CQ WEEKLY – COVER STORY; March 26, 2007 – Page 884
By Rebecca Adams, CQ Staff
For the past nine years, top officials from the nuclear power industry have made an annual trek to Wall Street to try to persuade financiers to help them build a new generation of commercial reactors. By all accounts, the sessions did not exactly throw off sparks: Executives focused on the profitability of their companies and on the productivity of their existing plants, hoping a picture of stability would ease concerns about the huge costs and uncertain timetables for building new reactors. Bankers, seemingly unconvinced, ate their breakfasts, then flocked to other speculative but less risky energy plays such as ethanol.
But this year, the road show was a hot ticket. When industry executives convened at the posh Metropolitan Club in midtown Manhattan on Feb. 22, much of the discussion revolved around news from Washington, specifically new policies to shift some of the cost of future plant construction to the federal government.
Nuclear's Declining Share: Click Here to View Chart
The notion of serious risk-sharing resonated with more than 100 bankers and analysts, who crowded into a meeting room and lingered after the presentations to pepper speakers with questions about new reactor designs and projected timetables for licensing.
The promise of billions of dollars worth of federal loan guarantees, tax credits and regulatory incentives from Congress and the Bush administration, many of which were contained in the 2005 energy overhaul, is slowly coming to fruition, giving the industry and potential investors reason to believe that the much talked-about revival in the nuclear industry may no longer be a pipe dream.
This idea of a “renaissance” has been fed by the need to find alternatives to coal plants that emit carbon dioxide and other greenhouse gases. Even House Speaker Nancy Pelosi, once a vocal opponent of nuclear power, believes it is worthy of re-examination. “I think it has to be on the table,” she allowed in early February.
Nuclear reactors are not only seen by some as “greener” than fossil fuel plants, they also tend to have lower operating costs, a big advantage with nationwide electricity demand projected to rise 45 percent by 2030. But that is only once they’re built, and many experts believe that this revival cannot happen unless the utilities, the investment community and the government figure out a way to share in the construction costs and all the potential pitfalls, delays and overruns that come with them.
This is where the nuclear industry’s presentations to Wall Street come in. The investment firms that might be willing to back a fleet of advanced reactors say federal guarantees to insure a portion of the construction costs could significantly reduce their risks and lower companies’ borrowing costs.
But the debate is far from settled. The optimism is not obscuring the considerable risk for everyone involved. That is largely because the federal government has yet to make good on some of its biggest promises, remaining mum on such critical details as what percentage of new plant construction costs it is willing to back.
Moreover, a streamlined regulatory process the Bush administration launched in 2005 has not been tested. The Nuclear Regulatory Commission plans to issue combined licenses that simultaneously authorize construction and start-up operations. Utilities hope the expedited process will discourage the kind of lengthy legal challenges that led to billions of dollars in cost overruns during the spate of nuclear construction in the 1970s and 1980s. But it is unclear whether the agency has the resources to accommodate a surge of applications if the companies were to rush to submit their plans in order to take advantage of tax breaks or other incentives.
The many unresolved questions are discouraging some utilities that own existing nuclear plants from jumping into the fray. They are exploring other options, including renovating older, coal-fired plants, building new “clean coal” facilities or purchasing power from other generating companies.
“I’m not a true believer. We’re talking about a renaissance in nuclear. I don’t see it,” James E. Rogers, chairman and chief executive officer of Duke Energy Corp., told the North Carolina Utilities Commission at a January hearing. Duke wants to build a new reactor 55 miles south of Charlotte by 2016 to meet expected electricity demand but says it may not meet the deadline because of economic uncertainty, untested regulatory procedures and lingering questions about where to store radioactive waste.
1970s Flashbacks
Utility executives painfully recall the economic and regulatory perils that bedeviled the nuclear industry during its last big expansion. In those days, before Three Mile Island and Chernobyl, regulators encouraged companies to tweak technologies and experiment with plant designs. Companies responded by revising and customizing their plans, often entering into cost-plus contracts that did not hold projects to a fixed price. Inevitably, plants became mired in delays and cost overruns.
Where the Plants Are — And Could Be: Click Here to View Chart
One of the biggest fiascos took place in New York, where the Long Island Lighting Co. was forced to give up on its Shoreham reactor after spending $6 billion on it. The plant was never fully accepted by the local public, which was concerned about people’s ability to leave the island in case of an accident. In all the years of fighting over the evacuation plan and other safety issues, the cost of the reactor kept going up and up, until finally the sunk costs of the plant weighed the utility down financially to the point where it was forced into a settlement with the state. The company’s electricity operations were eventually taken over by a public power authority that was created by the state legislature in anticipation of such an outcome.
