ML19247B610

Draft Rept Assuring Availability of Funds for Decommissioning Nuclear Facilities

ML19247B610
Person / Time
Issue date:	07/31/1979
From:	Wood R Office of Nuclear Reactor Regulation
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References
NUREG-0584, NUREG-584, NUDOCS 7908100408
Download: ML19247B610 (50)

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NUREG-0584 fSkk DR:1I ASSURING THE AVAILABILITY OF FUNDS FOR DECOMMISSIONIt4G NUCLEAR FACILITIES ROBERT S. WOOD ANTITRUST & INDEMNITY GROUP OFFICE OF NUCLEAR REACTOR REGULATION U. S. NUCLEAR REGULATORY COMMISSION July 1979 556153 (Note: Any opinions or conclusions contained in this paper are those of the author and do not represent official NRC policy.)

74908100 pop

I.

Funding Assurance for Reactor Decommissioning A.

Introduction and Statement of the Problem The NRC has undertaken a comprehensive reevaluation of its policy regarding the decomnissioning of nuclear facilities.

One aspect of that reevaluation ~

has been to reexamine the extent to which the Commission's regulations and policies assure that adequate funds will be available to shut down a nuclear facility after its operating life has ended.

Currently, the NRC's policy on assuring funding for decommissioning is codified in Sections 50.33(f) and 5C. 32 of 10 CFR Part 50.

These regulations require applicants for reactor operating licenses to furnish the Commission with sufficient information to demonstrate that they can obtain the funds needed to meet both the costs of operating tne plant as well as the estinated costs of pernanently shutting down the facility and maintaining it in a safe condition. Current Commission regulations are generally moot on decommissioning non-reactor facilities and licensees although decomnissioning of these facilities is generally addressed in their licenses.

Because the major part of the Commission's efforts are related to reactor licensing and because the public interest appears to be concerned with large, expensive power reactors and the radiological impacts of decommissioning then the major part of this Daper will attempt to analyze funding for decommis-sioning in terns of reactors.

The second part will apply this analysis to non-reactor facilties and licensees.

Historically, the Commission has implicitly assumed in evaluating the financial qualifications of reactor licenses that if an applicant for a reactor operating license is financially qualified to construct or operate a nuclear facility, it er y ?-

u d o,g, Q is also qua'ified to shut it down.

When compared to the current cost to cons t ruct a nuclear power reactor -- currently in the range of 51 billion -- a cost

• of deconmissioning a nuclear facility of sona 350 million should not be unmanageable.

In f act, such a cost for decommission 1cg a plant is comparable

o the fuel costs associated with reloading the reactor core every 18 nonths.

Further, it can be argued that regulated electric utilities are especially immune to negative economic conditions because they provide an essential coonodity and because, generally, they are allowed to recover the costs of providing this connodity from their customers.*

• See further discussion of cost below.

For an elaboration of this point see the 1923 Supreme Court decision in

~

"Bluefield Waterworks and Improvement Co. v. Public Service Commission (262 U.S. 679), as quoted in, Clair Wilcox, Public Policies Toward Business Fourth Edision; Richard D. Irwin Inc., TH1, p. Tr3- - - -

A public utility is entitled to such rates as will pernit it to earn a return... equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties, but it has no constitutional rights to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures.

The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management. to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties.

A rate of return may be reasonable at one time, and become too high or too low by changes af fecting opportunties for investment, the money market and business conditions generally.

55G155 The problem with the above analysis is that deconmissioning for nost nuclear reactors will not take place for 30 to 40 years af ter start-up, if the delayed dismantling option is chosen, it may be 60 to 100 years before a reactor is disnantled.

No natter what the current financial health of a utility is, financial solvency of any particular enterprise cannot be projected with confidence so far in the future.

If, for whatever reasons, an electric utility ceases operation, there is no guarantee as to the degree that its successor would assure its commitments to decommission its plants.

Unlike the costs of fuel reloading. which produces a strean of revenues for a utility deconmis-sioning is only an expense and does not produce any of fsetting revenues or return on investments.

In other words, there is no direct econcaic incentive for a utility to deconnission.

A conpounding problem arises in the case wnere a utility is fnrced because of aCC1 dent or for other reasons to permanently shut down its reactor prenaturely.

If one of more reactors owned by a utility is forced to be shut down and decommissioned, and such reactors contribute substantially to the utility's rate base, even a previously financially sound utility could be forced into bankruptcy and default on its deconnissioning obligations.

Certainly the accident at Three Mile :sland indicates that a utility can rapidly find itself in a precarious financial position with the resulting uncertainties that such a position raises.

It nust be kept in nind that decommissioning costs although small in ccnparison to reactor construction cost, are not insignificant. Varicus estimates of cost O C Ce A d'mD r r -; t -

for deconnissioning large connercial nuclear reactors have been nade.

In 1975 the Atonic Industrial Forum ( AIF) estinated this cost to be approximately $27 million in constant dollars.

In 1973, Pacific Northwest Laboratory (PNL) perforned a study for the NRC that estinated decommissioning cost at approxi-nately $42 nillion in 1978 dollars.

When the 25". contingency factor used by PNL is taken into account and when the present value costs of both studies are adjusted for the same year, the costs derived in both the PNL and AIF studies are almost equal.

Other studies have indicated decommissioning costs of up to

$100 million.* Further, most studies have estimated " technological" costs rather than the interest, inflation, and Federal income tax costs +o decommission.

Although most electric utilities would most likely meet their decommissioning obligations, such decommissioning is not absolutely assured by the current financial health of reactor license applicants.

Thus, NRC is in the process of examining various alternatives for assuring that funds for decommissioning reactor facilities will be available.

3. Criteria for Evaluating Alternative Financial Assurance Mechanisms The NRC has developed five criteria by which it is evaluating the relative ef fectiveness of the alternative financial assurance mechanisms being considered.

For a survey of deconmissioning costs see, " Costs and Financing of Reactor Decomni ssioni ng:

Some Considerations" by Vincent Schwent, California Energy Commission, Septenber 1973.

b5Ei157 cirst and most important is the actual degree of assurance provided by the alternative.

In other words how high is the probability that the alternative will actually provide funds when needed to pay for deconnissioning? Further, to what extent does the alternative provide assurance that funds collected and earnarked for decommissioning will actually be available for decommissioning?

Such assurance cannot always be measured absolutely, but the alternatives can ce ranked by the relative degree of assurance that they provide.

This can then be compared to the alternatives' ranking by the other criteria to detennine the overall cost-ef fectiveness of an alternative.

Second is the cost of providing the assurance.

This cost includes not only the direct dollar costs of the alternative, but also its indirect administrative costs (including public cost through governmental expenditures) of the alter-native. To f acilitate comparisons among alternatives, current and projected future costs have been calculated on a present value basis in 1973 dollars.*

Third is the equity of the alternative.

In other words, are the costs of deconnissioning being paid by those who benefit from the facility?

The fourth criterion is the degree to which the alternative is responsive to changes in inflation and interest rates, to changes in estimated or actual As used in this paper, present value means the value of a good or service given in 1973 dollars.

To derive this value, an inflation rate is assumed and futyre noninal dollar C0sts are discounted by the conpounded value of that infl-ation rate.

S56158 reactcr life, to technological changes that decrease or increase ultimate decommissioning costs, and to other changes.

Fif tn is the ability of the alternative to handle ef fectively differing owner-ship and jurisdictional arrangnents existing in the electric utililty industry.

Sach arrangnents can becone problematic when, for exanple, a nuclear power pl a nt is owned by several investor-owned utilities reporting to the Public Utility Connission (PUC's) of different states.

Further compounding such a problen would be the situation of public utilities, which may not be regulated or which nay report to regulatory bodies other than the state PUC's.

Since the various state PUC's set the rates that investor-owned utilities nay charge their customers by determining what nay be 'llowed in the rate base, they are the bodies that have primary jurisdiction for such utilities over hcw decon-nissioning costs nay be specifically collected.

