ML20003A139

Answers of Miami Valley Power Project to Applicant Seventh Set of Interrogatories Re Witnesses & Decommissioning Costs. Analysis of Decommissioning & Premature Shutdown Costs of Plants & Certification of Svc Encl.Related Correspondence

ML20003A139
Person / Time
Site:	Zimmer
Issue date:	01/20/1981
From:	Feldman J MIAMI VALLEY POWER PROJECT
To:	CINCINNATI GAS & ELECTRIC CO.
References
NUDOCS 8101290726
Download: ML20003A139 (47)

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NUCIER REGUIMORY CCMISSION -

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Before Mministrative Judges: O ,, p Charles Bechhoefer, Chairman < c Dr. Frank F. Hooper Glenn O. Eright / [#'2 1 ' _ _ ' 's' In the Matter of:  : Y ' e,Q[.Plt U

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Dacket No. 50-358 9 q 4. ! _y CINCINNATI GAS & ELECTRIC CO., ET AL.  : m v'44 '3 7j

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MIAMI hW PCXER PROJECT'S ANSWERS 'IO APPLICAhT'S SEVENIH SET OF INTERE GATORIES

1. James H. Feldman, Jr. answered this interrogatory. His address is 216 East Ninth Street, Cincinnati, OH 45202. He is an attorney.

Answer: CG&E's response to Novenber 27, 1978 NBC Recuest for Mditional Financial Infor: ration (as revised Noverber,1980)

Accountants for the Public Interest, An Analysis of Decomnissioning and Premature Shutdown Costs of Nuclear Power Plants, August, 1980.

Public Utilities Fortnightly, Progress of Regulations - Nuclear Plant Decenmissioning Cost, April 26, 1979.

- Iwler, Iouis,2 Industry Developnents, Regulatory Bodies Ready for In Plant Retirements" Electrical World, 7-15-78, p. 19.

U.S. General Accounting Office, " Cleaning Up the Renains of Nuclear Facilities -

A Multi-Billion Dollar Problem," Washington, D.C., U,gCov' . Printing Off, ice,,

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EO-77-46, 6-16-77. g.

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Vider, Eaise, "What ~Happens When a Nuke Dies", Valley Mvocate, 7-26-78.

Article in htther Jones, December,1980.

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2. All documents listed in answer to question 1. Also answered by James H. Feldman, Jr.

3. James H. Feldman, Jr. answered this interrogatory.

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Answer: George G. Suckarieh, Ph.D., P.E. '~~

671 FiMAle Ibad Cincitinati, OH 45220 '

(513) 751-2533 - - - - - -

Education: Ph. D. Civil Engineering, Ohio State Univ.

MBA, Ohio State University 6Sl g U0.1290 y f - .

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l ME, University of Cincinnati Current Employnent: Professor of Construction Management, thiversity N of Cincinnati, College of Applied Sciences.

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Thcreas R. Her: nan, J.D.

lu9 l 03 3434 Riverdell Dr.

Amelia, Ohio 45102 lg6m ,o (513) 753-4399

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,s ao EcucatiCnal background: Undergraduate degree in econdmics, University

• • of Cincinnati, Cincinnati, CH.

E Juris Doctor, Salmon P. Chase College of Iaw.

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ob$ Current Erploynent: Attorney at law , Dennison & Eckerson, 200 Main g5~

Street, Eatavia, OH 45103

$< Ralph Estes

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C Chairperson, Departre.nt cif Accounting

,, C Wichita State University '

1. @ Wichita, Kansas 67208 5gj (316) 689-3215 g S C'.$

.$ E: Educational

Background:

DBA frcra Indiana University A MBA and BS frc= Cf.r.si y of Kentucky 3}h g~. CPA:

adN Current Erployment: Chairperson, Depart:nent of Accounting, Wichita yy$

State University.

4. See answr to interrogatory 3.

5. Tc'e individuals listed in response to interrogatory 3 may be called as witnesses.

Swa.ory of testinony of witnesses: These witnesses will generally testify that the Applicants have underestimated the costs of decanissicning the Zimner Plant.

