ML19294C151
| ML19294C151 | |
| Person / Time | |
|---|---|
| Site: | Haddam Neck, Millstone File:Connecticut Yankee Atomic Power Co icon.png |
| Issue date: | 04/30/1979 |
| From: | NORTHEAST UTILITIES SERVICE CO. |
| To: | |
| References | |
| FRN-43FR10370, RTR-NUREG-0584, RULE-PR-30, RULE-PR-40, RULE-PR-50, RULE-PR-70 CDF-C108, NUDOCS 8003070204 | |
| Download: ML19294C151 (31) | |
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DRAIT COPY ACCOUNTING ALTERNATIVES FOR NUCLEAR DECOMMISSIONING COSTS MILLSTONE UNIT NO. 1 MILLSTONE UNIT NO. 2 MILLSTONE UNIT NO. 3 CONNECTICUT YANKEE PREPARED BY:
Y Northeast Utilities Service Company Accounting Department Depreciation & Contract Adm. Section April, 1979
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DRAFT NUCLEAR DECOMMIoSIONING ACC_0_UNTING ALTERNATIVES A - Introduction Three considerations must be addressed in order to ensure that adequate funds will be available to pay for the costs of deconnissioning nuclear power plants when they are no longer useful for the production of energy.
These considerations include:
1.
Amount of Funds - The amount of funds that must be' collected over the life of the plant must be determined so that sufficient dollars will be available upon retirement of the plant to cover the decom-missioning of the plant.
The determination of the appropriate method of decommissioning nuclear plants and related costs of such methods are primarily an engineering function and will not be covered in this memorandum.
2.
Collection of Funds - In accordance with fair and equitable rate-making concepts, collection of these funds should be accomplished over the life of the plant so that the burden of supplying these funds is equitably allocated to those customers who receive the benefits from the plant.
For purposes of this study, it is assumed that a negative net salvage approach will be used to determine the expense to be charged to current operations.
This expense will be collected f rom customers through the normal ratemaking process.
3.
Use of Funds - Collected funds should be invested during the period prior to their expenditure for decommissioning nuclear plants.
Consideration must be given to methods of investing the funds that provide assurance that they will be available upon ret.irement of the plant and to met. hods that provide the highest return and, therefore, the lowest cost to the current consumers of nuclear power.
The main thrust of this memorandum is addressed at resolving the third
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consideration mentioned above, namely, what should the company do with the funds collected from current customers in advance of the expenditure of these funds for decommissioning nuclear plants? The amount. of funds and collection of funds considerations are closely related with the use of funds and will be addressed only where this relationship affects any decisions associated with the use of collected funds.
B - Financial Assumptions For the moment, in addressing the question of what to do with funds collected during the in-service life of a nuclear plant, we will assume that the amount to be collected or to be on hand at the end of the life of the plant is a known quantity.
We will further assume that the r
economic environment in which the Company operates will remain the same over the life of the plant and any period after retirement of the plant.
For example, we have assumed that tax laws will remain the same; that a const:nt rate of inflation will be experienced in future yeart; that the rate of return currently allowed the Company on common equity will
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3 re nain approximately the same; and that the cost of long-term debt and preferred stock will remain constant.
The financial assu;nptions used in all cases developed foc this study are set forth in attached Scbedule I.
The estimated decommissioning costs in 1978 dollars, for each method of decommissioning, for each of the four nuclear units (Millstone Unit Nos.
1, 2 and 3 and Connecticut Yankee) are set forth in Schedule II.
Tnese assumptions are necessary in order to enable us to deal strictly with the question of what to do with collected funds and not to confuse the issue with extraneous estimation problems.
C - Depreciation Reserve Method There are four possible alternatives that can be followed in using or investing funds collected from customers in advance of spending that money on decommissioning nuclear plants.
In the Depreciation Reserve method, which is technically known as the
" Price Level Adjusted" method, additional revenues are collected from customers over the service life of the plant to cover the decommissioning cost of nuclear plants (net cost of removal) through the use of a negative net salvage factor, periodically adjusted for inflation, that has been allowed by regulatory authorities in determining the appropriate depre-r ciation expense.
These revenues are taxable with no concomitant tax 1
deduction for the additional negative net salvage depreciation charge because, under current tax law, cost of removal is an expense for income tax purposes only in the year the expense is incurred.
Therefore, only the after-tax amoant is available for investment.
For ratemaking and
accounting purposes the decommissioning costs should be spread over the life of the plant.
llence, there is a timing difference between the book (ratemaking) and tax treatment of this cost.
Under normalization accounting for this tax timing difference, the Company would provide the customer with a tax benefit before the expense is actually allowable as a tax deduction to the Company.
