits against the government. A growing number of S&Ls are pursuing such claims.

With Winstar, utilities have the basis to pursue recovery of damages owed from the DOE's continuing recalcitrance. And, despite past timidity by some companies to litigate on stockholder and ratepayer behalf, utilities can be expected to aggressively pursue Winstar breach claims. With these stakes, stockholders and regulators will not accept anything less. The stakes are just too big to ignore and too important to responsibly sign away in a legislative deal.

For example, with DOE's continuing default, both indirect and consequential damages will arise that are associated with capital market discounting of nuclear plant valuations, particularly those associated with underfunded decommissioning costs. There is also the financial risk and uncertainty associated with the DOE having to come back to seek additional money beyond the $13 billion collected to date. Finally, there are the lost investment opportunities on the dawn of electricity's competitive age.

Utilities are not the only parties at risk. If the nuclear reactor construction cost overruns offer any guide, the taxpayers can also expect that a Yucca Mountain facility circa 2010 will rise in cost by multiples that will dwarf the bill for a 1998 repository. Simulations suggest costs total as much as $20 billion to $30 billion more.

Most calculations match current estimates before the Republican leadership in the Senate (em $400 million to $700 million per reactor. Assuming 100 reactors, the potential exposure to the federal government is on the order of $40 billion to $70 billion. And the clock is ticking.

Most of the world's great stories are touched by the brush of justice. Some may call it irony. But, as the End of Days approaches for the current generation of nuclear power plants, there is something poetic to the potential recovery of stranded investments by the application of the most basic contract law to government policy. Hopefully, the hapless utilities will be remunerated in time to save their businesses.

Stephen Maloney is president of Devonrue LTD, a consulting firm to power and telecommunications companies.

Estimating Damages

The price tag on DOE inaction keeps increasing

If the DOE does not begin taking fuel in 1998, federal government inaction will cost the nation's nuclear utilities billions of dollars. As the length of the default increases so does the cost to consumers. For example, if the DOE does not accept fuel until 2030, cost for used fuel management could range from $34 billion to $56 billion, as the chart below illustrates.

Potential Federal Liability (in billions)

Low High

Estimate Estimate

Utility used fuel management costs:

On-site storage $1.2 $1.2

Extended storage after plant shutdown $9.2 $18.4

Total fuel management costs $10.4 $19.6

Refund of past nuclear waste

fund payments $8.5 $8.5

Interest charges $15.0 $27.8

Total potential federal liability $33.9 $55.9

Source: Energy Resources International.

Figures are reported in constant 1997 dollars.

Federal inaction also could cost ...

s $1.2 billion (em for utilities to build stainless steel containers at the plant site in 34 states if federal storage facilities are not built;

s $9.2 billion to $18.4 billion (em for utilities to safely manage on-site fuel storage, at $4 million to $8 million per utility;

s $8.5 billion (em in relief payments made to utilities and electricity customers from the Nuclear Waste Fund;

s $15 billion to $27.8 billion (em for recovery paid to consumers in recognition of lost opportunity for alternative uses of money paid into the fund since 1983, plus interest.

(em Nuclear Energy Institute,

Washington, D.C.

Federal Liability?

Winstar says it's unmistakable

The Law. Generally speaking, a private citizen cannot sue the federal government and recover damages for breach of promise. That would violate the government's "sovereign immunity." To prevail, the plaintiff must prove that the sovereign has waived its immunity in "unmistakable" terms.

The Issue. Has the DOE waived its immunity against a suit for damages for failure to accept nuclear waste for storage?

The Winstar Rule. In the case of U.S. v. Winstar Corp.,* decided July 1, 1996, the Supreme Court ruled that the new buyers of three failed savings and loans could recover damages after Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. That law had effectively "repealed" promises made by Federal Home Loan Bank Board that the buyers could treat any excess takeover price as "supervisory goodwill" and include that intangible amount as part of the new bank's minimum required capital reserve account.

The High Court ruled that in promising favorable accounting treatment, neither the bank board nor other federal agencies had circumscribed their authority to modify banking regulations or any other sovereign powers. Hence, the doctrine of unmistakability did not bar the suit.

The Implications. As applied to nuclear waste, Winstar might imply that utilities can sue the DOE (em the theory being that DOE's promises to accept nuclear waste have not otherwise restricted the government's sovereign authority to modify or promulgate new regulations.

*116 S.Ct. 2432, 135 L.Ed.2d 964.

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