If one assures that the economic viability of electric utilities cannot be

" guaranteed" many years in the future, then, as indicated above, the nost inportant criterion is, of course, how effective is the alternative in providing assurance that funds for deconnissioning wil1 De available when needed.

The equity and cost criteria are next in degree of importance.

Finally, criteria

1. our and five are incortant in a negative sense.

If an alternative does not neet.these last criteria at sone nininun or threshold level, then that alternative should be disnissed. However, once an alternative neets that threshold, then its relative ranking by the first three criteria should be controlling.

555159 Finally, in addition to these criteria, the alternatives will be analyzed in relation to the type of deconissioning mode that can be used.

Thus, the staff is exanining whether any of the alternatives are particularly suited for, or inef fective in dealing with, inmediate disnantlement versus delayed disnantle-ment versus entenbnent.

C. Alternatives for Assuriny that Funds will be Available The NRC staff has deternined that there are six basic alternatives for assuring the availablity of funds for deconnissioning nuclear power plants.

Each of these alternatives may be used exclusively -- except surety bonds --

and sone may be used in combination with the others.

They are briefly described below before being more thoroughly discussed later in the paper.

1.

Prepayment of deconnissionirg costs.

Cash or other liquid assets that will retain their value for the projected operating life of the plant may be set aside or deposited in an account prior to reactor start-up.

Such funds could cover the total estinated cost of deconnissioning at start-up or they could be' invested such that the principal plus 3ccumulated interest over the life of the pl ant together were sufficient to pay deconnissioning costs.

At the tire funds were set aside, allowances would have to be nade for inflation over the projected life of the plant.

As with sone of the other alternatives discussed below, if subsequent decon-nissioning cost estinates vary fron earlier projections, adjustnents to the fund nay be nade.

556160 2.

A funded reserve accumulated over the estinated life of the plant.

The funded reserve, or sinking fund, requires a prescribed amount of funds to be set aside annually in some manner such that the fund, plus accunulated interest, would be sufficient to pay for costs at the estimated time of deconmissioning.

The fund could be invested in high-grade securities, in state tax-free securities, in federal debt obligations, or other assets.

The fund could be administered as part of or separate from the utility's assets.

Finally, the fund could be built up by equal annual paynents or by accelerated, inflation adjusted,or sone other method of variable payment.

3.

An unfunded reserve or funding at decommissioning.

The unfunded reserve is an accounting procedure generally using negative net salvage value depreciation which allows estimated deconmissioning costs to be depreciated over the life of the facility.

'ihen a company depreciates a capital asset, it normally estimates the cost (or replacenent value) of the asset less any salvage value to arrive at net cost.

In the case of a reactor or other nuclear facility, this salvage value is actually a cost (i.e., deconnis-sioning expense) so that the net depreciation value of a nuclear f acility equals its original capital cost plus its deconnissioning cost.

This net depreciable value is nornally divided by the estinated operating life of the f acility to arrive at the annual depreciation to be taken for the facility on the utility's books.

The method of depreciation can be UiG161

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straight-line, where depreciation charges taken for a facility are the same each year.

Alternatively, accelerated depreciation can be used as allowed by IRS regulations where annual depreciation deductions are greater in the earlier years and less in the later years of a facility's life.

Because the depreciation reserve accumulates on the company's books before it is needed for decommissioning, funds. collected from customers through the rate base could be invested in the utility's assets.

As the depreciation reserve accumulates, it is deducted from the rate base so that customers are not double charged.

If decomnissioning begins as scheduled, the utility could have plant assets in the amount of the depre-ciation reserve that are not encumbered by securities.

Securities could then be issued against such plant assets and the funds raised used to pay for decommissioning.

The rate of return on such invested funds would be equal to the utility's combined rate of return on debt and equity.

Presumably, but not necessarily, the rate of return would be higher than that which could be obtained from higher-grade debt instcuments issued by public or private entities.

As with any equity investment, the rate of return would reflect both the utility's relative economic ef ficiency an_d investors' perceived risk of the investment they were making.

It should be kept in mind that the negative salvage aproach is an accounting arocedure.

Any reserve accumulated through depreciation may not be segregated

' rom the rest of a utility's operating funds. In this sense; it is unfunded.

,,,, n b V..b 4.

Surety Scnds.

Bonds could be bought by licensees from surety companies.

Basically, a surety bond guarantees that funds equal to the face value set for the bond will be paid in the event that the bond purchaser def aults.

A surety bonding company, of course,, vill try to minimize its risk by care-fully evaluating the financial health of the bond purchaser and only issuing a bond in cases where default is highly unlikely.

The bond holders still nust provide funding for decommissioning through some other method.

5.

Deconnssioning " insurance." The nuclear er general insurance industry or sone other public or private body could institute sonc form of pooled approach to decommissioning, where it could both administer a general fund for all decommissioning expense and provide deconnissioning " insurance" in case of prenature reactor shut-down. Alternatively, only premature shut-down insurance could be provided.

6.

Funding from general revenues.

Funds for deconnissioning can be paid out of general tax revenues, either at the state or federal level.

D.

Analysis of Alternatives 1.

Exclusion of two alterna_tives To sinpllfy the analysis of the various alternatives it may be helpful first to narrow the range of acceptable alternatives by applying the criteria discussed in section 3 of this paper. As applied to decommissioning funds 556163 for reactors, two alternatives -- surety bonding and funding out of general tax revenues -- should be immediately dismissed because they fail to meet acceptable mininuns of at least one of the criteria.

First, we discuss surety bonding.

In response to a petition for rule making tendered before the NRC by the Public Interest Research Group and others, the NRC staff asked the ten largest surety bonding ' companies

• whether surety bonds in the amount of $50 million for a tern of 40 years would be available, and, if so, what would be their cost? All companies responded that bonds would not be available in that large amount for that long a term.

Surety bonding companies apparently do not issue bonds for more than a few million dollars or for longer than a few years.

Also, although a surety bond theoretically provides a high degree of assurance that funds for deconnissioning will be available, in reality surety companies have indicated that their practice is to renew surety bonds annually.

If a conpany began to experience financial problems, the surety company could, and most likely would, decline to renew the bond.

Thus, long-tern assurance evaporates.

Size as measured by surety capacity ranked by the U. S. Departnent of the Treasury.

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The cost of a surety would be high.

Even if surety bonds were available in the amounts and tire span necessary for reactor decommissioning, the cost could be 1.57. to 2% per year of the f are value of the band.

Over the estimated 35-40 year life of a reactor, this cost could be 80% of actual decommissioning cost and would be in addition to the cost of any provisions the utility would have to make for decommissioning funds themselves (since, as described earlier, the surety company would pay only in the event of def ault by the utility).

Second, we dismiss having the general public pay for decommissioning out of general tax revenues.

In recent years, the trend in economic decision-making has been to tie the cost of a product as closely as possible to the ultimate users of that product lest economic dislocations result.

Decommissioning costs are real costs that will definitely have to be paid rather than a contingency that may never arise. As such, these costs should be treated as part of the overall cost of generating electricity via nuclear power and as such they should be paid, to the greatest practical extent, by the users of that power unless there are overriding societal or political reasons.

Although it can be argued that decommissioning is a special expense and thus perhaps should be treated specially by society, more persuasive argurents suggest that if a utility decides to build a nuclear plant based on its best economic judgment, then the prospective decommissioning expense should be factored into that judgnent.

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2.

Federal incume tax considerations Before analyzing the remaining four alternatives individually, we should first nention the problem of the federal corporate income tax

• which is gernane to the remaining four alternatives. Most private utilities nust pay a tax of 48", of their adjusted gross income.

This is an important consideration in evaluating the cost aspects of the remaining alternatives because of the way the U.S. Internal Revenue Service has indicated, at least infornally to the NRC staff, it will treat decomnissioning expenses.