Accumulated j
funds collected from customers less those paid out in taxes are less than the credit balance in the accumulated provision for depreciation
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j account associated with negative net salvage.
Outside investors must I
i supply the funds required to pay current taxes due.
Therefore, rate li base should not be reduced by the full amount in the accumulated pro-vision for depreciation without a concomitant increase equal to the accumulated deferred tax expense.
Accumulated deferred tax expense, in this case, will be a debit balance on the balance sheet.
liowever, it should be noted that the Connecticut Authority has not heretofore allowed normalization of timing differences relating to depreciation.
Under flow-through accounting, revenue requirements will cover current income taxes on th.e additional revenues and the negative salvage component of depreciation expense.
The after-tax amount of funds available for investment is equal to the additional depreciation charge before giving Y
effect to the reduction in rate base that occurs as a result of the accumulation of these depreciation charges.
This equality of after-tax amount available for investment with the additional depreciation charge occurs because, unlike normalization accounting, the Company does not provide the customer with a tax benefit prior to the Company actually
being allowec. to take the tax deduction for cost of removal expenses incurred.
Flow-through accounting for tax timing differences passes along the costs, as well as the benefits, to the customer.
Where expenses are incurred on the Company's books and are not currently allowable for tax purposes, flow-through accounting does not reduce current tax expense.
Under both flow-through and normalization accounting for the " Depreciation Reserve" method, the additional depreciation resulting from the negative net salvage factor causes a credit to accumulate in the accumulated provision for depreciation.
Customers will therefore benefit from reduced carrying charges on rate base.
In effect, the customer will be receiving a benefit on the funds he has paid in equivalent to the Company's overall embedded rate of return.
This reduction in rate base has the effect of reducing the total revenue requirements that are necessary to provide the funds for decommissioning.
The Company also benefits from the " Depreciation Reserve" method in that these net af ter-tax funds, provided by the customer, will be available for use by the Company.
The availability of these funds to the Company will reduce outside financing requirements which, in turn, will help avoid the vagaries of the financial markets that can be so prevalent with larger and more frequent financings.
It will also reduce future r
revenue requirements for the customer to the extent of the cost of money 1
associated with the funds which would'otherwise be provided for by additional outside financing.
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D - I'unded Reserve Method I
The fanded reserve method of handling funds collected assumes that the same n.ethod of collecting funds frora the customer is employed by the Company as assumed under the " Depreciation Reserve" method.
- However, instead of the Company being able to use the net after-tax funda for reinvestment in productive utility plant, a separate fund, under the direction of a trustee, would be established.
The trustee would invest these funds in securities of other companies or government entities.
It is estimated that, currently, a trusteed fund would he able to earn annually approximately a 9.5% before-tax return (before payment of the administrative costs of the trustee).
A trusteed fund will incur administrative costs, which are, currently, approximately 0.51 per annum, for managing fund cash and assets.
These trustees' costs will reduce the return on fund assets. A 9% return after deducting administ rative costs would furt.her be reduced to approximately 4.4%
af ter income taxes.
Under current tax law, income on such a fund would be taxable to the Company.
Because of this lower after-tax return, the customer will have to pay in additional revenues in order to provide the same funds at the end of the life of the plant for decommissioning the nuclear plant.
The only assumed benefit associated with this lower r
return is the additional security a trusteed fund provides to the consumer that the funds collected will actually be available to perform the required decommissioning.
The benefit of this additional security would be particularly true if the investments were in governmental securities.
lt murt be remernbered t hat the security offered by this method of funding only reduce:. the risk that the funds collected would be unavailable for expenditure on decommissioning.
This method of funding does not reduce the risk that insufficient funds might be collected from consumers over the life of the plant.
It is entirely conceivable that the unexpected, premature shut.-down of a nuclear plant, under estimation of deconunissioning costs, and unforeseen changes in regulations covering decommissioning of nuclear plants could produce requirements for decommissioning funds significantly in excess of those that are collected over the life of the plant and available under any funding approach.
The resolution of these risks lies solely in the financial viability of the owners of nuclear plants.
Therefore, careful cost-benefit evaluation of the reduction in risk must be made with the higher cost associated with the limited increase in security.
Under flow-through accounting, the customer would provide sufficient revenues to pay the associated income taxes with an amount remaining 1
equal to the decommissioning expense which would, in turn, be invested in the trusteed fund.
Under normalization accounting, as in the case with the Depreciation Revenue method, the customer would provide revenues that are less than thesumofdecommissionfngexpenseandincometaxes to be paid by the Company. Deferred tax accounting reduces the revenue requirements needed from the customer to maintain the same level of return to the Company's investors.
llowever, since the Company has to pay the current income taxes due, the Company will be required to raise enough cash to
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make up the di f ferenc e caused by normalization.
