ML17298C058
| ML17298C058 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 04/09/1985 |
| From: | Harold Denton Office of Nuclear Reactor Regulation |
| To: | Ruhter W ARIZONA, STATE OF |
| References | |
| TAC-56666, NUDOCS 8504190015 | |
| Download: ML17298C058 (8) | |
Text
EXHIBIT J
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Docket No. 50-528 UNITED STATES NUCLEAR REGULATORY COMMISSION WASHINGTON, D. C. 20555 APR S
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Mr.. Wayne E. Ruhter, Director Utilities Division Arizona Corporation Commission 1200 West Washington Phoenix, Arizona 85007
Dear Mr. Ruhter:
0 In your letter to Mr. John Martin, dated December 14, 1984, you requested that the Nuclear Regulatory Commission (NRC) review the incentive regulation plan adopted by the Arizona Corporation Commission for Palo Verde Unit 1, and to provide an analysis of its implications for the safe construction and opera-tion of the plant.
Your letter has been referred to my office for a reply.
Before addressing" the Palo Verde incentive plan, I would first like to discuss the subjects of incentives in a general sense and how the NRC assures that nuclear power plants are designed, constructed and operated so as to protect the public health and safety.
At this time, there are a number of incentive'lans in effect in various States.
A brief summary of our general concerns about such plans, prepared in response to the California Public Utilities Commission, is'enclosed.
Currently, the NRC has no formal requirements, or explicit policy or guidance, related to incentive plans.
The NRC staff is now studying on a generic basis the possible effects that incentive plans could have on nuclear power plant safety.
Economic performance incentives have been, and remain, inherently present in all utility operations even without the introduction of specific incentive plans by state regulatory agencies.
These include the incentives to minimize construction costs and schedule delays, maintain a high plant capacity factor during operations, and minimize plant shutdown time.
The NRC's regulations are intended to assure that utility actions affecting public health and safety during design, construction and operation of a nuclear plant are reasonable and prudent.
Prior to authorizing construction of a nuclear power plant, the NRC staff performs a review of the preliminary design of the plant to assure that NRC regulations will be met.
During construction, the NRC performs many inspec-tions and audits of the construction activities to assure that the plant is being constructed in accordance with the NRC 'accepted preliminary design and NRC requirements.
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Prior to issuance of the operating license, the NRC staff reviews the final design of the plant as described in the applicant's Final Safety Analysis Report (FSAR).
When that rev'iew is complete and construction is also complete (as determined through NRC inspections),
an operating license is issued.
- Included with the license are the technical specifications which define the safety limits and limiting safety system settings for plant operations.
Each licensee is required to operate the plant in accordance with, and within the limits of, the technical specifications, the other conditions of the license, the FSAR, and NRC regulations.
- Also, NRC inspections of the plant continue during the lifetime of the plant to assure that those requirements are being met.
Where specific incentive programs are established, such as those established for Palo Verde Unit 1, utilities must still abide by NRC's safety requirements set by the regulations, the operating license and its technical specifications.
A well run plant tends to be more productive and reliable (and,
- hence, less prone to potential safety problems).
Incentive plans can be beneficial for achieving those goals if the utility uses the plans along with other measures, such as a preventive maintenance program.
The concern with incentive plans is that, in the interest of short-term economics, pressures may cause utilities to hurry work, take short cuts or delay action in order to meet a deadline, a
cost limitation or other factor.
In. other words, the potential exists that such a program could encourage, directly or indirectly, the adoption of actions designed to maximize the measured performance against which the financial rewards or penalties of the program are applied, at the expense of operating policies and actions which might be more cost-effective in the longer-term interest of the ratepayer
- and, more importantly from'our perspec-tive, at the expense of public health and safety.
Graduated incentives would minimize these pressures while large step changes would increase them and,
- perhaps, produce undesirable results.
We have looked into the incentive plan that the Arizona Corporation Commission has adopted for Palo Verde Unit 1.