James H. Feldman, Jr. prepared the answer to this inte. m.atory.

6. James H. Feldman, Jr. prepared the answer to this ht amienry.

Answer: None.

7. James H. Feld:ran, Jr. prepared the answr to this interrogatory.

Anse r: See answer to interrogatory 3 and 5.

8. James H. Feldman, Jr. prepared the answr to this interrogatory.

Answer: Attached please find the Accountants for the Public Interest Report: An Analysis of Decamissioning and Prenature Shutdown of Nuclear Power Plants.

MVPP also intends to use any independant calculations cited in.:

MVPP's answers to interrogatory 1. MVPP does not currently have copies of these other documents, but will provide then as soon as po'sibles to '

party so requesting them as soon as possible. O ~'/ 4

9. James H. Feldman, Jr. prepared the answers to this inte m a h . _ _ . .

g Answer: Imah I<osik C

Saul Rig 5 erg I- M 26198) p, ;2 Tan McIbnald y 0.'5:e W.h&:&cfSig the Se.g) >*

VERIFICATION frg

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STATE OF CHIO )

Cn COUNIY OF HMELTCN ) SS.

James H. Feldman, Jr., being duly sworn and cautioned says that he is the Attorney for MVPP in the above-captioned proceeding; that the foregoing answers

. to tM interrogatories ara true as he believes.

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l 6 p ,-u m . r an, a r, Skorn to before me and subscribed to in presence this 20 day of January, 1981..

M'cM KAREN D. NORTHCUTT Notary Pubuc, Stata et OMo Et GairhJJoe f4pirn #s. 22. ISA(

t m.x.r.LnCATION I hereby certify that a copy of the foregoing answers to applicant's seventh set of interrogatories were served on all iniividuals on the service list by regular U.S. Mail, with the exception of local counsel for Applicants, who was served by leaving a copy at his office this 20 day of January, 1981.

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AF Fil.lATES IN g g7,\ )%; ; E/ , 4.

A rranta, Georg.a N .

costoa, Massacnwsatts AN ANALYSIS OF DECCMMISSICNING AND PREMATURc N . r'P chicago, iinnois SHUTDCWN COSTS OF NUCLEAR PCWER PIMI'S b t'-i #1 3,- 1, ,,, c -

j, c,<q n u.arn., riorio. ~. s c Newark, New Jersey b* ~

bjM.5v New York, New York g { g e, s,, t I' .33' jf Philadelphia, #eensylvania Portler'd. .iegon

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• I ." *

• The debate over nuclear power plants has been particurarly) ':.

Providens, Rhode Island San Francisco, Californ.a vigorous, often acrimonious and frequently emotional. It has Toledo, Ch.o expanded in recent years to add economic issues to those of a technical and engineering nature.

"any cf the ecencmic issues have been the object of study and investigation by Congress, the nuclear industry, and others advocating or opposing nuclear power. Two of these issues, however -- decommissioning costs and the economic effects of .

premature shutdewn -- have received little attention. This report presents the results of an indepedent analysis of these issues for the guidance of regulatory agencies, Congress, and others who must make decisions concerning nuclear power.

In this report we cite a number of estimates made by others concerning the possible magnitude of decommissioning costs, useful lives of nuclear plants, and capacity factors to provide exemplary parameters for our analysis. Such citations do not represent an endorsement of these estimates, which involve nonaccounting issues in which API has no special competence.

TABLE OF CONTENTS

• I. Introduction . . .. . . . . . . . . . . . . . . . . . . . . . . . . 1 Accountants for the Public Interest. . . . . . . . . . . . . . . . 3 The Study. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 i