For. most depreciation-type expenses, IRS allows a company to deduct from its gross income each year an anount reflecting the depletion of a capital asset for that year.

Two basic nethods of depreciation are allowed by IRS.

The first, or straight line remaining life method, assumes that an asset's value will decrease the same amount every year for each year of the asset's expected life.

Second, the IRS allows, within certain linits, a company to accelerate depreciation deductions for an asset, such that annual depreciation deductions taken early in an asset's expected life are greater than those deductions taken towards the end of an asset's expected life.**

State corocrate income taxes, because of their diversity and lesser impact are not treated in this paper, although state property taxcs are discussed later in this paper.

See a discussion of accounting for cecommissioning expenses in " Accounting for Cost of Renoval ( Asset Depreciation Range System)" by Stuart G. McDaniel, Public Utilities Fortnightly, February 15, 1979, pp. 25-28.

S5b166 Under current IRS policy, deduction of decommissioning expense annually from a cenpany's incone is not allowed.

The IRS reasons that because decommis-sioning is a definite expense rather than a depreciable asset, it will only allow expenses for decommissioning to be deducted in the years in which such expenses are actually incurred.

Although a utility will eventually be able to deduct decommissioning expenses from its incone tax, it will lose the earlier use of cash assets that annual deductions for depreciation would afford.

It has been argued that, by not being able to deduct decommissioning expenses annually from its federal tax liability, a utility will have to collect ainost $2.00 in revenues to provide for every $1.00 in future decommissioning expense (assuming a 48% tax bracket).

This is somewhat misleading because decommissioning expenses will eventually be deducted from federal corporate incone taxes when they are actually expended to pay for decomnissioning.

Nevertheless, deconmissioning financing costs could be increased sonewhat. if a utility did not have earlier use of, and earnings from, noney entailed in annual deductions.

In certain linited situations, the IRS has indicated that it will allow annual deductions for decommissioning expense.

Investor-owned utilities nay be eligible for annual deductions if they meet the following criteria.*

Note that publicly-owned utilties are generally exempt from federal income tax.

656167 First, all funds collected from custoners (or any other source) for decom-nissioning expense nust be innediately segregated from the utility's assets.

A utility may collect from its custoners by its normal monthly billing procedures and deposit such funds in a blind trust inmediately upon collection.

In other words, the utility cannot have even short term use of these funds.

In fact, IRS suggested that, perhaps, a separate decommissioning account be established on a customer's bill.

Second, the blind trust itself cannot be reinvested in a utility's assets.

If it is desired that earnings from the trust fund themselves are tax-exempt, the fund snould be invested in state or municipal tax-exempt securities. Third, the fund must be administered by parties not nomally involved with the operations of the utility.

A fourth restriction indicated by IRS pertains to when a utility over-estimates decomissioning costs.

If a state establishes a trust fund '. hat meets the conditions described above, but provides that any excess funds af ter decommissioning expenses have been paid will be returned to the util'lty, the IRS has indicated that this prc/ision would probably jeopardize the tox-exempt status of the fund.

Because utility rate-making is basically a state and FERC responsibility, NRC staff has not taken a specific position with respect to federal tax treatment of decommissioning expenses. NRC staff has net with IRS officials to describe to them the utilities' concerns on this matter and and the inpact of IRS decisions on alternatives the NRC might consider.

NRC is passing along to interested parties whatever information it has received from IRS. Utilities, in conjunction with guidance fron state public utility conmissions or other state bodies, that are interested in setting up a tax-deductible blind trust fund for decommissioning expenses prior to definitive NRC policy, may wish to request a 556168

" revenue ruling"* on a specific method of treatment of decommissioning expense.

The IRS will indicate whether a proposed method meets its tax exempt criteria and, if such criteria are not met, will indicate why not.

IRS will rule only on a case-by-case basis, and not generically.

Because the remaining alternatives all have tax ramifications and because IRS tax policies can have significant cost and equity impacts as a result, the arguments and generalizations presented above should be kept in mind during the following analysis. Also, beyond the direct cost effects of taxes on funding for decommissioning are the indirect effects of how a utility chooses or is allowed to use various accounting procedures.

For example, a utility nay use straight-line depreciation in establishing its rate base before a PUC but may take advantage of accelerated depreciation allowed by the IRS.

The difference in these accounting systems produces a difference in calculated tax cued by the company based on straight line depreciation and the actual tax owed based on accelerated depreciation.

Some states allow this difference to be

" flowed through" (i.e., passed on to the customer innediately) while in other jurisdictions the taxes can be " normalized" through a deferr.ed taxes account which tends to smooth out the tax bill over the life of the facility.

Each of these accounting procedures has significant impacts on the cost of the various funding alternatives to be discussed below.

A " revenue ruling" may be obtained 1 itira the specifics of a hypothetical or intended approa

uhn Nithers, Assistant Commis-sioner, Technical, Internal Re-ce. 1111 Constitution Avenue, NW, Washington, DC 202, 5 % 169 3.

gmparative analysis of the " funding-at-commissioning,"

" sinking fund," and " funding at decommissioning" alternatives a.

Levels of assurance As indicated in Section C, funding at comnissioning would require the utility to deposit funds at the time of facility start-up such that these funds plus any accunulated interest would be sufficient to cover the costs of decomnis-sioning. Such a deposit plus interest must also be sufficient to cover esti-mated inflation.

Of all the alternatives considered, a deposit at time of start-up provides the greatest assurance that funds will actually be available.

This assumes, of course, that original estimates of decommissioning costs, including inflation and interest rates, were accurate.

Because funds deposited at start-up can grow in real terms over the life of a reactor, there could be a shortfall if a reactor is shut-down prematurely.

To prevent such a shortfall, there could be required a deposit covering total decommissioning costs at reactor start-up, regardless of interest to be earned.

Any interest earned, which would presum-ably cause the amount on deposit to exceed at any time necessary decommissioning funds, could be returned to the utility as earnings or retained by the state.

(However, as was indicated in the section on taxes, returning earnings to the utility may have negative implications for the tax-exenpt status of the deposit fund.

Additionally, such an approach tends to be a less efficient, and thus nore expensive, use of a utility's or ratepayer's funds.)

bb(I5.70 Providing the next higher level of assurance is the sinking fund option.

Particularly if the fund is structured so that higher paynents are nade earlier in a f acility's life, a relatively high degree of assurance of funds availaoility occurs. Providing the least anount of assurance is the funding-at-deconnissioning alternative.

All three alternatives, but particularly the latter two, do not allow sufficient accumulation of funds if a facility is forced to be shut down prematurely or if a utility encounters financial difficulties.

b.

Cost considerations Intuitively, one would expect the deposit-at-start-up option to be the nost expensive, because if a utility is required to deposit funds in advance, these funds are renoved earlier than with other funding options fron its use. Normally, a utility can, over the long run, earn more from its own equity capital structure (e.g., usually a 12-15" return) than by investing in higher grade commercial securities outside the company (currently 9-11*.).

A deposit should not be invested in a utility's own assets for the very reason that the deposit account was established in the first place - i.e., to nininize the risk that deconnissioning funds would not be availablo.

Investnent in stocks of outside corporations should also not be allowed due to their increased risk or instability.

Therefore, this paper considers only high-grade debt instrurents such an non-electric-utility bonds, other high grade corporate bonds, or various government bonds.

Ob171 Those decomnissioning funding alternatives that allow greater use by the utility of its own capital structure should tend to be cheaper.

The New York State approach, which basically follows the negative salvage value depreciation method and allows depreciation reserves to be in/ested in the utility's own assets, should allow a greater return and should thus cost less overall.

This, in fact, is the basis upon which New York justified its approach.*

Other studies have indicated that the deposit at St. art-up method is perhaps not that nuch more expensive than other options. One study by Barry Mingst of the NRC** has indicated that the negative-salvage-value method is more expensive than the deposit method, which in turn is more expensive than the sinking fund method.

