TODAY’S STUDY: NUCLEAR’S NEWEST SCHEME TO BEAT ITS BAD ECONOMICS

Nuclear Socialism Comes To The Heartland Of America: Early Cost Recovery For New Nuclear Reactors In Iowa And The Return Of Electricity Rate Shock
Mark Cooper, February 2012 (Institute for Energy and the Environment, Vermont Law School)

EXECUTIVE SUMMARY
The push for early cost recovery (sometimes called advanced cost recovery or construction work in progress, CWIP) for construction of nuclear reactors is driven by one basic truth about new nuclear reactors. They are totally uneconomic.

• New nuclear reactors cannot compete with a large number of alternatives resources that are widely available to meet consumer needs for electricity.
• They are so risky, they cannot raise capital in normal financial markets.
• In order to build new nuclear reactors, the utilities are demanding the suspension of the regulatory rules and financial market mechanisms that protect ratepayers and balance the interests of consumers and utility shareholders.

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The vigorous efforts by utilities suggest that the stakes are high. Past experience and current developments in a small number of states in the Southeast that have allowed advanced cost recovery for nuclear reactors indicate that removing consumer protections imposes significant costs on ratepayers and exposes them to extraordinarily dangerous risks.

The Staff of the Iowa Utilities Board (IUB) has examined the advanced cost recovery proposal pending before the legislature (HF561)and concluded that it poses a serious threat to Iowa ratepayers. This paper shows that the IUB Staff concerns are well-founded by viewing early cost recovery through three lenses that put the Staff analysis in perspectives:

• a broad understanding of the nature and function of utility regulation
• the experience of the few states that have opened the door to advanced cost recovery, and
• the availability of alternatives that cost less and expose ratepayers to less risk.

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HARM TO CONSUMERS

Table ES-1 summarizes the state of advanced cost recovery in the Southeast. The Staff analysis of HF 561 suggests that, compared to these other states the approach proposed in Iowa is particularly hostile to consumer protection and favorable to utility shareholders in several ways.

• The utility prerogative to trigger an early and rapid approval undermines the ability to conduct rigorous review of large cost proposals.
• Numerous types of costs are recovered automatically
• Extremely favorable treatment of cancelled or abandoned projects favors utilities at the expense of consumers
• Extremely favorable treatment of stranded plant favors utilities at the expense of consumers.

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In the four states in the Southeast where funds are being collected from ratepayers under new advanced cost recovery for nuclear reactor construction in the Southeast, each individual nuclear reactor project costs $15 to $20 billion. Over $4 billion has already been approved for advanced cost recovery, yet it appears increasingly unlikely that the most of reactors will ever be built. Ratepayers will have paid billions but received nothing for their money. If reactor construction moves forward as proposed, almost $85 billion of construction costs will move into the utility rate-base causing rapid increases in typical consumer bills within a decade. Rate increases can mount to almost $70 per month before any power is generated by the reactors. Early cost recovery will not prevent rate shock.

Large rate increases trigger ratepayer opposition. Recognizing the controversial nature of rate increases, utilities have used a variety of tactics to diffuse political opposition. They have

• hidden the ratepayer impact behind a veil of confidentiality;
• underestimated the cost of the reactors;
• misrepresented the cost increases they would ask for;
• simultaneously asked for large general rate increases that should not include nuclear construction costs, then declare that the failure to approve the increases is jeopardizing the nuclear construction project;
• stretched out construction schedules; and
• deferred rate increases.

Simply put, as controversial as the decision to adopt legislation to authorize advanced cost recovery may be, it is only the start of the process and has proven to be the least controversial step in a long running political battle over cost recovery.

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PICKING THE WRONG RESOURCE RAISES RATES UNNECESSARILY

Utilities prefer large central station projects for a number of reasons. First and foremost, central station units enable them to increase their income by significantly building their rate base with one facility. They have greater control over central station facilities. The commitment to large nuclear projects tends to crowd out other projects for several reasons. The size of nuclear projects is so large that resources are always constrained and choices are biased in favor nuclear reactors. Utility financial resources are tied up for a decade or more. Management time is focused on the large project, particularly in the construction phase. The need for alternatives is reduced; indeed, alternatives become a threat to the large facilities because reductions in demand raise questions about the need to for large additions to supply.

Forcing nuclear reactors into the resource mix is a bad choice for a number of reasons. Exhibit ES-2 shows the dim view of nuclear power taken by many in the utility industry.

Although utilities frequently claim that nuclear is a big jobs program, when the overall impact of the projects is taken into account, that is not the case. The high cost and capital intensity of nuclear reactors affects another benefit that is frequently claimed for new nuclear reactors – job creation. Because nuclear reactors involve large expenditures and are large construction projects, they tend to create construction jobs and require operational labor. The claim to superior job creation collapses, however, when one considers the alternatives.

• Because they are capital intensive, they produce relatively few jobs per dollar invested.
• Because they result in high-cost power, they drain resources from household budgets, which means consumers have less to spend on other goods and services that have much higher economic multipliers, particularly in the local economy.
• Because they raise the cost of doing business, they tend to hamper the ability of other enterprises in the state to compete in regional, national, and global markets.
• Because the equipment vendors are foreign corporations and the capital expenditures generate high levels of income, the drain on the local economy is compounded.

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CONCLUSION

The specific impact of early cost recovery will depend on the underlying statute and the changes to it, the type of nuclear reactor the utility chooses to build, and the alternatives foregone in favor of pursuing the nuclear project. The process of collecting costs before reactors become used and useful has advanced farther in the Southeast than anywhere else in the nation. Five nuclear construction projects involving ten reactors have already collected hundreds of millions from ratepayers and been authorized to collect several billion. What they are collecting today is only the tip of the iceberg. What they expect to collect in the near future is of equal importance, and what they will collect in the long-term is of even greater importance.

Utilities claim that early recovery of costs delivers a number of benefits, which justify the dramatic restriction of consumer protection. Some of the claimed benefits are economic – early cost recovery is supposed to reduce the total revenue requirement in the long run and moderate the “rate shock” that hits consumers when expensive, capital intensive projects come online. Also, big construction projects create lots of construction jobs for a short period of time. Some of the claimed benefits are environmental – reduced reliance on fossil fuels which suffer price volatility (in the case of natural gas) or are heavy emitters of greenhouse gases (in the case of coal).

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The response to the claimed benefits from consumer advocates has long been straightforward. Early cost recovery robs consumers of the time value of their money. The shifting of risk biases utility decision making so strongly toward expensive options that consumers are bound to be worse off. Any accounting and rate shock benefits can only make nuclear reactors a little less worse; it does not make them better. Paying too much for nuclear power results in many fewer jobs and much less reduction in emissions than could have been achieved if more cost-effective choices had been made.

Nuclear power suffers these problems under all circumstances. Major nuclear incidents require the authorities responsible for oversight of the nuclear industry to re-examine the technology. If the accident at Fukushima causes them to abandon early cost recovery as a subsidy for nuclear reactors consumers will be a lot better off.