Much has changed in the industry since then. Utilities are now relying on standardized designs for boiling water and pressurized water reactors that they hope will need to be certified only once by the NRC. The agency has also replaced its old review process, frequently criticized by the industry as lengthy and unpredictable, with one in which all critical decisions are made before the first pipe is laid and concrete is poured. And instead of multiple public comment periods, the agency will solicit public input only twice — a development company executives say would reduce opportunities for industry opponents to stall reviews.
“The government is more proactive in setting energy policy, and they know they need to work with industry to implement that policy. It’s more of a partnership now,” said Anthony F. Earley, chairman and chief executive officer of Michigan-based DTE Energy and an industry veteran who served as a top executive of the Long Island utility during the fight over Shoreham.
Utilities such as DTE are responding with license applications or plan to file applications. In all, 15 companies or consortia have plans to build as many as 33 plants, most next to existing reactors. The first could come on line as soon as 2015. In one sign of the renewed activity, the NRC conducted a preliminary environmental review of Exelon’s plans to build a new reactor at Clinton, Ill., concluding this month that the project would probably comply with environmental laws.
But even if they obtain regulatory approval, the utilities will find themselves operating in a different, arguably riskier business climate than before. In the 1970s and 1980s, nuclear utilities were de facto monopolies regulated by state utility commissions. The arrangement meant the companies had to consult with regulators on the need for new facilities but were assured that they could pass some or all of the costs on to ratepayers.
Some utilities’ inability to cost-effectively manage their nuclear and coal-fired plants prompted calls from industry executives to break up the traditional structure of power companies and spin off generating plants, transmission lines and distribution facilities into separate units. That trend culminated in deregulation plans that were passed in Congress and many states starting in the 1990s that threw the entire electricity market open to competition. In the new landscape, generating companies must compete against each other on price in the hope of serving multiple distributors. That has added an element of unpredictability for the companies eager to build new reactors because they will have to strike long-term supply agreements without being sure when plants will come on line.
Many utilities with existing plants, such as Dominion, Exelon Corp., Southern Company and Constellation Energy Group, believe they can operate the plants profitably once they are running. Experts say the companies have made strides in keeping the facilities producing electricity at least 90 percent of the time, eliminating the frequency of costly outages. There has also been a concerted effort to improve safety and chip away at reminders of the 1979 accident at Pennsylvania’s Three Mile Island that sent the industry into a tailspin from which it hasn’t yet recovered.
Assuming Risk
To offset some of the economic risk, the nuclear industry is pressing the federal government to assure lenders that it will pay off a company’s debt if a nuclear project goes into arrears. Utility executives say concrete assurances are necessary for future plant construction because some midsize utilities with market capitalizations of $40 billion or less cannot realistically carry the debt associated with financing a new $4 billion plant on their own.
Streamlining the Regulatory Process: Click Here to View Chart
The 2005 energy law addressed these concerns by including language providing loan guarantees for “innovative technologies” that avoid emitting or that sequester greenhouse gases. Next-generation nuclear reactors fit the criteria, as do coal plants that capture greenhouse gas emissions and store them in underground reservoirs, and renewable-energy projects such as wind power or hydrogen fuel cells. However, the Department of Energy has not yet finalized the rules for obtaining the guarantees or provided specifics about how much of a project’s cost it will back.
The nuclear industry contends that the law allows the government to guarantee up to 80 percent of a plant’s total cost. So far, however, the Energy Department says it is willing to guarantee only 80 percent of projected debt — a difference that could amount to $1 billion or more in a project’s costs and significantly affect the industry’s ability to borrow the rest on favorable terms. The White House Office of Management and Budget suggested the lower amount, worried about possible defaults and future costs associated with the loan guarantees.
“The rationale — and on some level, I can see how they came to these conclusions — is that if you guarantee 80 percent of the debt, then you would drag in lending from commercial banks, who will add some due diligence” in scrutinizing the projects, said Richard Myers, vice president of policy development for the Nuclear Energy Institute, the industry’s trade group.
But, he added, “in practice, it just doesn’t work that way. There’s no market for that second tranche of unguaranteed debt” because institutional investors are too scared of the financial risks.
Wall Street executives agree with that assessment, predicting that the burden will fall hardest on utilities in deregulated states that cannot negotiate with utility commissions for higher rates to offset their risk.