This relationship holds true under a variety cf parametric assumptions with respect to interest rates, inflation rates, method of decom-nissioning chosen, etc.

For example, Mingst assunes the following in one scenario:

Decommssioning a PWR is estimated to cost $50 million in 1978 dollars, the interest rate is 3*, on invested funds, the utility's discount rate is 10%, the inflation rate is 8%, and the tax rate is 43%, where each of these Letter from Charles A. Zielinski, Chairman, New York State Public Service Comnission to Robert G. Ryan, Director, Office of State Prograns. U. S.

NRC. dated January 9,1973.

The remainder of the analyses of costs of funding alternatives will rely prioarily on two studies.

One is Decost Comcuter Routine For Decommis-sioning Cost and Funding Analysis (NUREG-0514) by Barry C. Mingst, Of fice of Nuclear Material Safety and Safeguards, U.S. NRC.

The second is Financing and Accounting Alternatives for Deconmissioning Nuclear Plants _

by Preston A. Collins, Senior Consulting Engineer, Gilbert Associates, Inc., September 23, 1978.

556172 rates is the average annual rate over the expected life of the f acility; and the actual f acility life is 32 years, at which time the f acility will be imme-diately dismantled. Given these assunptions,the Mingst study found that costs in constant dollars for the various funding options are: (1) Constant-fee sinking fund - $104 million; (2) Escalating-fee sinking fund - $33 million; (3) Deposit at facility start-up with earnings accumulated in the fund - $118 nillion; (4) Deposit at facility start-up with earnings returned to the utility - $79 million; (5)

Straight-line negative salvage value depreciation - $210 million; and (6) Adjusted straight-line negative salvage depreciation - $130 million.

Mingst's study found that the same relationship among the various alterna-tives generally held if other values were assigned to the variables.

For example, with other variables remaining the same as above but with an inflation rate of 6", rather than 8",, the following decommissioning cc.;ts are derived:

(1)

Constant-fee sinking fund - $70 million; (2)

Escalating-fee sinking fund - $65 million, (3) Deposit at facility start-up with net earnings accumulated in the fund - $80 million; (4)

Deposit at facility start-up with earnings returned to the utility - $78 million; (5)

Strai ght-li ne negative salvage v'alue depreciation - $142 million; and (6) Adjusted straight-line negative salvage value depreciation - $107 million.

The Collins study has indicated that the costs of the various alternatives nay not be as high as the Mingst study indicates.

Although the Mingst 556173

___.___ _ _ study provides a broad-based method for analyzing the sensitivity of most inportant variables af fecting the costs of the various decommissioning fund alternatives, it has nade sinplifying assumptions regarding accounting for federal income taxes and the capitalization involved in the negative salvage nice depreciation nethod. These appear to be the primary reasons for the overall higner costs associated uith Mingst's projections.

Preston Collins, on the other hand, assumes the constancy of most variables, but examines how various assumptions about federal taxes and accounting for them can affect the ultimate present value cost of decommissioning funding alternatives. His study nas assumed the following:

Decommissioning currently costs $24 million; the plant will be immediately dismantled in 32 years; the annual rate of return on capital is 10%; the average annual interest and inflation rates are each 3%; and the federal corporate income tax rate is 48%.

Collins then proceeds to analyze the three options being discussed in this section, using as his variaoles whether the federal income tax on the earnings of the fund is either paid by the fund itself directly or by the consumers througn the rate structure

• If paid indirectly by the consumers through the This is a sonewhat artificial distinction. Under nost ci rcumstances the customers would be paying taxes in either case. Under the fund-itself-paying-taxes option, the fund is uapitalized at a higher level so that it can generate sufficient earnings to pay taxes by itself and still have enougn remaining to pay for decomissioning.

Under the custcmer-pays-the-taxes option, the fund is capitalized at a lower level with annual revenues collectea directly fron the customer to pay for taxes.

However, the custoner would also be paying a significantly Icwer cost of capital anortization under the lower capitalized option.

550174

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._..... __ __.._ _._ _ _ _ __ _ fund itself, the fund would have to be capitalized at a higher level than if paid directly by consumers.

Anotner variable is wnether the federal income tax on the annual amortization of the fund is " normalized" or " flowed through."

Finally, the study examines whether the fund should be established to include total dollar costs prior to or af ter the expense for decommissioning is deducted fro., income tax.

(See Appendix A for a more detailed description of these alternatives.)

The range of present-value costs (in 1973 dollars) terived in the study following the above assunptions is described below.

In general, it proved cheaper to capitalize the fund at a lower level initially to include the tax 1 eduction accruing when decommissioning occurs.

Thus, options assuming full funding, which does not account for the evertual tax dedution, have not been included below with one exception.

1.

Decosit at start-uo.

It was considerably less costly to have the customers rather than the fund itself pay taxes.

When taxes were paid by the custcmers, the fund cost $30,325,000 when the fund amortization was flowed through and

$32,301,000 when the amortization was normalized.

When taxes were paid by the fund itself, the fund cost $52,955,000 when flowed through and $52,627,000 when nornalized.

(If deconmissioning is assumed to cost $50 nillion, rather than $24 nillion as Collins assumed for his study, the above costs should be adjusted by a factor of 2.03 and are, respectively, as follows:

$64,218,000 ; $68,334,000 ; $110,321,000, $109,633,000. )

6bb$.7b

- 2.

Funded reserve, or sinkinn fund.

The range of costs varying according to the accounting systens used was narrower than,the deposit method.

Again, structuring the fund so that customers will pay income taxes due on the earnings of the fund is sonewhat less costly than income taxes on earnings paid by the fund itself.

When taxes on earnings were paid by the customers, the present value cost of this alternative was $28,000,000 when the amorti-zation was flowed through and $29,305,000 when the amortization was normalized.

When taxes on earnings were paid by the fund, the present value cost of this alternative was $38,408,000 when the amortization was flowed through and $45,153,000 when the amortization was nornalized.

(If deconnissioning is assuned to cost $50 million, the above costs would be, respectively:

$58,332,000, 561,051,000, $80,015,000, and $94,064,000. )

3.

Unfunded reserve, or funding at deconnissioning.

Because an unfunded reserve earns no interest, income taxes on interest are not relevant considerations for this option, although a return on equity is earned on the reserve.

The present value cost of the unfunded reserve option would be $37,346,000 if the federal income tax on the anortization were flowed through and $41,214,000 if the tax on the amortization were nornalizca.

However, if the ultimate tax deduction is taken into account when the reserve is initially established, the present value cost when taxes on the anortization are flowed through is $22,290,000.

(If decennissioning is assumed to cost $50 million, the above costs would be, respectively:

$77,303,000, 535,861,000, and $46,347,000.)

55617G

-J

~

-24 Several important conclusions can be drawn with regard to the costs of the funding alternatives from the results of the Mingst and Collins studies.

First, it is cheaper to have the customers pay for taxes on a fund directly 4-(rather than indirectly by capitalizing a fund at a higher level initially to cover annual tax payments).

Not only is direct paynent by the fund more costly, but it also may have negative effects on a utility's ability to attract capital, particularly because such capital would be used for a non-revenue-producing expense.

Second and more broadly, the present value cost of the fund is more affected by federal income tax policies and the method of accounting chosen to deal with those policies than it is by variations in interest rates,*

inflation rates, expected facility life, etc.

Of course, this assumes that the country does not encounter the disasterous type of inflation suffered by Germany during their Weimar republic.

Third, and most broadly, the relative present-value cost of the various funding alternatives is ambiguous.

Each of the options has a fairly wide cost range depending on the tax accounting With respect to the longer-tern relationship between the interest rate and inflation rate, studies have found that the real interest rate, i.e., the annual yield on investments over and above inflation, has averaged from approximately 1.5% to 2.0%.

