Too many rules can make any plant uncompetitive.
Now, more than ever, the commission must weigh
the costs when it looks at health and safety, decommissioning and antitrust impacts. Nuclear assets seem to pop to the surface wherever one looks for causes behind the current upheaval in the U.S. electric utility industry. The nuclear experience (em with its costly prudence reviews so prevalent during the 1980s (em has helped fuel a major shift in attitude.
Senior utility managers have now come to accept fundamental changes in the electric industry. This change in attitude stems in part from high production costs in isolated areas and marked regional differences in retail rates. And, in many cases where electric rates are considered "high," a heavy commitment to nuclear power is involved.
One scenario for a restructured industry would envision an independent, unregulated generating sector. In fact, some proposals have already surfaced that would have utilities divest themselves of some or all of their generating assets, including nuclear plants.
If utilities should proceed as suggested, and transfer ownership of their nuclear assets, the U.S. Nuclear Regulatory Commission would likely play a significant role, based on the substantive and procedural laws and regulations currently in place. The specter of NRC involvement in turn poses key questions: How will the NRC react to proposals to transfer nuclear assets? Moreover, how will the NRC enforce rules, regulations and nuclear legislation, now that generation may become deregulated, putting at risk any costs incurred by plant owners to comply with NRC directives?
One thing is certain, the NRC will not lessen its commitment to safe operation of nuclear facilities. In a speech given at Massachusetts Institute of Technology this year, NRC Chair Shirley Jackson stated the commission's view clearly:
Our focus is on ensuring that, as the business environment changes, economic pressures do not erode nuclear safety. That means that nuclear electric generators must continue to maintain high safety standards, with sufficient attention and resources devoted to nuclear operations, and with decommissioning funding secure. ... [I]t is not the NRC's mandate to ensure the economic viability of nuclear power or to jeopardize it, only to ensure that whenever nuclear power is used, it is used safely, and that, when a nuclear plant is shut down, there is adequate funding to ensure that it can be decommissioned safely.
Jackson's statement identifies the two major areas in a restructured industry in which the NRC will exert considerable influence: operational safety and decommissioning funding. The commission will address these issues both for nuclear plants that do not change hands and for plants proposed for transfer. While the NRC has not yet taken action, it has given hints that changes are imminent.
While the NRC considers that protection of health and safety remains its fundamental responsibility in regulating nuclear power, the issues of health, safety and decommissioning costs have now acquired an economic component that did not previously concern the commission.
In a restructured industry, market forces will determine the price for generation output. In this setting, the costs incurred to comply with NRC-imposed rules must not inflate costs so high as to make the price uncompetitive. How will nuclear plant owners and the NRC respond, now that regulation must be tuned to the market?
Public statements by senior staff and the commissioners give some indication of present thinking. It appears the NRC believes it can continue to provide adequate protection of public health and safety in a restructured environment. Thus far, there has been no indication that any dramatic change in the NRC's policies and programs on health and safety will prove necessary. The NRC staff has indicated that safe operation of nuclear facilities need not be inconsistent with cost recovery through market-based pricing.
To illustrate what might be at stake, consider comments filed by the Nuclear Energy Institute regarding draft Standard Review Plans (see sidebar) now under consideration at the NRC. The NEI comments represent a consensus in the U.S. nuclear industry, forged through NEI and an Executive Task Force. The consensus position lists several key points:
• Clear, stable and predictable regulatory requirements are essential to prepare for competition in a restructured industry;
• The NRC may find it appropriate to broaden its definition of corporate entities judged financially qualified to own and operate nuclear power plants beyond the current definition of "electric utilities";
• The commission should encourage policy-makers to assure collection of all necessary decommissioning funds as part of all rate regulation and restructuring legislation; and
• The industry takes exception to the NRC view that any corporate restructuring, such as forming a holding company, requires formal NRC approval.
In short, any business involved in a nuclear plant transfer, whether directly or by merger or corporate reorganization, should pause and take stock of the many policy questions now under active consideration at the NRC.
Financial Qualifications
The NRC staff expects regulatory changes for nuclear plants transferred to an entity with no guaranteed market by an owner qualified as an "electric utility" under NRC rules (i.e., an owner that recovers its costs through rates set by the owner itself or by separate regulatory authority). The NRC staff has publicly recognized the inadequacy of the current regulations classifying licensees as either "electric utilities" or "not electric utilities" in dealing with the organizational structures that will arise under restructuring.