II. Decommissioning. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Introduction . . ..... . . . . . . . . . . . . . . . . . . . . 7 NRC's Present Poli,cies . . . . . . . . . . . . . . . . . . . . . . 7 Alternative Forms. . . . . . . . . . . . . . . . . . . . . . . . . 8 Experience to Date . . . . . . . . . . . . . . . . . . . . . . . . 10 Cost Estimates . ...... . . . . . . . . . . . . . . . . . . . 10 Financing Decommissioning Costs. . . . . . . . . . . . . . . . . . 12 Income Tax Considerations. . . . . . . . . . . . . . . . . . . . . 15 Possible Effects of Decommissioning Costs on Ratepayers. . . . . . 17 Recommendations . .. . . . . . . . . . . . . . . . . . . . . . . . 22 III. Plant Productivity and Cost Recovery . . . . . . . . . . . . . . . . 23 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Plant Life . . .. . . . . . . . . . . . . . . . . . . . . . . . . 23 Capacity Factors . . . . . . . . . . . . . . . . . . . . . . . . . 28 Relationship Between Plant Life and Capacity Factors . . . . . . . 30 Effects of Useful Life and Capacity Facters on Depreciation. . . . 32 Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Appendix A: References on Estimated Costs of Decommissioning. . . . 35 Appendix B: References on Capacity Factors. . . . . . . . . . . . . 37 i l

Appendix C: List of Those Submitting Comments . . . . . . . . . . . 39 Beterences . ... . . . . . . . . . - * - - = * ' ' ' * * * *

• AO

Our study included a review of relevant literature including material from advocates and opponents of nuclear power. We obtained information, advice, and reactions frcm nuclear engineering consultants and from a number of other organizations and individuals. Coses have been projected on the basis of a range of assumptions. Based on analysis of these data, we conclude that the following actions would be in the public interest:

Recommendations:

. I. Utility regulatory agencies should require- utility companies to:

a. include decommissioning costs in rate-letting procedures and

b. finance decommissioning by means of a funded reserve through

.an external trust established in a financial institution and controlled to insure the safety and preservation of the fund.

A formula is presented on page 18 to estimate the cost of decom-missioning to ratepayers per kilowatt hour used.

II. Internal Revenue Service Regulation 1.167(a)-11(d) should be amended to permit an income tax deduction for amortization of estimated future decommissioning costs.

III. Utility regulatory agencies should recommend the use of the units-of-productior. inethod tor computing depreciation on nuclear plants, as a more appropriate method for recovering costs and charging users with the power actually consumed. Alternatively, regulatory agencies should assure periodic reassessment of estimated life and capacity factors.

IV. The nuclear power industry should seek declining term insurance '

to cover, in the event of premature shutdown, the unrecovered capital costs and the unfunded costs of decommissioning. 'Whether nuclear power generation is vital to the public interest is not an accounting question and is consequently one on which we take no position._ If such power f.tj deemed to be in the public interest, and if private insurance coverage cannot be developede Cong,ress and appropriate Federal agencies should give immediate considera-tien to the develo'pment of a nuclear power insurance pool pa,rtially or wholly supported by the Federal government.

I. INTRODUCTION Few public issues in the recent history of the United States have been debated more intensely and with more emotion than the matter of nuclear power -- and with good reason. Its proponents assert that nuclear power cust play an important role in energy production if we are to become iniependent of foreign sources of energy; that nuclear power is cheape chan its present primary competitor, power from coal-fired plants; that it is safe and environmentally benign, etc.

Opponents of nuclear power deny virtually all of the claims of its adherents. They point to conservation ,and solar energy as alternative

" sources," assert that coat is cheaper, point to the accident at the Three Mile Island #2 nucle.r plant in March of 1979 to demonstrate that it is unsafe, etc.

It has become increasingly apparent that the future of nuclear power could well depend upon economic factors. Notwithstanding the plethora of studies and reports from governmental agencies, industry representatives and public interest groups, Amory Lovins, testifying on September 21, 1977, before the Environmental, Energy and Natural Resources Subcommittee of the Committee on Covernment Operations of the U. S. House of Representa-tives, stated: ". . . the projected costs of nuclear electricity depend on nearly 50 main variables of which all are disputed, probably none is known within a factor of two, and few if any are independent of each other, so that almost any position is supportable (however disingenuously)."