That is, the Com[,any will have to raise capital from outside investors equivalent to the deferred tax credit in the income statement.
The concomitant balance sheet charge associated with the negative deferred taxes in the income statement will be a debit to accumulated deferred taxes.
This amount will have to be included in rate base because this capital will be raised from outside investors to whom the Company must pay a return.
In this instance, deferred tax accounting produces a negative cash flow impact on the Company.
Under both the flow-through and normalization accounting methods, the charge to expense for decommissioning costs will appear in the income statement.
The contra credit to this account will be made to either the accumulated provision for depreciation or a separate contra asset account on the balance sheet.
Unlike the Depreciation Reserve method, this credit must not be deducted from the rate base. To deduct this credit from the rate base would imply that these funds were invested in Company assets, which is not the case.
Th'e funds collected from customers rep. resented by this credit will not be available for investment in utility plant.
The funds will be deposited in a trusteed fund.
Net earnings of the fund will increase the fund balance with a concomitant r
increase in the contra asset account.
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E.
Pre-In-Service Bond. Met.ho.d--
The Public Interest Research Group, et al, Docket No. "RM-50-22 has petitioned the Nuclear Regulatory Commission (NRC) to require that a prerequisite for nuclear construction licenses be the fil.ing of a bond prior to the in-service date of the plant with a future value equal to the final decommissioning cost.
The bonding approach would require an amount with a future value equal to the final decommissioning cost to be deposited in a separate fund that could not be used by the utility.
Obviously, this large lump sum of money could not be raised from our customers at the time the payment is made.
It would require the utility to go to the financial markets to raise the funds.
This approach could put a tremendous and presumably very costly burden on a ut _lity to provide the funds necessary.
This is particularly true of the Company's financial position today wherein we are unable to sell bonds for any reason because the Company's earnings do not meet the indenture require-for interest coverages.
ments The money deposited in this fund would draw interest and such interest I
income would be considered taxable income to the fund.
A return must be paid by the utility to the investors that supply these funds.
Therefore, the amount deposited in the fund must be included in rate base so that Y
the Company can pay a return to investors. The revenue requirements needed to pay this return to investors would be grcatly in excess of the income earned on the fund, if we assume that the fund assets will be invested in high quality securities that would pay a taxable return of about 9% or a tax-free return if invested in municipals of 5 to 6%.
This approach offers customers additional protection that funds will be available for decommissioning the nuclear plant upon retirement, lloweve r, this assurance is limited by the quality of the estimates made of the final decommissioning cost some 30-40 years hence, the retirement date, any changes in the art of decommissioning, future inflation on the total cost of decommissioning and possible new regulatory requirements.
It is very possible that additional payments into or refunds from the fund would have to be made as required to assure that the fund properly reflects any of these aforement.ioned changes if and when they take place.
F_ - Sinking _ Fund Method The Sinking Fund method is similar to the " Bonding" approach, except that a periodic payment (annuity) is paid into a fund during the life of the plant rather than a lump sum payment at the time the plant is placed in service.
The sinking fund accrual consists of a periodic annuity, the future value of which is sufficient to decommission the plant.
Again, the annuity is invested in a fund that cannot be used by the utility and the earnings of the fund would be taxable.
This method suffers 1 1 t.he same problem as the " Bonding" method in thatfutureinflation.Estbefactoredintotheamount to be paid into the fund.
In the " Depreciation Reserve" and " Funded Reserve" methods, the customer does not pay for inflated costs until the inflation actually occurs.
L G - Comparison of Accounting Alternatives Schedule 111 sets forth the summation of the annual revenue requirements during span life and the present. worth of such requirements under both the flow-through and normalization accounting methods, for each method of decommissioning, for each accounting alternative and for each unit.
These schedules show that the " Depreciation Reserve" method is, by far, the least expensive approach for the customer. Total discounted and undiscounted revenue requirements over span life are much less under this approach.
This means that both the total dollars to be paid-in by the consumer and the present value of those total dollars to be paid-in are the lowest of the z.iternatives studied.
Schedule IV shows the dollars reflected in Schedule III for Millstone Unit No. 3 in bar chart form and graphically illustrates that the "Depre-ciation Reserve" method is, overwhelmingly, the most economic accounting alternative.
It should be noted that the " Depreciation Reserve" method is the most economic accounting method, regardless of the method of decommissioning the units and that Immediate Dismantlement is the most economic method r
of decommissioning.
l 9 ounting_ Entries j-3 S.-hedule V sets forth the accounting entries that would be required throughout span life for each accounting alternative and for both the flow-through and normalization accounting methods.