The NRC does have a set of regulatory requirements for an entity that does not qualify as an "electric utility," and which proposes to own and operate a nuclear facility. Some indication has appeared that the staff is exploring a set of financial qualifications that take a flexible, totality of circumstances approach, rather than stating formulaic standards (such as reliance on bond ratings). It is clear that whatever set of financial qualifications it puts in place for license transferees, the NRC will continue to rely primarily on its inspection programs, as indicated by Jackson at MIT:
The NRC traditionally has relied on its inspection and plant assessment programs to identify any adverse trends in safety performance. Based on inspection program results, plant performance reviews, and other evaluative mechanisms, the NRC can take action it deems appropriate to protect public health and safety. In the current economic environment, if new business arrangements, competition, or economic constraints result in any impairment of safety, it is imperative that our assessment mechanisms detect such problems early.
The commission has asked the staff to examine measures to identify plants where economic stress may be impacting safety. The NRC has approved for public comment a paper entitled, Establishing and Maintaining a Safety Conscious Work Environment. The paper includes as 'evidence of an emerging adverse trend' the following example: 'cost-cutting measures at the expense of safety considerations.'
Comments from the NRC staff have also indicated that the
commission intends to rely on intensified inspection programs and early detection of trends to assure safe operations in a competitive setting.
Funding
Decommissioning Costs
Decommissioning costs could raise difficult and interesting issues in the transfer of nuclear assets.
On one hand, the act of funding for future decommissioning costs does not involve recovery of a variable plant cost incurred with the production of units of output. The need to undertake the decommissioning process is fixed in place at the time a nuclear plant first becomes active. While perhaps not literally true, it can generally be said that the scope of the decommissioning task changes little as the plant's life continues.
Nevertheless, the scale of decommissioning costs is enormous. Current actual costs of plants such as Trojan, Rancho Seco, Connecticut Yankee, and Fort St. Vrain indicate that decommissioning expense lies in the $400-million range. NRC regulations currently require licensees to set aside a certain minimum amount [10 C.F.R. § 50.75(c)]. That minimum is far below the actual cost the industry has experienced. NRC staff has acknowledged that its current regulatory requirement is low. It intends to pursue rulemaking to increase the required minimum.
Moreover, decommissioning costs will play a key role in how competitive markets shake out. Decommissions funding involves taking that level of cost incurred at the outset of the plant's productive life and spreading it out over each unit of output produced during that life. In the traditional setting of regulated monopoly, utilities recovered this cost from their customers. The need to recover these costs in a competitive market where prices are based on marginal costs could render some nuclear assets uneconomic. Decommissioning costs that have this effect represent but one class of costs described as "stranded."
While the matter has not escaped its share of controversy, it would seem that, as part of the restructuring process, stranded cost recovery for decommissioning costs must be put in place. This recovery would involve identifying the amount of the stranded costs, which would likely include decommissioning costs not yet recovered at the time of the shift to a competitive market. A non-bypassable charge, such as a charge for wires to deliver the power purchased in the competitive mode, is then put in place for a fixed period. These stranded costs are recovered from the system customers who would have been responsible for them in the regulated mode.
Interest is increasing in various plans to securitize these stranded costs. That is, the revenue stream created by the stranded cost recovery charge is isolated and dedicated to servicing a new debt issue, whose proceeds the utility has used to write off or cover the stranded costs. The cost of the new debt is lower than the existing capitalization underlying the stranded costs. The debt is lower either because the assured and dedicated revenue stream makes the bonds less risky than the existing debt, or because the issuing entity can issue tax-free bonds, or both. The lower capital cost can be reflected in rate reductions.
Prospects for Sellers (em
and Buyers
The holder of a licensed nuclear asset can price its output based on fuel cost (em which has always been competitively advantageous compared with fossil fuel (em plus O&M costs, which are increasingly being brought under control. If stranded cost recovery is allowed for fixed capital costs, then recovery of these costs through the output price would become less burdensome. If decommissioning funding is also recovered in this way, then such costs are not a factor at all in setting the price of generation output.