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More recently I'. C. Bupp of Harvard Business School wrote, in Energy Future:

A tangle of contradictory expert opinions similar to that which for years had characterized the nuclear safety imbroglio had by 1977 overtaken the question of whether nuclear was, or ever could. be expected to be, a relatively cheap source of electricity. It was virtually impossible to make any substan-tive statement about the economic performance of nuclear power without offending one of the parties in an arcane and increasingly rancorous dispute.

The controversy touched every important factor on which the economic performance of a nuclear power p1* ant depended:

the respective investment costs of coal and nuclear generating stations; the proper way to deal with inflation in allocating this investment cost to each kilowatt hour of electricity pro-duced by the plants during their assumed lifetimes; respective fuel and fuel-related costs; and the appropriate way to discount future cash flevs in allocating the fixed and variable costs of nuclear and coal-fired power plants.

After weeks of expert testimony on the subject in early 1978, the Public Service Commission of Wisconsin concluded that "there is a wide range of views in this record concerning the relative econcaics of nuclear and coal-fired generation. These views range from nuclear power's being much less costly than coal to coal's being much less costly than nuclear, and include the view that it is impossible to tell " Several months later, the staff of another state public service commission--New York's--summarized yet another lengthy review with a terse con-clusion: "There is no credible bottom line comparison of the total generating costs of nuclear and fossil facilities which can be extracted from this record."

In my opinion, no credible bottom line comparison can be extracted from any existing data. In short, almost six years after OPEC quadrupled the price of fossil fuels--and almost fif-Leen years after nuclear power supposedly first gained a compe-titive edge over coal--it is still plausible to assert that -

atomic energy is or is not competitive by a choice of assumptions that suit one's interest.

Whether an analyst supports or opposes nuclear power, he or she adopts assumptions and cites evidence about : elative capital and fuel costs, power plant capacity, and other '2ctors that maintain one or the.other position (1, pp. 123-4].

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Many billions of dollars have been spent, are committed to be spent, or are presently planned on being spent for nuelear power plants in this country. This report will review and analyze some of the issues involved in accounting for these costs.

Accountants for the Public Interest (API)

API is a national nonprofit accounting organization devoted to public interest accounting, including research and analysis of the financial implications of public policy issues. Since 1972, API has provided inde-pendent and objective accounting studies through its largely volunteer staff at the national office and its local affiliated organizations.

Affiliates participating in this study were:

CPAs for the Public Interest (Chicago)

Community Accountants (Philadelphia)

Accountants for the Public Interest of Rhode Island, Inc. (Providence)

Oregon Accountants for the Public Interest (Portland)

This project has been supported by grants from an anonymous donor and from the following:

CR Fund of the You n Project W. H. and Carol Ferry The Max and Anna Levinson Foundation API maintains absolute independence in performing analyses of public policy issues. In keeping with this policy, no donor influenced nor attempted to influence any part of this study or report.

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The Study Accountants for the Public Interest is neither for nor against nuclear power. We have no " position" as to the economic. advantages or disadvantages of various forms of power production. We also recognize that there are a great many complex non-economic factors which must be weighed by Federal and state legislatures and regulatory agencies in establishing future energy policies and directions. These include a variety of social, coral, civil rights, political and health issues. We take no position on these matters, nor on many of the other economic and financial factors which have been the focus of attention in Congress, the media, and by govern-mental agencies and special interest groups representing both sides of this important controversy.*

Two aspects of nuclear economics, however, have received compara-cively little attention and consideration: the possible effects of decommissioning costs and earlier-than-expected retirement of nuclear plants on ratepayers, taxpayers, utility companies.

These initial focal points of our study were modified son. aat .af ter the accident at the Three M. ile Island #2- (TMI) nuclear plant, which occurred shortly before we commenced our work. TMI brought vividly to our attention the possibilit that decommissioning and early retirement could be intimately related. We had previously conceptually viewed the

• Such as waste management costs, availability of capital, tax advan-tages, capital cost escalation, insurance and other government subsidies, uranium' supply, replacement power, etc.

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' j two as rather unrelated; that is, funds (however much) could be accumu-lated over the life of the plant (however long) .* Since it became clear very soon af ter the accident that th:re was a significant possibility that TMI might never reopen, we were forced to look at decommissioning in a different light--that a plant might have to be decc=missioned very soon (af ter a f ew months, in the case of TMI) af ter it commenced producing electricity. .