For illustrative purposes, the dollars shown reflect the hmediate Dismantlement method of deconnissioning for Millstone Unit No. 3.
However, although the dollars would be different the accounting entries would be the same for any method of decommissioning, for any nuclear unit.
The entries shown are for the first year's activity together with a summation of the activity that would be recorded throughout span life.
I - Post Retirement Accounting A major consideration in the use of funds collected for decommissioning is the determination of the amount to be collected which has an effect on the handlinF of funds after the retirement date of the plant.
The main goal to be achieved in determining of the amount to be collected and the handling of the funds is to ensure that the customer who receives the benefits of the plant while it is in service pays for all the asso-ciated costs and gets the,. benefits of any associated savings.
Ideally, when a unit is retired as a production facility, all post retirement accounting would be below the line thus eliminating any effects on future customers. At the time of retirement, the credit balance of the accumulated depreciation (Reserve) account would be
established on the liability side of the balance sheet.
This would be unnecessary under any of the funding concepts because the fund itself and the associated reserve would have been already excluded from rate base consideration.
In addition, under normalization, the rate base effect of deferred income taxes would have to be eliminated to prevent future customers from paying the carrying costs associated with this additional financing.
Three approaches that could be followed for post retirement accounting (1) do nothing, (2) make it the sole responsibility of the company, sie and (3) reflect post retirement earning power and inflation in customers' revenue requirements during span life.
1.
Do Nothing - For the " Depreciation Reserve" method no accounting adjustments would be made to the reserve associated with net salvage.
After the retirement date, this credit will continue to be deduct-d from rate base and will continue to effect revenue requirements until the funds for decommissioning are expended.
Thus, future customers will receive the benefit of a reduced rate base, even though they had not paid in any of the funds during the life of the plant.
Whenactualdecommis$ioningccstsareincurredtheywouldbedebited to the reserve account.
Because these costs would be incurred at a point in time after the actual retirement date, and also, after the amortiration period, the effects of inflation would escalate these costs above the amount amortized.
If conventional accounting
practices are followed, the cumulat ive actual deconunissioning cost s would exceed the credit balance of the reserve, thus creating a permanent debit balance in the reserve account.
Under flow-through accounting procedures, post retirement customers' revenue requirements would be reduced because of the income tax deduction for the cost of removal actually incurred.
Future customers will receive the entire tax benefit assoc ated with the deduction 3
for actual decommissioning expenses.
In fact, the effects of post retirement inflation and the doubling effect of income tax on revenue requirements would cause the af ter span life reduction of revenue requirements to exceed the revenue requirements charged to the customers during the in-service period.
In other words, over the entire perie1, from the in-service date to when the unit is completely dismantled, the total revenue requi rements to deconunission the unit. would be negative.
Under normalization the future income tax deductions have been passed onto the customers during span life.
Due to post retirement inflation, the actual tax deductions will exceed the amount nor-malized during span life.
Therefore, there will be a credit balance in the Accumulated Deferred Income Taxes account after the unit has r
been cc,mpletely dismantled, thereby creating a permanent reduction in rate base.
For any of the " Funding" methods, there would be no rate base effect associated with the reserve account because the capital g
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rec eived from customers during span life has been already segregated 1
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However, under normalization the rate j
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Of course, the post retirement inflation problems k
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" Funding" methods.
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Company Assumes Sole Responsibility Af ter Span Life - Under the g
M funding concepts, this approach would be relatively simple to h
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income and expenditures from the fund would be eliminated as factors in determining customers' after-span life revenue requirements.
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i the company was allowed to normalize the tax effects during the in-d sersice period, then the accumulated deferred income tax account
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would have to be excluded frcm rate base caiculations in order to remove its effect on customers' revenue requirements.
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for the " Depreciation Reserve" method accounting adjustments must h
1 be made at the time of retirement.
Again, both the reserve account 1
and accumulated deferred income taxes (if applicable) associated i
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with decommission costs would be eliminated from rate base.
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may be accomplished by transferring the reserve account to the 5
liability section of the balance sheet.
This liabilit.y, which I
L represents funds supplied by customers during span life, would be j
b adjusted annually to reflect the effects of inflation.
C he debit associated with this adjustment would be charged 's 4 ow-the-t f
line expense account.
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.... _ _ _ _ Presumably under the " Depreciation Reserve" method the monies collected from customers during span life would be invested in company assets with the expectation that tlle return on such assets should outpace inf!stion.
i At the time of actual decommissioning the company would have available a pool of bondable property, and bonds could be issued as needed to generate the required cash.