Under these circumstances, what is the likelihood that a nuclear plant owner might consider
transferring the asset? Good, it appears, because certain risks remain inherent in nuclear plants. First, the complexity of nuclear operations and the scrutiny of safety requirements always make it possible that the NRC will impose new requirements that will increase operational costs to unexpected levels. Second, the size of these plants and the magnitude of these costs mean the impact of dealing with problems can be substantial. In fact, the plant owner can be forced into a permanent shutdown before the fixed costs associated with its nuclear investment have been recovered.
These risks may appear tolerable for a utility whose nuclear assets constitute a relatively small part of its generating asset portfolio. But for a company (em and there are a number of them (em whose nuclear investments make up a disproportionate share of the total portfolio, these risks appear to be highly undesirable.
On the buyer's side, however, the prospect of owning a nuclear plant free from decommissioning costs could prove attractive if the buyer could acquire the plant at a capital cost consistent with competitive energy prices. In particular, some companies may regard themselves as technically
competent and able to manage and control the inherent risks.
It appears, therefore, with appropriate decommissioning funding in place there is good reason to anticipate nuclear asset transfers. Where the stranded cost recovery adequately handles decommissioning costs, the NRC's concern with assured recovery of those costs in a transfer transaction should be allayed in much the same manner as it is now. The commission would regard the assured recovery through the stranded asset charge as it regards the "collect-as-you-go" mechanisms it permits for entities that qualify as an "electric utility." It would look to the same mechanisms it now uses to assure that the entity collecting those funds will have them available to pay the costs when the plant shuts down.
On the other hand, the NRC is well aware that there may be cases where a satisfactory stranded cost recovery mechanism has not been put in place to cover decommissioning costs. The NRC's April 1996 Advance Notice of Proposed Rulemaking (see sidebar) noted the possible need for additional funding assurance for those costs where the licensee is no longer subject to the regulation at the federal or state level. The NRC has not chosen the path it will follow in such circumstances. In identifying that path, the NRC will have to weigh, on the one hand, the need to assure recovery of decommissioning costs.
One fact is certain: At shutdown, a costly decommissioning will be required because the health and safety repercussions of not doing so are unacceptable to society. Someone will have to pay. On the other hand, the NRC must also weigh the fact that any mechanism it puts in place must be workable in a competitive market. A funding requirement that is so onerous it cannot be achieved will simply mean the immediate shutdown of the nuclear facility, before sufficient funds for decommissioning are accumulated. At that point, the decommissioning costs must be addressed. The way in which the NRC will thread this needle remains to be seen. Undoubtedly, it will have to be solved before any nuclear asset transfer occurs to an entity that is not subject to rate regulation and which must accept the funding burden as a term of the transfer transaction.
Going forward, any NRC policy on asset transfers becomes somewhat academic if nuclear plants do not have a significant economic role in a competitive market at the generation level. This topic has been the subject of discussion and controversy in recent months.
A study published in February 1997 by the Washington International Energy Group, sponsored by the INGAA Foundation, concluded that some 40 percent of the nation's nuclear generating capacity faces the risk of shutdown due to adverse economic factors in a competitive market. That vulnerability was found to exist across the range of top performers, good performers and poor performers (as measured by O&M costs and capacity factors).
The nuclear industry has responded that the WIEG study is too pessimistic. Attacks have been made on its assumption as to future energy prices and the trend of O&M costs, as well as on the static moment-in-time aspect of WIEG's method.
It can be said with certainty that creation of a competitive market creates questions about the economic future of existing nuclear capacity. Nuclear capacity constitutes about 14 percent of total generating capacity and about 21 percent of actual energy output from that capacity. Regionally, nuclear can play a more important role, particularly in the Northeast and upper Midwest. Moreover, nuclear generation is regarded as environmentally desirable in regions facing serious air emissions problems.
It is by no means clear that public policy-makers will accept the loss of a significant part of this segment of the nation's generating capacity as a consequence of their interest in achieving the benefits of restructuring. The uncertainties about electric pricing trends and O&M cost trends do not yield irrefutable answers as to the purely economic analysis.
It makes sense, therefore, to maintain an intense interest in NRC's response to a restructured electric generation market. t
George A. Avery is with Shaw Pittman Potts & Trowbridge, a law firm in Washington, D.C. William R. Holloway assisted with the preparation of this article.