This reasoning led us to examine other relationships not originally contemplated in our study. If capacity factors are lower than those originally estimated by the nuclear industry, would, therefore, estimated lives be longer than those projected? And does the straight-line method of depreciation make sense in view of the widely varying capacity factors and uncertain useful lives?

Because of the complexity of the subject matter and our limited re-sources, we found it necessary to carefully focus the study and limit its scope. Therefore, we have made no attempt to analyze similar cost factors for coal-fired plants. We must leave for future analysis the question of whether our comments on decommissioning, early retirement, etc., are- significant with respect to coal--the commonly compared competitor of nuclear power.

In performing this analysis, API retained the services of nuclear engineering consultants and obtained advice from a number of experts in the field, as well as comments from both pro- and anti-nuclear advocates (see Appendix C). All analysis and evaluation was, however, performed 5

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independently by API staff and volunteers, and conclusions and reconnendations contained in this report are those of API alone.

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• I II. DECOMMISSIONING e

Introduction Decommissioning may be defined as .the process of retiring, by dig-mantling or decontaminating, nuclear plants when they are no longer

_ producing power. ,

According to the General Accounting Office, As with every industry, nuclear facilities and equipment may be shut down, replaced, or become obsolete. Cleanic; up the remains of nuclear activities, however, presents special problems because of radioactivity and contamination which caa endanger public health and safety. Some radioactivity rerains hazardous for thousands of years, making final and absolute disposal at best a difficult and expensive task (lo, p. 1].

Permanent disposal of radioactive materials.is presently not autho-rized at nuclear power plant sites. Thus, at some time the plant will need to be decontaminated and the radioactive materials removed from-the plant site. This will require that all, waste materia _ls be removed from storage tanks on site. In addition, the entire nuclear plant pri-mary system, including major portions of the structures, foundations, drain system, pumps, valves and piping systems must ultimately be cleaned up, disassembled, packaged to meet the required shipment regulations, and transported to permanent vaste burial grounds for long-term storage.

NRC's Present Policies The present decommissioning regulations, originally promulgated 7

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W by the' Atomic Energy Commission,* are contained in Sections 50.33(f) and 50.82 of 10 CFR Part 50. These regulations require applicants for power reactor operating licenses to furnish the Nuclear Regulatory Co= mission with sufficient information to demonstrate that they can obtain the funds needed to meet both operating c'osts and the estimated costs of perma-nently shutting down the facility and maintaining it in a safe condition.

The development of detailed, specific decommissioning plans for nuclear power plants is not currently required until the licensee seeks to termi-nate his operating license. Should license termination be desired, Sec-tion 50.82 of 10 CFR Part 50 requires that the licensee provide the Com-mission with information on the proposed procedures for disposal of the radioactive material, decontamination of the site and procedures to assure public safety.

Alternative Forms NRC Regulatory Guide 1.86 describes four alternatives for retirement of nuclear reactor facilities which are considered acceptable by the Commission staff. The NRC has, however, not yet issued definitive regu-lations on decommissioning. The Cuide is published by the NRC as an example of a procedure that would be expected to be approved subsequent to a formal review, but the guide is not binding on the NRC or the reactor owner. The four methods are:

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• In January 1975 the Atomic Energy Commission (AEC) was split into l two Federal agencies, the Nuclear Regulatory Commission (NRC) and the Energy Research and Development Administration (ERDA). ERDA was subsequently melded into the Department of Energy.