Another alternative woulc be to transfer the reserve account t.o an appropriate retained earnings account and annually transfer from the unappropriate account an amount equal to the inflation of the costs.
3.
Reflect Post Retirement Earning Power and Inflation in Current Customers' Revenue Requirements - Under this approach the inflation and earnings expected after retirement would be reflected in customers' revenue requirements during span life. One of the primary deficien-cies of this approach is that a reasonably precise prediction of the inflation and earnings expected after retirement must be cade the time the unit becomes operational.
at The problem of changing decommissioning cost estimates and/or accounting treatments during span life would have a greater impact than other post retirement methods because of the longer time periods involved.
3 Whether or not to fund would also have a larger impact.
If the monies collected from customers is invested in company asset.s they w uld earn approximately 11%, net of taxes and the revenue require-ments would be lower than those associated with a fund which is earning less than the inflation rate.
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If the method of decommissioning is a delayed removal type, then financial predictions must be made for approximately 85 years.
If inapp2opriate estimates are used during span life, how will the company adjust after span life? Chances are deficiencies would have to be absorbed by the company and any excess refunded to customers.
In conclusion, none of the above approaches solve all the problems associated with post retirement accounting for nuclear decommissioning
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funds. Obviously, the "Do Nothing" approach is unacceptable and should not be considered a viable alternative.
This leaves the last two approaches which require similar accounting entries and differ only in the handling of inflationary increases in decommissioning costs and the af ter-tax earnings of funds expected after retirement of the related nuclear plant.
Because it would be virtually impossible to precisely predict prospective inflation rates, income taxes, earnings on funded investments, the company's rate of return and the actual decommissioning costs, there will be, undoubtedly, some differences between actual decommissioning costs and the rel..d monies collected from customers and invested either in company 4 octs or a trusteed fund.
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.n-It appears that the second approach, w4uan the company assumes sole responsibility af ter span life, would be preferable for (1) the "Depre-ciation Reserve" method or (2) any of the funding methods where the fund is expected to earn more than the rate of inflation, such as, a fund invested in tax-exempt securities earning 6% with a 5% inflation rate.
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If a funding method is used and funded investments are earning, net of taxes, less than the inflation rate than the third approach would be preferable.
It must be understood that if a fund is earning less than the inflation rate and the post retirement inflationary increases have not been recovered by the retirement date the fund will eventually go
" bankrupt".
That is, the effect of inflation on the decommissioning costs will outpace the earning ability of the fund and there will be insufficient funds t<
arry out the actual decommissioning processes.
Ilowever, if a delayed removal method of decommissioning is used there is some question as to whether regulatory agencies would allow expenses based on projections for approximately 85 years (50 years after retire-ment) to be paid by current customers.
In any event, the need to constantly monitor estimated decommissioning costs and related accounting methods and the need for timely regulatory response is imperative.
Schedule VI sets forth the summation of the annual revenue requirements through the year of final decommissioning and the present worth of such requirements under the flow-through and normalization accounting methods,
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for each method of decommissioning, for each accounting alternative and for each unit.
The difference between the comparable amounts shown in r
Schedule III are the post retirement revenue requirements.
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J - Conclusion T5te basic premise under all these accounting alternatives is to attempt to have all costs and benefits charged and credited to customers that receive the outputs of the nuclear plant during its service life.
In evaluating the accounting alternatives for nuclear plant deconunis-sioning costs we should not lose sight of the overall philosophy of generally accepted depreciation accounting methods.
Most utility companies in most regulatory jurisdictions have been using depreciation expense and the " Depreciation Reserve" method as the proper vehicle for accounting for net salvage (positive or negative) for many years.
Other types of non-nuclear utility plant are expected to have net costs of removal which, when expressed as a percent of original plant cost, are expected to be greater than the negative net salvage percentage applicable to nuclear units.
There is no justifiable reason for decom-missioning costs of nuclear plants to be singled out as a special funding issue.
" Funding" methods are not the central issue in nuclear plant decommis-sioning.
The critical issue is to ensure that the regulatory agencies Y
which have the jurisdiction over the ratemaking process allow the appro-priate costs for NRC-approved decommissioning methods to be recovered over the useful life of the plant.
Even if " funding" methods were required, this would not ensure that the proper amounts would be available
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to carry out the decommissioning processes.
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the owners of the nuclear plants and the assurance that the owners will, in fact, be able to collect the decommissioning costs from the customers who receive-the benefits of the nuclear facilities. The Company should I
have the option of selecting the method of providing funds for decommis-sioning costs which is most suitable to its individual requirements and the most economic method for its customers.
Based on the analyses contained in this paper, the " Depreciation Reserve" method (as it has for many years) is 'he most' suitable and economic method for accounting for nuclear plant decommissioning costs.