Official Commission Initiatives to Date
Notice of Imminent Changes
NRC actions over the past year and a half have indicated an intent to revise its regulations and practice in response to restructuring initiatives:
Dec. 14, 1995. Industry representatives (federal and state regulators and industry and investment officials) brief the commission on restructuring issues.
Jan. 5, 1996. NRC staff briefs the commission on its near-term, mid-term and long-term action plan to address restructuring issues.
April 8, 1996. NRC issues Advance Notice of Proposed Rulemaking, Financial Assurance Requirements for Decommissioning Nuclear Power Reactors (61 Fed. Reg. 15,427). The ANPR indicates NRC is considering clarification of the definition of "electric utility." It also indicates the NRC may consider holding companies jointly and severally liable for decommissioning costs. (Currently, co-owners are generally responsible only for their individual pro-rata share of the plant.) The proposed rule is expected to be issued for comment sometime in 1997.
May 15, 1996. NRC issues Action Plan for NRC Response to Electric Utility Industry Restructuring and Economic Deregulation, indicating interest in financial qualifications, decommissioning funding and antitrust reviews. Rulemaking is contemplated concerning NRC approval for all licensee corporate changes that significantly reduce assets or recourse to rate recovery. Of considerable interest is that the NRC is considering requiring its approval for a licensee sell-off of non-nuclear assets. The action plan includes schedules for revision of Standard Review Plans (draft 8/96 and final 6/97). The plan will determine the need for rulemaking by June 1997, with a schedule to be established.
July 30, 1996. NRC staff briefs the commission on the status of NRC's actions in response to electric utility restructuring and deregulation. Sept. 23, 1996. NRC issues Draft Policy Statement on the Restructuring and Economic Deregulation of the Electric Utility Industry (61 Fed. Reg. 49,711), indicating interest in joint and several liability for decommissioning funding.
Dec. 27, 1996. Draft Standard Review Plans on Antitrust and Financial Qualifications and Decommissioning Funding Assurance (61 Fed. Reg. 68,309). These draft plans reflect NRC's regulations and do not provide the final NRC position.
April 24, 1997. NRC staff, federal and state regulators, and industry and investment officials briefs the commission on emerging issues in restructuring, including electricity grid reliability, antitrust review, foreign ownership and acceptable state-specific approaches to decommissioning cost recovery.
Transferring Existing Nuclear Plant Licenses
Section 184 of the Atomic Energy Act prohibits the transfer of a license, either directly or indirectly through transfer of control, without the written consent of the NRC. %n1%n Two types of license rights can be transferred: a license to own, which applies to all licensed owners of a plant; and a license to operate, which applies to the one entity licensed to operate the plant. To obtain transfer approval, the party taking over a license must satisfy four principal issues:
s The transferee is not owned, controlled or dominated by an alien or foreign government;
s The transferee is technically qualified;
s The transferee is financially qualified, which includes both operations and decommissioning funding; and
s For AEA Section 103 licenses, %n2%n the transfer is compatible with antitrust laws.
Procedure. The proposed transferee must file an "Application for Transfer of a License" that includes information on the prospective licensee. %n3%n The information submitted must address the four principal issues.
Transfer applicants should notify NRC of their intentions as early as possible. The NRC has few resources to conduct reviews and the number of applications is expected to increase as restructuring unfolds. Allowing insufficient review time may adversely affect an applicant's restructuring plans. Affected parties can request an administrative hearing on the action if they can establish standing, but the NRC staff can act on the application prior to the hearing.
On the other hand, the commission can defer action until after a hearing if it believes that significant health and safety issues exist. The NRC staff reviews the application subject to the substantive criteria of 10 C.F.R. § 50.80 and grants the license transfer if it determines: (1) that the proposed transferee is qualified to hold the license; and (2) that the transfer is consistent with the law. Intervention is possible but rare. If it occurs, the proceeding can be protracted.
1The NRC has implemented that requirement through regulations found in 10 C.F.R. § 50.80.
2Subject 103 licenses are all plants that received construction permits after December 19, 1970. These plants are subject to antitrust review under the AEA. Plants that received construction permits prior to December 19, 1970 are designated Section 104(b) licensees and are exempt from antitrust review.
3See 10 C.F.R. § 50.37 and § 50.33.
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