As indicated in NUREG/CR-0570, "For the period 1961 to 1976, the average real return relative to the gross national product deflator on 3-to 5-year U.S. Government securi-ties was 1.435.

For the period 1963 to 1976, the average real return on AAA corporate bonds was 1.955.

The average excected real return on 9-to 12-month Treasury issues, relative to expected inflation rates for the period 1953 to 1975, was about 2.2%.

Two percent thus appears to be a reasonable assumptinn for real rate of return."

(See NUREG/CR-0570, Technology, Safety and Costs of Decommissioning a Reference Low-Level Waste Burial Ground, Vol. 2, E.S. Murphy and G.M. Holter, Paci fic Northwest Laboratory, March 1979.)

Of course, the real rate of return discussed here does not consider income taxes.

&dbE a

m.-..

~_m.

4

-25 assumptions used and each of these ranges overlaps with the other, so that varying accounting procedures used by and allowed of utilities in different states may imply that the most expensive option in one state may be relatively cheaper than another option in another state.

Consequently, it will be the responsibility of the utilities together with their state public utility commissions to determine the optimal accounting structure for a particular option since no one option is clearly preferable in all circumstances.

c.

Analysis of the equity implications of the three funding options As discussed earlier, the ideal situation from the point of view of equit~y is for consumers of a particular service to pay for all costs associated with that service.

In the case of decommissioning, equity requires customers to pay the same amount annually in real or present value cost over the life of the facility.

This implies that the optimal funding alternative from the point of view of equity is some form of the sinking fund method or negative sal vage value depreciation.

The sinking fund would be structured such that annual payments would escalate to be equivalent to the rate of inflation.

Although payments would increase year-by-year (assuming inflation continues) in noninal dollars, in constant dollars they would remain the sane.

A deposit at start-up would theoretically inpose relatively greater costs on users early in a f acility's life or even prior to olant start-up, depending s

on how and whether the fund is capitalized.

Custoners receiving benefits t

fron the plant well into its operating life will be paying considerahly less L'

b-

~'

-26 for its decomnissioning under the deposit method. Funding at decommissioning, or an unfunded reserve, could impose costs either on those customers later in its life or even those customers of the utility after the facility closed down.

In practice, an absolutely equitable payment stream is difficult to achieve.

As Collins' study indicates, the capitalization of the fund and the financial and accounting methods used to recover that capital significantly affect the equity of the alternative.

Equally importarit is the vulnerability to change of the decommissioning cost estimates themselves. As costs change, the annual payments embodied in any funding alernative will have to be changed commensu-rately.

If we assume that cost changes will inevitably be in the direction of higher costs than estimated, the theoretical inemity of the deposit at start-up option might be further "itigated as later customers are required to Dick up increased costs.

Further, this equity argument car get over-refined and over-stated.

As a group, the customers at the end wi'l be the same as at the beginning.

Customers who move into another service area will place them-selves at some unknown spot on a second utility's equity scale.

We can use, as a benchnark measurement of equity of the various alternatives, the ratio of the present value of the first payment to the last in the 32-year payment strean posited by Colli.ns. The closer the ratio is to one (1), the nore equitable the option is.

For the deposit-at-start-up alternative, the e

best ratio achieved was 4.3.

For the sinking fund alternative, the best ratio 8

achieved was 2.6.

For the unfunded reserve alternative, the best ratio achieved 556179

_ _ _.. was 1.6.

Thus, for Collins' evaluation of the alternatives, the unfunded reserve is the most equitable, primarily because customers are paying relatively equal annual paymer.ts for the reserve which is used by the utility as an internal source of capital.

(A similar analysis of Barry Mingst's results indicates the following results: constant fee sinking fund - 11.7; escalating fee sinking fund -1.0; deposit-at-start-up -11.7; straight line depreciation -

11.7; and adjusted straight line depreciation - 1.0.)

Unfortunately, the achievement of equity by a fund tends to reduce its ability to provide assurance of the availability of funds in case of prenature shut-down.

This is so because the greater amounts of funds collected early in a facility's life to provide such assurance, the more inequitable the fund tends to be.

d.

Administrative impacts Any of the three direct funding options should require moderate administrative ef fort depending on how they are structured.

All methods of funding will require some regulatory oversight to assure that funds are not inappro-priately invested or otherwise nismanaged. The degree to which additional administrative ef fort is required is also dependent upon how of ten changes are required in either deposits or investnents nade by the fund.

In theory, both the deposit-at-start-up and f undi ng-at-deconnissioning methods requi re less administrative effort than the sinking fund nethod.

This is because, for the deposit method, once the deposit is made, the fund can accumulate interest with perhaps only occasional shifts in investnents required, and because, for the funding at deconissioning nethod, no actual cash is involved and '.he utility would be subject to no more than the outside audit of its 2ccounts 556160 thau it normally receives.

As is true with all options, if estimates of eventual deconmissioning costs or inflation cause the amount on deposit to be less than required, additional administrative ef fort will be necessary.

In sun, there will not likely be sufficient administrative difference between the deposit nethod and the sinking fund method.

The unfunded reserve approach will require less administrative ef fort but this does not appear to be significant.

e.

Resoonsiveness to change As indicated in the previous section, each of the three funding options discussed in this chapter can be structured to accomodate changes in estimates of final decomnissioning cost resulting from changes in inflation rates, tech-nology, i nterest rates, etc.

A sinking fund is the most anenable to change since annual paynents could always be increased or decreased.

The deposit method is relatively more resistant to change once a deposit is made if unexpected changes in decommissioning cost estimates occur.

This problem can be alleviated either by structuring the deposit so that it can be added to or subtracted from as necessary, or by combining the deposit with a variable-rate sinking fund.

The fundi ng-at-deconmi ssioning alternative i s,

of course, the least affected by change since funds are not actually involved

u. nil decommissioning takes place except that changes in depreciation rates nust De passed on to the custoner.

Care will have to be taken, however, such that any structural shif t will not ef fect the potential tax-exenpt status of certain methods.

Thus, the annual 556181

. sinking fund, because of its ability to be " fine-tuned" periodically over its life, can limit the amount of money that night be returned to the utililty because of an over-estinate of deconnissioning cost.

f.

Adactability to nultiple jurisdictions Many power plants are jointly owned by several atilities.

Particularly in New England and the Pacific Northwest, a facility i's often owned by utilities in different states which report to different PUC's; or it is owned by both investor-owned and public utilities, the latter usually not reporting to state PUC's.

When this situation occurs, a certain option or options nay not be fully effective.

Additionally, once wholesale power is sold interstate, FERC regulations will apply thus introducing another dimension to the regulatory questions associated with deconnissioning.

For example, a state PUC nay not wish to approve payments in advance or annually into a sinking fund when such funds may go out-of-state into either a blind trust or a utility-administered fund.

Similarly, a municipal systen may be proscribed by its charter from contributing to a fund over which it has little control.

No generalizations can be made at this point concerning the overall superiority of one funding option over another with regard to ;urisdictional problens raised by joint ownership.

Although NRC has. funded a project to study these oroblens with the New England Regulatory Assistance Progran, the project has not yet been completed.

If any funding alternative were shown to be clearly superior to any other, then cost states should tend to select that one.

So far, this has not proven to be the case as is evidenced by the wide diversity of G5G183

_._....__..._ _ ___ _ funding options approved by different states.

The extent to which utilites can own plants jointly now indicates that jurisdictional problems should be relatively minor.

If utilities from different states can fund plants for over $1 billion, they should be able to jointly fund deconnissioning costs for $50 million.

4.

Decomnissioning Insurance and The Pooled Acoroach to Funding for Decommissioning a.

Descriotion of the insurance option Another alternative is to have either the nuclear insurance industry or some other part of the insurance industry provide decommissioning insurance.