K - Future Considerations 1
As mentioned in Section B - Financial Assumptions, for the purpose of i
this study it was assumed that the economic environment in which the Company operates will remain the same over the life of the nuclear plants and any period after retirement of the plant.
It was further assumed that current tax laws will remain unchanged.
There are very costly income tax considerat. ions related to the accounting alternatives for nuclear decommissioning costs.
Firstly, the revenues collected from the customprs for the additional negative net salvage (decommissioning expense) depreciation charge are subject to federal and state income taxes because, under current tax law, cost of removal is an expense for income tax purposes only in the year the expense is incurred.
Secondly, for the funding methods, the income earned by a fund is subject to income taxes unless the fund is invested in " tax-exempt" securities.
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In addition, in recent years there have been several attempts by some members of Congress to eliminate the " tax-free" provision i
on earnings from tax-exempt securities.
.i Of course, all these income tax costs are eventually passed onto the customer.
These costs become a significant portion of the total revenue requirements.
For example, in the " Funded Reserve" flow-through case l
for Immediate Dismantlement of Millstone Unit No. 3, the income taxes
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~.t applicable to the revenues collected from customers amount to $228 million over the span life of the unit.
The income taxes on the earnings i
of the fund amount. to an additional $140 million for a total tax bill of i
$368 million.
In the " Funded Reserve" and " Sinking Fund" cases, using both the flow-through and normalization accounting method, the total income tax cost over span life ranges from $317 million to $376 million.
For the " Pre-In-Service Bond" case the total tax cost increases to over
$450 million.
Thus, the need for some type of tax relief or special tax treatment of funds set aside for purposes of decommissioning nuclear l
units is obvious, j
j Whereas it might be too presumptuous and too costly to expect that the I
i Federal government would forego tax revenues on the monies collected j
r from customers, it is possible, or at least probable, that the income tax on earnings of a trusteed fund, set aside solely for the purposes of
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.i decommissioning nuclear plants, could be either eliminated entirely or d
deferred until the decommissioning costs are actually paid.
There
~~i appears to be a precedent for the deferral approach in the current tax
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- regulations applicable to pension funds where the earnings of a pension fund are not taxed until they are withdrawn.
In addition, payments into
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the fund are tax deductible at the time they are made.
Another interesting precedent regarding special tax treatment is the provisions fo the Black Lung Benefits Revenue Act of 1977. For tax years beginning af ter 1977, a coal mine operator may claim a tax deduction l
for payments made to a Black Lung Benefits Trust for t' e purpose of I
funding prospective black lung liabilities.
The highlights of the Act t
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are that the payments te the trust ^ deductible, there are severe limitations i
i on the trust's investments, the income received by the trust is tax-exempt, and payments into the trust are irrevocable.
Clearly, this is a precedent that could be used in developing a case for special tax treat-ment applicable to ftwding nuclear decommissioning costs.
rj Aside from the tax aspects, the creation of a fund poses several problems such as the designation of a trustee, the beneficiaries of a trust, limitations on the type ana/or amount of investments made by a fund, provisions for changing the amount of payments into a fund, and provisions I
for the ultimate disbursement of the funds.
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There are several interesting possibilities regarding the designation of r
a trustee.
Because of the magnitude of such funds, the expertise required to properly administer the funds and the length of time the funds would i
i h-have to be maintained, the trustee would probably have to be a major i
F insurance company or bank or perhaps a consortium of such companies.
To mention other possibilities, the following is quoted from Appendix D of 1
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" Technology, Safety and Costs of Decommissioning a Referen ce Pressurized Water Reactor Power Station" prepared for the U S.. Nuclear Regulatory Commission by Battelle Pacific Northeast Laboratory:
"A variety of entities could be designated to provide stewardship for the collected funds.
Possibilities include state government, the federal government, a private organization such as a bank, or the utility itself. An independent ' Decommissioning Assurance Agency' could also be chartered by each state or by the federal government to retain and invest the sinking fund and perhaps oversee activities and disperse payments to those conducting the activities.
Such an agency would act in a fiduciary capacity for the public.
Its governing board might be composed of representatives of th e
public, government, power consuming industries, and power producing industries.
By including various interest groups, tendencies to ove. estimate or underestimate costs and the annual payments nced d e
to fund the costs should be minimized."
It is interesting to note that the primary emphasis of the above quote
_ seems to be the "public" or " governmental" involvement in administering h
such funds.
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The limitations on the types of investments that funds could make lead to some awesome possibilities.
To financial managers of investor-owned
{l utilities, the first thought might be to the same types of investments it that are traditionally made by pension funds Iloweve r, regulatory agencies might have other ideas.