The plan includes the following features:
( I)
- Recently, the Arizona Public Service Company was granted a rate increase, part of which was based on some of the construction work in progress (CWIP) related to Palo Verde Unit 1.
The incentive plan provides for graduated penalties against the money earned due to the CWIP portion of the rate increase prior to comaercial operation.
The penalties affect reported earnings as mell as the final total plant cost that can be included in the rate base after commercial operation is achieved.
(2)
Prior to commercial operation, the Arizona Public Service Company is permitted to accrue, as part of CWIP, the allowance for funds used during construction (AFUDC).
This AFUDC accrual is included in reported earnings.
All AFUDC accruals for Palo Verde Unit I cease when the plant goes into commercial operation, at which time the recorded CWIP can be
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Mr. Wayne E. Ruhter r included in the rate base.
The incentive plan provides for the cessation of further AFUDC accruals if either of two levels of plant operation are not achieved by a specified date (i.e.,
100 consecutive hours at 80K power by December 31, 1985 and 100 consecutive hours at 95% power by March 1, 1986).
This would result in graduated penalties on reported and future earnings until commercial operation is achieved.
(3)
The incentive plan provides for a construction cost cap of $2.86 billion, with amounts above the cap to be presumed to have been imprudently incurred (i.e., would not be included in the rate hase unless the utility can prove that the funds were prudently incurred).
(4)
The incentive plan provides for graduated rewards and penalties associated with plant capacity factors outside the 60-75K range after the plant has achieved commercial operation.
Although not included in the incentive plan, the
$43.5 million rate increase which becomes effective the month after fuel loading on Palo Verde Unit 1 is complete (identified in the information provided with your December 14, 1984, letter) is also an economic incentive.
We have not investigated the possible effects of your plan in detail; however, we do have some general observations.
The Palo Verde Unit 1 incentive plan appears to reinforce and, to some extent, augment the inherent economic incentives that have affected utilities in the past.
Elements in the above plan have been used in plans adopted by other state regulatory agencies for plants in their jurisdiction.
All of the features of the incentive plan appear to be graduated incentives, i.e.,
no step changes seem to be involved.
With regard to the construction phase of Palo Verde Unit 1, prior to issuance of the low power license, the NRC staff had determined through a number of inspections that construction and testing of the plant had been completed in substantial agreement with the docketed commitments and regulatory requirements, with the exception of several items which were included as conditions of the license for completion at specified times.
We note that the incentive plan became effective in late November 1984 when plant construction was essentially complete.
We have not separately evaluated whether, during this short interval, the incentive plan had any adverse affect (from a safety standpoint) on construction activities, or what effect, if any, anticipation of the plan's provisions may have had.
She effect of the incentive plan on plant safety ultimately hinges on utility management's reaction to the plan; that is, the nature of the operational plans, operating instructions and other measures that may be taken to further safety objectives in the context of the incentive plan's provisions.
Since Palo Verde Unit 1 has just started the post-construction testing program in January
- 1985, we have not yet seen how the utility will implement those elements of the incentive plan that deal with plant operation.
During the
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Mr. Wayne E. Ruhter four month period covering fuel load and low power testing, the NRC staff has planned an enhanced inspection effort for the plant, in part because of the incentive plan.
This enhanced inspection effort is intended to provide added assurance that the utility is operating the plant in accordance with NRC requirements and to determine whether any adverse safety implications are evolving due to the incentive plan.
As we stated previously, the NRC staff is now studying, on a generic basis, the possible effects that incentive plans could have on nuclear power plant safety.
This study is expected to be completed near the end of this year.
At that time, we will be better able to provide a judqement as to the effect that incentive plans, such as the Palo Verde plan, may have on plant safety.
We are pleased to have had this opportunity to comment on your incentive plan.
Sincerely,
Enclosure:
As stated Harold R. Denton, Director
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Office of Nuclear Reactor Regulation
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