Because decommissioning is an event that must take place rather than one having only some probability of taking place, it is not, strictly speaking, an insurable event. However, the pools could provide the support necessary to administer a decommissioning fund pool among participating utilities.

Decommissioning insurance could also be offered in the more limited situation of providing funds only in those cases where utilities were forced to decco-nission facilities prematurely.

This approach is more in keeping with the traditional role of insurance.

With the above distinctions in mind, the NRC has asked American Nuclear Insurers (ANI)* and Nuclear Mutual Limited (NML)* to evaluate the role of the ANI is the larger of tha two nuclear insurance ;ools, offering liability and property insurance coverage for nuclear f acilities and activities.

NML is a nutual program organized by a few large utilities to provide reactor property insurance.

5S6183 nuclear insurance industry in providing assurances for funding for decommis-sioning. NML's response was in that it felt that decommissioning insurance was probably unnecessary and, in any case, violated the insurance principal of spreading risk among similarly exposed insureds.*

ANI, on the other hand, indicated in informal discussions that there mignt be some role for the nuclear insurance industry to play, particularly with regard to premature shut-down insurance.

They envisioned four possible approaches that they intended to study further for feasibility, cost, and their possible role.

First, two separate annual payments would be made.

The larger would be to a trast fund adninistered by the insurance pools to pay for actual decom-missioning expense when incurred at the end of the f acility's expected life.

The utility would have full vesting rights to its contributions.

The smaller payment would be into a fund for decommissioning af ter premature shut-down.**

Second would be a single fund fron which all decommissioning expenses would be raid.

There would be no attempt to segregate funds between expected and prenature deconmissioning costs.

There is sone possibility that contributions to such a fund would be considered insurance payments and tnus be tax-exempt.

Letter from Hubert H. Nexon, Senior Vice President, Commonwealth Edison Company, dated Feoruary 7, 1979.

Although estinates are preliminary, based on the Atomic Industrial Forun's decommissioning estinates of roughly $24,000,000, the paynents would De

$750,000 and $250,000 annually in constant dollars.

556184

.................. _ _ _ _ _ _ _ _.. _ _ _ _ _. _ _ _ _ _. _ _ _ _ _ _ _ _ _ _ _ Third, the pools could collect only those funds required for premature shut-down insurance, and let the utilities provide their own system of funding for decommissioning at the end of expected facility life.

The premium for such coverage presumably would decline as the utility accumulated more funds.

Fourth, ANI could provide up to 10% of an insured's policy limit from its property insurance in a segregated fund for decommissioning in case of an accident. Given the current property insurance limit of $300 million, this would be up to $30,000,000.

It is not clear that property insurance would cover deconmissioning expenses that resulted in premature shut-down due to excessive contamination from operations rather than fron accidents.

b.

Analysis of Insurance 00 tion Analyzing the insurance option is constrained by the fact that it is not yet clear that the option will actually be available.

Although the insurance pools have begun to evaluate it, they have not yet drawn any definite conclusions.

Particularly in view of the Three Mile Island accident, it is not clear that the pools would be able or willing to offer the increased capacity required for decommissioning insurance.

Nevertheless, certain generalizations and conclusiens can be made.

In tenas of the level at assurance provided, deconnissioning insurance is excellent.

s6165

_ _.. Assuming that decommissioning insurance would cover whatever balance of funds was necessary to cover decomissioning costs, such payments would be assured. One problem, of course, would be the extent to which actual decom-nissio.'ing costs exceed the estimated costs.

6ct this is a problem with all options. It should be no nore difficult for an insurance system to accomodate changing cost estinates than for any other option.

Because the insurance cools are composed of companies within the United States and throughout the world representing enormous assets, it is highly un,likely that the insurance concanies themselves would be unable to pay for decomissioning expenses for which they were legally obligated.

Nevertheless, the insurance method might be more vulnerable to a rash of premature shutdowns than would be the case of each utility handling its own decommissioning independently.

Potential capacity problens, if there were very rany premature shutdowns,could jeopardize the insurance option.

From an equity standpoint, the insurance option is also good.

Because insurance premiums involve annual payments, they could be structured so that the users of the f acility would be paying the costs associated with it.

If used in combination with another alternative, such alternative could be chosen having the optinal equity and cost characteristics.

As indicated above, the cost of the insurance option cannot yet be d'etermined because of the tentativeness of the pool's estimates.

However, using the gross figures provided by ANI, we can conclude that the deconmissioning insurance option will be an expensive one.

The $750,000 annual payment 556166

,. discussed above is analogous to a sinking fund payment nade annually over the estimated life of the facility.

In addition to this, another annual payment of $250,000 is made for prenature shut-down insurance.

Assuming the ratio of these cayrents, if not the absolute anounts themselves, remains constant, the insurance aption will be one third more expensive than the sinking fund Defore taxes, and approximately one sixth more expensive after taxes, since the prenature shutdown prenium would nost likely be deductible from income taxes.

From the standpoint of the other criteria by which these alternatives are being evaluated, the insurance option is adequate.

Its ability to adapt to changed assunptions regarding deconnissioning costs is essentially identical to the sinking fund and there should be no problem with respect to the effects of joint ownership. Any internal administrative expense would already be built into the prenium, and external administrative expense should be no greater than with the other alternatives.

5.

Effect of Funding Alternatives on Other Decommissioning Modes Thus far we have discussed various alternatives for assuring the availability of funds for deconnissioning by implicitly assuming that the facility would be innedi ately di smantled.

In addition to immedi ate dismantlenent --

i.e.,

a f acility will be decommissioned innediately af ter it ceases operation -- three other basic decommissioning odes exist. A facility may be mothballed with conplete dismantlenent and removal of the f acility occurring at sone indefinite point in tne future. During the nothballing anase, one Ub63.N

-35 mode assumes that the f acility will be actively safeguarded through custodial care; the other node assumes that the f acility will be passively safeguarded, possibly through in-place physical barriers, The third additional option assunes that the facility will be permanently entonbed at its site.

The PNL study found that the constant dollar cost for deconmissioning via nothballing with passive safe storage for 30 years was approximately 20%

higher than imediate dismantlement, and for decommissioning via mothballing with custodial safe storage for 30 years was approximately 40% higher than immediate dismantlement.

However, although costs were higher, delaying disaantling for 30 years could cause a reduction in overall potential nan-rem exposure of almost 70"..

Delayed dismantling becomes even more expensive an option when local property taxes are considered.

Al though it is difficult to generalize about sonething as variable as local property taxes, the results of a study by Northeast Utilities on deconmissioning costs for their three Millstone plants and Connecticut Yankee indicated significant property tax costs prior to the site being returned to its original state.

Estinated total property tax cost for 50 years in constant 1978 dollars ranged from a luw of $24.3 million for the partial dismantlenent and. delayed removal of Millstone I to a high of 5264 million for the nothballing and delayed renoval of Millstone 3.*

These costs are in addition to the already higher technological costs of the delayed dismantling options.

preliminary Nuclear Power Plant Deconnissioning Study for Northeast Utilities January 1979.

dboiS8

..............._......._..... _ _ _ ____.2 hen inflation and potenti al interest on a fund are taken into account, current dollar cost is reduced as long as the interest rate exceeds the infla-tion rate.

For exanole, assuning an inflation rate of 5". and interest rate of 7",, the range of present worth costs for local property taxes is projected to be from 59.1 million to $85.6 million depending on the reactor. This factor alone tends to indicate that, under most circunstances, inmediate dismantling is significantly cheaper than any of the delayed options.* Local property tax costs associated with delayed dismantlement override the sonewhat 1 wer finanical costs Mingst found in sone delayed dismantlenent funding options.

Conclusions and Recommendations It has 'econe apparent fron the above discussion that funding for decommissioning D

is a complex problen with few definitive answers.

So much of the various funding alternatives depends on assumptions about events that may or may not occur thirty or more years hence.