“Loan guarantees are critical,” said Caren Byrd, an executive director of Morgan Stanley. “It will be very hard to raise the funds without the loan guarantees already in place. Financial companies are saying without loan guarantees [backing 80 percent of project costs] will be very difficult, if not impossible, to finance these units.”
Nuclear industry officials say that even companies operating in states such as Georgia, Florida, Iowa and South Carolina that still allow companies to pass on a portion of borrowing costs to ratepayers might not be able to undertake more than one construction project at a time. For that reason, companies are pressing allies in Congress, such as Democrat Jeff Bingaman of New Mexico, chairman of the Senate Energy and Natural Resources Committee, to lean on the Energy Department to finalize its plans and heed the industry’s concerns.
Funding for the loan guarantees doesn’t count as direct spending, but must be set aside as part of the annual congressional budget process. The continuing resolution for fiscal 2007 spending designated $7 million to run the program and allowed up to $4 billion in guarantees. President Bush’s fiscal 2008 budget plan would up the ante to $9 billion in loan guarantees, including $4 billion in loans for nuclear power or carbon sequestration in coal-fired plants.
While nuclear companies are encouraged by the commitment, they remain frustrated that the administration has not yet finalized policies for the loan guarantees. The industry is urging Wall Street investment firms to prod the White House to clarify its intentions.
Energy Secretary Samuel W. Bodman blames the slow start on what he terms Congress’ tardiness providing funding, and on its requiring his department to issue a rule instead of guidelines, which entail fewer bureaucratic steps. Bingaman, who has said the Energy Department put “far too little energy” into the initiative, is considering legislative avenues to fortify the program, according to a spokesman.
Front-of-the-Line Treatment
The loan guarantees aren’t the only incentive in the 2005 energy law that the nuclear industry would like to see sweetened. Some generating companies also want the government to expand the availability of tax credits for energy produced from new reactors, and to provide generous risk insurance to compensate for bureaucratic delays a utility might encounter in the licensing process.
The 2005 energy law would give utilities a tax credit of 1.8 cents for every kilowatt-hour of electricity produced by the new plants. But the credits are structured to favor the first plants to begin operations. To qualify, a utility has to apply for a construction and operating license by 2009, begin construction by 2014 and start operating the reactor by 2021.
Companies taking a wait-and-see approach that have yet to apply for operating licenses want the tax credits expanded so that every utility that builds new reactors will qualify. Industry lobbyists also would like the Treasury Department to issue guidelines that would allow generating companies to transfer the credits to equity partners. Treasury officials have not publicly said whether they will accommodate the industry’s wishes.
Another feature of the 2005 law is that it requires the government to compensate generating companies up to $500 million apiece for regulatory delays incurred in the licensing of the first two new plants to be built, and $250 million each for the next four. Like the tax credits, this incentive is designed to encourage companies to get their projects in the regulatory pipeline quickly. But the front-of-the-line treatment concerns some in the industry, who worry that companies slow to apply for licenses and then subjected to delays wouldn’t be able to afford the extra expense.
“The biggest factors affecting the industry are how the loan guarantee program works and whether the first plants are built on budget and on time, which has never been done before in this country,” said Jim Hewlett, a senior economist at the Energy Information Administration.
Regulatory Certainty?
Beyond economic safeguards, the utilities want assurances that the Bush administration’s new, as yet untested regulatory system will lead to timely approvals of operating licenses. For that reason, some utilities want the government to go beyond the promises of the 2005 energy law and provide hundreds of millions in risk insurance that would automatically compensate every company that built a new reactor for bureaucratic or legal tangles encountered during the licensing process.
The companies have good reason to worry. Nuclear plant owners and the NRC expect lawsuits from environmental and citizens’ groups challenging the agency’s legal standing to combine construction and operating licenses — and other suits seeking to invalidate any licenses that are issued under the process. NRC officials are confident they have the authority to issue consolidated permits, but acknowledge that a drawn-out legal action could delay construction at a site by a year or more.
There are also concerns about how the NRC would respond to accidents or safety problems at existing plants. Some industry watchers question whether the agency would continue expedited reviews if an accident occurred at one of the nation’s 104 existing power plants, or revert back to its old regulatory timetable.
“Let’s say there is an incident,” said Richard Cortwright, a managing director at Standard & Poor’s Corp., the bond rating agency. “It doesn’t have to be on the scale of Three Mile Island. But if there’s something that really grabs headlines, it’d be interesting to see what happens to these applications then, whether they’d be shunted aside or delayed.”