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a. Mothballing. Mothballing of a nuclear reactor facility consists of putting the facility in a state of protective storage. In general, the facility may be left intact except that all fuel assemblies'and the radioactive fluids and waste should be removed from the site. Adequate radiation mon,itoring, environmental surveillance, and appropriate security, procedures should be established under,a possession-only licensa to ensure that the health and safety of the public is not endangered.

el b. In-Place Entombment. In-place entombment consists of sealing all the remaining highly radioactive or contaminated components (e.g...

the pressure vessel and reactor internals) within a structure integral with the biological shield after having all fuel assemblies, radioactive fluids and wastes, and certain selected components shipped offsite. The structure should provide integrity over the period of time in which sig-nificant quantities of radioactivity remain with the material in the entombment. An appropriate and continuing surveillance program should be established under a possession-only license,

c. Removal of Radioictive Components and Dismantling. All fuel assemblies, radioactive fluids and waste, and other materi.d5 having activities above accepted unrestricted activity levels should be removed from the site. The facility owner may then have unrestricted use of the site with no requirement for a license. If the facility owner desires, the remainder of the reactor facility may be dismantled and all vestiges removed and disposed of.

d. Conversion to a New Nuclear System or a Fossil Fuel System.

This alternative, which applies only to nuclear power plants, utilizes l

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the existing turbine system with a new steam supply system. The original nuclear steam supply system should be separated from the electric generat-ing system and disposed of in accordance with one of the previous three retirement alternatives. The conversion of the non-nuclear portion of a retired nuclear power plant is beyond the scope. of this study and, consequently, will not be addressed in this report.

Experience to Date Since 1960, 5 licensed nuclear power reactors, 4 demonstration .

reactors and 6 licensed test reactors have been decommissioned in the United States {10j. Much has been learned from the decommissioning of these small or experimental reactors. But each of those reactors was much smaller than the current generation of commercial nuclear plants and each was generally operated for such short periods of time at re-duced average pcwer levels, that it,is fair to say that there is not yet any significant experience either in the United States or elsewhere in the world on decommissioning of large light water reactors. Only one of the reactors, Elk River, was actually totally dismantled.

Cost Estimates Cost estimates for decommissioning have varied greatly and have been p

/ hotly debated. The disagreements have centered around the method of de--

D commissioning, inflation factors, which years' costs should be useds etc.

This controversy has been fueled by the absence of experience of decom-missioning one of the larger, new generation nuclear plants, and the 10

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uncertain applicability of the experience with. older and much smaller facilities.

Appendix A reports several estimates for costs of decommissioning a nuclear plant, ranging from S24 million to over $100 million.

It should be noted that some estimates re'er f ,co different forms of decom-missioning, some use different base years, som'e use contingency factors, some are based on other studies, and some do not indicate the size or cost of the plant for which the estimate is made.

_0ur purgose is not to predict which of these estimates is the most reasonable, but rather to demonstrate the possible ef fects of decommis-sioning costs on ratepayers based on a range of both costs sad estimated

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useful lives of the plant. Our computations are based on the need to provide for dec'ommissioning costs at the time of plant retirement. If the dismantlement bption is taken, these costs will be incurred soon after retirement. If mothballing or entombment is chosen, costs may be ,

incurred over or deferred for a number of years. In all three cases, however, it is appropriate to view decommissioning costs at the time of plant retirement as the discounted present value of all decommissioning costs subsequent to that date, regardless of the option chosen. When we have used a decommissioning cost of $50,000,000, for example, this could represent the cost of dismantlement at the time of plant retirement, or the present value at that point in time of expected costs over several years for mothballing or entombment.

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Financing Decommissioning Costs -

According to the House Committee on Government Operations:

The Nuclear Regulatory Commission should require applicant-for construction and operating licenses for nuclear power plants, as a condition of such licenses, to amortize the full cost of radioactive vaste disposal, spent nuclear fuel management, per-petual care, contingencies, and decommissioning costs over the expect useful lifetime of each power plant. . . . Funds suffi-cient for such costs should be levied by the power facility on its customers, and such amounts should be held in trust for purposes of such costs [17, p. 76].

Even dissenting Congressmen agreed, "There was virtual unanimity in the hearings that the cost of decommissioning and decontaminating ,

should be paid by the users of nuclear generated electricity." {l7, p. 98]

Less than 10 months before, the General Accounting Office reported:

"A conference of state officials has recommended that states protect them-selves from financial loss should a company not be able to pay to decom-mission its facilities. However, only seven states require some form of bonding or advance accumulation of funds for decommissioning." [16, p. iii)

The CAO report outlines three approaches by which utilities could collect from current users:

- By means of a direct charge to customers, and the setting of these aside in an escrow or trust fund.