The costs and effectiveness of the alter-natives are sonewhat sensitive to the inflation rate, the interest rate, technological changes and other variables. Utility accounting practices are by no neans standardized for application to nany specific problems, including deconnissioning, and the various state bodies regulating utilities are subject to different pressures and philosophies of rate-making.

ie recognize again however that there night be other reasons (e.g., the desire to reduce worker radiation exposure) that would argue in f avor of delayed dismantling.

55o189

-37

evertheless, certain patterns energe which nay lead to some generalizations.

First, assuring that funds for decommissioning will be available by some funding method is desirable both because of the nagnitude and uncertainty of the availabilty of funds required and because of the negative ef fects on equity of postponing providing for funds until they are actually needed.

(Col. lins' study indicates that under certain accounting assumptions, the unfunded reserve may be very equitable, but sucn equity varies according to how the reserve is amortized, or if it is amortized at all.)

The alternative of relying solely on an unfunded reserve for decommissioning, even if acceptaDie to a particular state, is so fraught with uncertainty as to be questionable under the 'iRC's responsibility to assure that a utility is financially quali-fied

• .o safely snut down a licensed reactor.

Second, the very conplexity of the variables influencing the funding alter-natives analyzed, together with the of ten anbiguous effect of many of those variables, indicates that the :lRC should allow 3 wide latitude of approaches to inplement scne standard level of assurance.

RC should avoid imposing requirenents so specific that they impinge on state or federal rate-making authority or on utility accounting practices, Darticularly when the ef fects of those requirenents are not all that clear.

The tiRC's function should be

• o reavire assurance of the availability of decommissioning funds within reasonaole bounds of cost-ef fectiveness.

Third, it is by no neans clear that prenature shutdown insurance will be available.

In conjunction with one of the other funding options, and assuning 55o130 J

.. _. _ _ _ _ _ _ _ _ a stable and reliable insurance narket, this would appear to offer the greatest assurance of the availability of funds with good equity characteristics, aloeit as a relatively high cost.

Without the insurance option, on the basis of assurance and cost, the next best oction appears to be that variation of the deposit-at-start-up option that is capitalized to take into account the eventual tax benefit and that accumulates interest over its life.

(See Collins' case numbers 5 and 6.)

Although this option penalizes custoners earlier in a facility's life to the benefit of later c u s tone rs, i t is not unreasonably inequitable.

Further, although funds are not conpletely provided in advance because the tax cenefit has been factored in, this alternative under nost circunstances provides a high level of assurance of funds availability thoughout the facility's life at a cost that is usually not substantially higher in real dollars than that of the sinking fund.

By taking account of the eventual tax benefit, the initial deposit is substa'ntially reduced.

This should ':

h a,e a negative effect on the level of assurance provided, because even utilities in serious financial difficulty will be able to use this tax benefit at time of deconnissioning.

One possible problen with the deposit approach is that a utility nay have problens raising capital for decommissioning because it is a cost not contriouting to generating revenue.

However, if considered as part of the normal capital cost of the facility, this problen should not be serious.

Finally, the point should be nade that for auolicly-owned utilities not subject to federal taxes, the present value cost of this method will be less, altnough the initial deposit will be greater.

(See Collins' case number 1.)

553191

. II.

Funding for Decommissioning of Fuel Cycle Facilities, Experimental and Research Reactors, and Byproduct Licensees A.

Introduction and Statement of Problem Many of the problems associated with funding for power reactor decommis-sioning are also apparent in funding for decommissioning non-power reactor facilities and licensees.

Consequently, much of the following relies on the analyses presented in Part I of this paper.

Decommissioning nuclear facilities and licensees other than non-power reactors represents a wide diversity of technique, risk, and cost. Many of the decommissioning studies being done by Pacific Northwest Laboratories and others for the NRC on decommissioning various nuclear facilities have not yet been completed.

Consequently, several conclusions in this section are necessarily tentative.

Althougn it is difficult to generalize about the wide diversity of licensees operating non-reactor facilities or possessing materials licenses, it is safe to say that many are not as financially secure as the regulated utilities operating large commercial power reactors.

Notable exceptions to this situation abound with firms like Exxon, Gulf, and other large corporations involved in various phases of the fuel cycle.

However, even in the case of these firms, their corporate structure is such that operating subsidiaries have been established to run a particular facility or facilities.

In case of defaults of the subsidiary, S56132

..... _ _. _ _ _ _ _ _ _ the assets of the parent company could probably not be touched.

In many other cases, licensees may be small companies, universities, hospitals, and, in the case of many byproduct materiais licensees, individuals.

Events of the past few years have also indicated that assurance of funding decommissioning non-reactor facilities and licensees should be strengthened.

The most recent example is the situation with respect to Nuclear Engineering Company at its Sheffield, Illinois waste burial ground. Another example is the American Nuclear Company default which caused the state of Tennessee to pay approximately $1,000,000 for the decontamination of that facility.

Finally, there are the major financial difficulties posed to New York state by the West Valley plant.

The cost of decommissioning various facilities varies, of course, according tn the function and size of the facility being considered.

The cost to immediately dismantle a large fuel reprocessing plant was estimated by Battelle Pacific Northwest Laboratory to cost $67 million in 1978 dollars.

For a small mixed oxide fuel fabrication facility, Battelle estimated decommissioning costs to be, in 1978 dollars:

$7.5 million for immediate dismantlement; S2.6 million for entombment; and $15.8 million for dismantle-ment delayed for 30 years.

For a low-level waste burial ground, decommissioning costs range from approximately $20 million for modest stabilization plus long-term care at a western site to $1.4 billion for complete exhumation and reburial of the wastes in a deep geological repository.

The cost to 556193

'n

- i immmmmmm---- - - ----

--m.m.

mui---im-

-mens

- - i.

m-um

- decommission uranium mining and milling ir;stallations are estimated to be about $5 million. Small research and experimental reactors will mostly like cost about $5-10 milliar..

Materials licensees should show the wid'st variation in cost of decommissioning.

Cost of removal of disposal or radioactive material from byproduct licensees could range from a few hundred dollars to over one million dollars.*

As with reactors, another major reason to require some assurance of decommissioning funds is to protect against financial uncertainty due to premature shut-down. Although most fuel cycle facilities (with the exception of reprocessing plants) should not usually be vulnerable to premature shut-down due to accident or excessive contamination, they are more vulnerable than power reactors to adverse business conditions that could cause the facility to shut down.

Another factor that increases the need for assuring decommissioning funds i" the decommissioning modes being considered.

For several types of non-reactor facilities, decommissioning options are being considered that require very long-term surveillance -- i.e., over 200 years.

For this period of time, the continued existence of even the most financially stable firm cannot be assurred.

For discussion of various fuel cycle decomnissioning costs, see Task Force Report on Bonding and Perputal Care of Licensed Nuclear Activities; Conference of Radiation Control Program Diret' ors; April 5,1976.

G56194

._ _ Still another problem should be considered -- that is, the availability of funds does not necessarily guarantee that decommissioning will be performed properly at reasonable cost.

Unless there is sufficient incentive for an owner to decommission, he may default even if decom-missioning funds have been set aside.

For example, the cost to decom-mission a facility may be 51,000,000, which amount has been set aside for decommissioning. The licensee may not be willing to use its labor or capital assets to decommission its facility if it is not earning a rate of return equivalent to using those assets on some other project.

Thus the licensee could go into technical default even though it was still financially viable. The li 7 sing authority would then have the responsibility to contract out the decommissioning job, perhaps at a higher cost than the $1,000,000.

To prevent this from happening, a contingency factor of perhaps 25% of basic cost should be added to estimates.

B.

Evaluation Criteria All evaluation criteria discussed in Part I of this study are relevant to decommissioning with the exception of criterion five.

Few, if any, non-reactor facilities are owned jointly, and even if they were, such firms are usually not regulated in the same way as are electric utilities.

However, a variation of criterion five -- the extent to which a funding option is compatible with state laws and policies -- is relevant.