The goal of the new process is to certify new plant designs after reviews lasting four or five years, and to give companies a firm go-ahead before any construction begins. In the past, plant designs were frequently modified after construction began, allowing regulators to step in at any time to interrupt a project and request changes.
It is unclear how the NRC would respond if a safety problem came to light after one of the new licenses was issued, and what criteria it would use for interrupting a project. Agency spokesman Scott Burnell said the threshold would have to be fairly high because the agency’s four- to five-year review will be rigorous.
“You’d have to find something so egregious that it wouldn’t seem possible that you would miss it in the initial review,” Burnell said. But he added, “We rarely, if ever, use the word ‘impossible.’ ”
Another wild card is whether the NRC will have enough skilled staff and funding to move quickly on applications. The Government Accountability Office in January concluded that the commission appears to be on track so far but warned that conditions could change.
“NRC has been effective in recruiting, developing, and retaining a critically skilled workforce to date, yet it is unclear whether this trend will continue in the next few years,” the GAO concluded. In fiscal 2006, the agency hired 371 new engineers, accountants and other employees — a significantly higher number than in previous years. But the GAO also pinpointed critical gaps in the agency’s workforce “that require significant new hiring or training to fill” in order to be able to successfully handle the challenges facing the commission.
The GAO warned that some regulatory offices carry more responsibility than others, and that “workload imbalances among employees and across offices could undermine employee satisfaction, making the recruiting and retention of a diverse, skilled workforce more difficult as expected industry competition intensifies.”
The nuclear industry acknowledges that government manpower issues could trip up its expansion plans. “It’s an area we’re sensitive to, but at the same time, we’ve been encouraged so far by the aggressive steps they’re taking,”said Steve Kerekes, a spokesman for the Nuclear Energy Institute.
Political Will
Such questions about the NRC’s resources underscore broader concerns about whether Congress and the administration have the political will to do all the things necessary to jump start the nuclear industry, or whether policy makers are by and large citing nuclear power as a long-term option they will never have to address head on.
Congress in the past has been slow to resolve sticky policy questions critical to the industry’s future. Chief among these is what to do about the highly radioactive waste generated by reactors. A 1982 law authorized the creation of a long-term plan for disposing the waste in an underground repository. But it took 20 years before President Bush and Congress endorsed developing a site, at Yucca Mountain, Nev. The fate of the project remains in doubt to this day because of disputes over environmental regulations and the geologic soundness of the site. Without a resolution, generating companies have stored spent nuclear fuel in pools within reactors or in casks nearby. Senate Majority Leader Harry Reid of Nevada, among others, has vowed to block the project.
Experts say the industry remains gridlocked by a vicious cycle in which negative public opinion of nuclear power influences policy makers’ reluctance to commit to changes, which, in turn, chills investor interest in new projects.
“It’s going to be hard to do a major build-out unless you have a fuel storage solution,” said Paul Clegg, an analyst with the investment bank Natexis Bleichroeder. “They can continue to move forward with plans, but before capital [investors] will commit, they will want to see it resolved.”
Beyond the waste issue, there is also a reluctance to bestow generous amounts of aid on utility companies in a time of tight budgets and widening deficits. Some lawmakers, such as Democratic Rep. Edward J. Markey of Massachusetts, are intent on eliminating existing incentives for the industry, for example by proposing to kill a law called the Price-Anderson Act that indemnifies plant operators from liability claims that would arise as the result of a catastrophic accident.
“Nuclear power is a mature industry that has benefited from decades of huge federal subsidies at the same time that alternative energy sources have been starved of federal funding for research and development,” Markey said. “Nuclear power is struggling to compete in the free market, and Wall Street has proved to be a tough judge over the past 30 years.”
The investment world says Congress needs to render the next verdict and decide how much it wants nuclear to be part of America’s energy mix — and whether it can reconcile its appetite for quick fixes with the industry’s decades-long timetables.
“There’s a lot of momentum going forward, and each week we get more positive news,” said Byrd of Morgan Stanley. “But we all have to keep in mind this is a very long-term project, and one of the concerns I have is that if we don’t see more progress, the financial community may lose interest.”
FOR FURTHER READING:
Deregulation’s broken promise, 2006 CQ Weekly, p. 2530; 2005 energy law (PL 109-58), 2005 Almanac, p. 8-3; Yucca Mountain designation (PL 107-200), 2002 Almanac, p. 8-8; nuclear waste disposal plan (PL 97-425), 1982 Almanac, p. 304.