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_ _ _ In a rate proceeding of the Pennsylvanla Electric Company (Penelec)
(Docket No. 392 and Docket Nos. 22259, et. al., 2/24/78 and 6/8/78),
the Pennsylvania Public Utility Commission (PUC) allowed decommi ssioning expense in the form of an annual annuity and ordered the Company to place the annuity and its accumulated interest in an escrow fund, which weuld be unavailable to the Company until the dismantling of the nuclear plant occurs.
The PUC further ordered that:
"One-twelfth of the annuity will be deposited in the fund at the end of each calendar month.
Each fund investment by the escrow agent shall be in those bonds i ssued by the commonwealth of Pennsylvania having the highest yield at. the time the investment occurs.
- A strict accounting shall be maintained for r
I the fund, so that its balance can be determined at any moment in time".
The PUC rejected Penelec's assumption that inflation will conti nue at its present rate and made no provision for inflation but rather provided that an adjustment could be made to the annual allowance "from time to i
time to account for any experienced inflation" 4
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The creition of a fund poses other interesting questions.
For example, who would be the beneficiaries of a fund? The customers? The citizens within the franchised territory? The goverrunent or a polit ical subdivision thereof? What provisions should be made for changing the amount of payments into a fund due to changes in the life of a nuclear unit, changes in the i.ethod or estimated costs of decommissioning, changes in inffation or earnings of the fund? What provisions should be made for disbursing the funds and who would be responsible f or such disburse-ments? The Company? The Trustee? Will enabling legislation be required U
f or t rusts of this nature?
The purpose of this section is not to evaluate but rather to stimulate thinking about future considerations and problems that ultimately must be addressed and resolved.
The final solution to the many problems associated with decommissioning nuclear units will, undoubtedly, not be resolved by any one company but rather by a joint venture of nuclear owning companies, the regulators and legislators.
A
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Schedule I
,e 4
NUCLEAR DECOMMISSIONING ACCOUNTING ALTERNATIVES FINANCIAL ASSUMPTIONS f
1.
Inflation rate of 5% annually.
2.
Effective combined income tax rate of 50.91% (46% FIT, 10% SIT).
3.
Year end rate base, no rate base effect after span life.
8 4.
Fund earning rate of 9.5% less administrative fee of 0.5%.
I 5'."
Span lives:
Millstone Unit No. 1 36 years
((
Millstone Unit No. 2 35 years F
Millstone Unit No. 3 35 years 4
Connecticut Yankee 29 years 6.
Rate of return and discount rates:
.6 Millstone Units Nos. 1, 2 and 3 Long-Term Debt 49.5% x 9.50% = 4.70%
Preferred Stock 13.0 x 9.50 1.24
=
l Common Equity 37.5 x 13.10* = 4.91 100.0%
10.85%
-}
- CL&P and HELCO - 13.00%; WMECO - 13.50%.
Connecticut Yankee Long-Term Debt 55.7% x 7.00% =
3.90%
~a.
Common Equity 44.3 x 13.77 6.10
=
f-100.0%
10.00%
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Schedule 11 C
NUCLEAR DECOMMISSIONING ACCOUNTING ALTERNATIVES ESTIMATED DECOMMISSIONING COST 1978 DOLLARS y,
Annual i$
Initial Post-Retirement Final Total
- y Decommissioning Costs Removal Decommissioning l
- [
Costs (50 Years)
Costs Costs
($030's)
Millstone Unit No. 1
(
Fbthballing/ Delayed RemdPval
$14,163
$1,059
$45,487
$112,600 t
i Partial Dismantlement / Delayed Total Removal 46,379 608 23,021 99,800 1
Immediate Dismantlement 64,600 64,600 R-R
~
Millstone Unit No. 2
2 Mothballing/ Delayed Removal 14,149 1,945 48,901 160,300 f
Partial Dismantlement / Delayed Total Removal 44,455 1,104 24,045 123,700 immediate Dismantlement 62,000 62,000 b'
Millstone Unit No. 3 Mothballing/ Delayed Removal 15,525 5,429 53,125 340,100 Partial Dismantlement / Delayed Total Removal 48,971 3,056 26,329 228,100
[
Immediate Dismantlement 67,500 67,500 Connecticut Yankee n
Mothballing/ Delayed Removal 13,180 1,841 44,870 150,100 Partial Dismantlement / Delayed Total Removal 40,424 1,072 22,476 116,500 u.