Many 556195 h

_ - - - non-reactor facilities and licensees are licensed by the state through NRC's Agreement States program. Although state criteria must be compatible with NRC regulations, this should not mean that the NRC is heedless of state needs.

C.

Alternatives for Assuring that Funds Will be Available and D. Analysis of Alternatives 1.

Variations in alternatives All funding methods considered in Part I remain relevant to non-reactor facilities.

(The sinking fund option can be broadened to include an annual tax based on production or use.

The revenue from this tax would be the basis of annual payments to the fund.) We are able to exclude funding from public revenues at the state or federal level for the reasons that were used in the case of power reactors.

One possible excepticn to excluding public funding is in the case of materials licensees where one alternative would be to impose a set license fee that could include costs for disposal of the licensed material.

Another difference between power reactors and non-reactor facilities and licensees is in the area of surety bonding.

For some of the smaller facilities where relatively small decommissioning costs are involved and where the operating life of the facility or the license is somewhat shorter, surety bonds may be available as an option.* In fact, several Although this paper refers to surety bondina as an alternative for consideration, other surety mechanisms are equally valid and should be assumed to be included in this analysis.

For example, bank letters and lines of credit would operate similarly and would have similar costs to bonds.

556136 s..

_ _ _ _ _ states currently require licensees under their jurisdiction to post surety bonds as a method of assuring the availability of decommissioning funds.

The NRC staff has yet to be convinced, however, that surety bcnding provides adequate assurance of funds over an extended period of time.

As discussed in Part I, many surety bcoding companies require, as a condition of their bond, that the bond be subject to periodic renewal.

If the licensec were to esperiance financial difficulty, the surety company could decline to renew the bond and the assurance would disappear.

2.

Federal income tax considerations As with commercial power reactors, decommissioning exoenses for other nuclear facilities and licensees would not be deductible from incume tax under IRS regulations until actually incurred.

For small materials licensees or non-profit licensees such as universities $nd ncs'pitals whose revenues would not subject them to the full 48" tax ate, this may not be as significant.

Similarly, blind trusts could be established with the principal from such trusts invested in tax-free securities such that both principal and interest would not be subject to federal tax.

Finally, it should be kept in mind t' at non-reactor licensees have tne same range of accounting options as do utilities.

Funded and unfunded reserves can be structured to take advantage of accelerated depreciation through normalization or flow through accounting methods, by net-af ter-tax funding, or by any of the other methods Collins discusses for utilities.

In fact, the range available to such licensees may be broader than for 556197 m

_ _ _ _ _ - utilities, whose accounting practices are usually regulated by the state public utility commissions and the Federal Energy Regulatory Commission.

3.

Comparative analysis of the " funding-at-commissioning," "sinkino fund,"

and ' funding at decommissionina" alternatives Most of the analysis in the comparable section of Part I is also valid here.

The deposit-at-start-up method provides the greatest assurance that funds will be available; the funding-at-decommissioning nethod provides the least assurance.

As indicated above, special care will have to be taken for those facilities who may be in custodial safe storage for 200 years or longer.

Certainly, to expect companies to be around to pay, such expenses annually as they are incurred for so long a period of time would invite cases of default.

Another consideration is the effect of various funding methods on small licensees.

Of course, the flRC's primary duty is to assure the funding of decommissioning as part of its mission to protect public health and safety and the environment.

fievertheless, some weight should be given to the effect that the deposit-at-start-up method may have on smail or marginal producers.

The argument can be made that licensees who are so vulnerable that they could be forced out of business by having to pay a deposit should not be in business in the first place.

Although this argument has some merit, its effect could run counter to U. S. antitrust policies, which the ilRC is also charged to uphold in its operations.

656198

..._.- - From this point of view, annual sinking fund payments would tend to be less disruptive than a deposit at start-up.

With respect to cost, the analyses performed by Collins and Mingst can be applied just as easily to the larger fuel cycle facilities and, thus, we can draw essentially the same conclusions as we drew in Part I.

For smaller licensees, the analysis would apply but would probably be too detailed for the level of cost involved.

With respect to equity also, many of the same conclusions apply.

One difference may be with those decommissioning alternatives that provide for long periods of custodial care.

If funding options are chosen for such decommissioning modes that require a licensee to make payments as custodial expenses are incurred, the equity principle could be substantially vioiated unless the payment were generated from deposits accumulated during the productive life of the facility.

One final consideration involves the administrative burden that could be incurred with 20,000 materials licensees.

Although few generalizations can be made at this point, any but the most simple system of funding for decommissioning tied directly to the issuance of most of these licenses could prove to be overly burdenson and not cost-effective.

. 4 Decommissioning insurance for non-power reactor facilities When the NRC staff solicited the views of the nuclear insurance pools on reactors, it also solicited their views on providing some form of decommissioning insurance for fuel cycle facilities. Again, there is no indication that the larger fuel cycle facilities would be treated any differently than reactors, although it is not yet clear that smaller licensees could be included at a reasonable cost. As with reactors, iny decommissioning insurance plan is extremely tentative at this point and would be subject to the same limitations discussed earlier.

There is also the problem of whether, by providing decommissioning insurance to reactors, there would be sufficient insurance capacity remaining for non-reactor facilities.

Conclusions and Recommendations As can be seen from the above discussion, most of the conclusions reached concerning reactor deconmissioning funding can generally be applied to non-power-reactor facilities.

As with reactors, it appears that NRC should reject the alternative of assuring funding for decommissioning through an unfunded reserve as being too fraught with uncertainty.

Also as with reactors, our analysis indicates that the NRC should allow a wide latitude of approaches to achieve assurance of the availabilty of funds.

S%200

.. _ _ _ _ Of all the options, the best appears to be the deposit-at-start-up method for the same reasons as discussed in Part I.

The sinking fund should also be acceptable in those cases with little likelihood of premature shutdown. Unlike reactors, it appears that, for smaller facilities at least, surety bonding may be an available option and may be acceptable if the bond is not able to be terminated by the surety company.

Finally, if available, decommmissioning insurance should prove to be acceptable under most circumstances.

5562C1

Apoendix A Preston Collins' study addresses three fundamental approaches to funding for decommissioning -- funding at commissioning, the funded reserve, or sinking fund, and the unfunded reserve or funding at decommissioning.

For each of these alternatives, when applicable, he examines three basic income tax effects via two approaches to each of these effects.

They are:

1.

Should the fund anticipate the use of the eventual tax deduction for decommissioning exoense?

la.

A fund or reserve is established at the full cost of decomissioning, without allowing for a tax deduction received when decommissioning is actually performed and paid for.

When the deduction was received, it would be returned to the customers at that time.

Ib.

A fund or reserve is established at the net cost of decommissioning, which allows for a tax deduction received when decommissioning is actually

' performed and paid for.

2.

Should taxes on fund earnings be paid directly by the fund?

23.

A fund is established at a sufficiently high level such that its earnings are sufficient both to build the fund at the appropriate rate, plus pay income tax on those earnings. Of course, the customer pays such taxes indirectly through taxes on the higher amortization required by this approach.

Appendix A bd6202 2b.

A fund is established such that the customers pay taxes on its earnings directly through revenues.

Thus it is caoitalized at a significantly smaller amount than in approach 2a.

3.

How shoul_d tax effects from different accounting nethods be treat _ed?

3a.

Income tax on the anortization of the fund or reserve is " normalized."

Basically, this requires a utility to reflect.the discrepancy between accelerated and straigi.L-line depreciation in a deferred tax account.

As Collins states, "The company is financing the tax on the deconiissioning amortization on which customers are paying a rate of return instead of the tax." (p.-5) 3b.

Income tax on the amortization of the fund is " flowed through."

This

"ethod allows for any tax savings (or costs) through accelerated depre-ciation to be passed on directly and innediately to the consurer.

356203 Appendix A

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