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Immediate Dismantlement 57,200 57,200
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Schedule III
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Page 1 or h 4
MILLSTONE UNIT NO. 3
- 7 NUCLEAR DECOMFIISSIONING ACCOUNTING ALTERNATIVES REVENUE REQUIREMENTS AT END OF SPAN LIFE J!d Ai 1
Present Worth Summation
$i Flow Thru Normalized Flow Thru Normalized y: '
( $000's) hI Mothballing/ Delayed Removal
- n M
Price Level Adjusted V;
$128,602
$ 63,134
$ 840,071
$ 412,398
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Funded Reserve 256,285 214,156 2,257,190 1,997,016 Sinking Fund 398,312 353,925 1,554,910 1,968,035
- (
Pre-In-Service Bond m.
652,537 629,670 1,953,548 2,166,510 Partial Dismantlement / Delayed Total Removal Price Level Adjusted a
S 86,258
$ 42,340
$ 563,461
$ 276,603
,J Funded Reserve y
171,880 143,620 1,513,871 1,339,337 3
Sinking Fund 267,139 237,351 1,042,860 1,319,894 Pre-In-Service Bond s
437,630 422,292 1,310,182 1,453,039 s
Immediate Dismantlement Price Level Adjusted
$ 25,523
$ 12,530
$ 166,803 81,893 Funded Reserve fl 50,853 42,466 448,011 396,261 r
Sinking Fund 79,030 70,200 308,560 390,457 0
Pre-In Service Bond 129,475 124,930 387,639 429,858 k
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Schedule III Page 2 of L MILLSTONE UNIT NO. 2 NUCLEAR DECOMMISSIONING ACCOUNTING ALTERNATIVES REVENUE REQUIREMENTS AT END OF SPAN LIFE T-Present Worth Summation P '
Flow Thru Normalized Flow Thru Normalized y
($000's)
Mothballing/ Delayed Removal
- c M
Price Level Adjusted
$ 60,615
$ 29,757
$ 396,011
$194,410 Funded Reserve 120,786 100,915 1,063,910 941,214
'R Sinking Fund 187,725 166,788 732,865 927,545 Partial Dismantlement / Delayed Total Removal Price Level Adjusted
$ 46,774
$ 22,962
$ 305,616
$150,031
'p Funded Reserve 93,204 77,865 821,001 726,290 Sinking Fund 144,859 128,691 565,530 715,722 I
Immediate Dismantlement Price Level Adj usted S 23,442
$ 11,512
$ 153,220
$ 75,222 Funded Reserve 46,705 39,006 411,516 363,982 72,581 64,460 283,395 358,565 1
1
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Gehedule 111 Parp 3 of h MILLSTONE UNIT NO. 1
~c NUCLEAR DECOMMISSIONING ACCOUNTING ALTERNATIVES REVENUE REQUIREMENTS AT END OF SPAN LIFE
+;
Present Worth Summation e
Flow Thru Normalized Flow Thru Normalized
($000's)
Mothballing/ Delayed Removal Price Level Adjusts,d S 40,909
$ 20,079
$282,415
$138,629 Y
Funded Reserve 82,799 69,451 779,634 691,342 g
yf Sinking Fund 131,389 117,138 526,176 677,185 Partial Dismantlement / Delayed Total Removal Price Level Adjusted
$ 36,261
$ 17,796
$250,315
$122,888 f.'.
Funded Reserve 73,389 61,556 691,017 612,756
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Sinking Fund 116,439 103,809 466,308 600,187 Immediate Dismantlement
+si Price Level Adjusted
$ 23,472
$ 11,523
$162,062
$ 79,575 4
Funded Reserve 47,497 39,828 447,298 396,596 y
3:.
Sinking Fund 75,359 67,174 301,824 388,425 M
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- 1 Pag.: 14 of h CONNECTICUT YANKEE NUCLEAR DECO?efISSIONING ACCOUNTING ALTERNATIVES REVENUE REQUIREMENTS AT END OF SPAN LIFE s
r-Present Worth Summation 90 Flow Thru Normalized Flow Thru Normalized
- s
($000's)
Mothballing/ Delayed Removal Price Level A,1]usted 7
S 85,285
$ 41,859
$387,043
$190,001 Funded Reserve 145,314 116,536 777,675 657,955 5
Sinking Fund 193,885 166,738 600,126 661,800 9
Partial Dismantlement / Delayed Total Removal y
y Price Level Adjusted S 66,191
$ 32,489
$300,413
$147,472 Funded Reserve 1
112,785 90,443 603,594 510,666 Sinking Fund
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150,479 129,411 465,798 513,677 Immediate Dismantlement Price Level Adj usted
$ 32,498
$ 15,949
$147,524
$ 72,413 h
Funded Reserve 55,368 44,387 296,367 250,701 x
Sinking Fund 73,868 63,510 228,665 252,120 l
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