- Through depreciation charges, which would enable the utility to collect the funds but would not guarantee the money would be available when needed.

- With a bonding arrangement, which might protect the governmental body if the licensee were unable to pay for the decommissioning.

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e In responses from 32 utilities (representing 48 operating reactors) to a GAO questionnaire:

Seventeen stated that they use depreciation accounts to reflect decomnissioning costs which ultimately wind up in utility rates. However, even though funds collected through this method are an advance recovery of costs, these funds are not set aside in special accounts; Instead the funds are used in current operaticns in lieu of borr'owing. These utilities expect to be able to pay the eventual decommissioning costs from whatever future budget is affected. The 15 other respon-dents are presently doing nothing to' accumulate funds for decommissioning [16, p. 17].

The CAO report concludes, on this point:

We believe the cost of decommissioning should be paid by the current beneficiaries, not by future generations. . . .

private companies have an obligation to accumulate funds for decommissioning during the life of their projects. NRC should make advance planning for decommissioning mandatory at the time of licensing, including provision for funding [16, p. 25].

Management consn1 rant John Ferguson agrees: "While regulatory in-action may lead to public funding as a solution, collection from customers who benefited from the plants, prior to their decommissioning makes more sense, economically and politically and is consistent with generally accepted depreciation accounting practices." And: " Consideration of funded reserves for accomplishing the decommissioning of nuclear power plants is clearly an issue whose time has come." [7, pp. 37 and 40]

The NRC now seems to be moving in this direction. In a lengthy and comprehensive position paper issued in July of 1979, Robert S. Wood, Assistant to the Chief of the Antitrust and Indemnity Group, Office of Nuclear Reactor Regulation, U. S. Nuclear Regulatory Commission, states:

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. . . decon:missioning for most nuclear reactors will not take pla e for 30 to 40 years after start-up; if the delayed dis-mantling option is chosen, it may be 60 to 100 years before a

. /), reactor is dismantled. No matter what the current financial

'y' % ) health of a utility is, financial solvency of any particular enterprise cannot be projected with confidence so far into g the future (18, p. 3].

Wood considers many alternatives based on several criteria developed by the NRC:

1) probability that the method will actually provide funds when needed;

2) cost of providing the assurance;

3) relative equity of the alternative;

4) degree to which the alternative is responsive to technical and economic changes;

5) ability to accor:nodate differing ownership and jurisdictional arrangements.

He eliminate _s, bonding as a possibility, based on a survey conducted by the NRC of the ten largest surety bonding companies--all of whom indi-cated that bonds would not be available in that large an amount ($50 million) for that long a term (40 years). Similarly the method used by the 17 respondents to the GAO survey, depreciation with no funded re-serve, is rejected as not fulfilling the first and most important of the GAO criteria--assurance that funds will be available when needed.

Wood recommends that the utilities be required to put up a deposit at the time of plant start-up to assure fund availability. While it.

would provide maximum protection to taxpayers, we believe this approach 14

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is overly conservative and imposes an excessive .and unwarranted penalty .

on utility companies, a penalty that would ultisteely by borne by rate-payers, stockholders, or both. His second choice, a ,f,u,,nded reserve g- ,

(or sinking fund) method, is more defensible, and is supported by ,,

Ferguson and the House Committee report, as indicated earlier in this section. Under this method, a trust fu~nd wo'uld be established in,,a financial institution under which investments would be diversified and thus safer than funds accumulated by a utility and invested only in itself.

Since decommissioning costs represent a future obligation of the utility that would most likely be borne by taxpayers in the event of company insolvency or bankruptcy, taxpayers' interests require that a decommissioning fund be accumulated that cannot be used for other pur-poses. We believe that the most appropriate means of accomplishing this end is through an external trust at a bank or other financial institution, While a company-managed sinking fund is a second alternative, such a fund would not be adequately protected from other uses, and would provide no advantages to ratepayers since earnings from a fund maintained by a third party could still accrue to the utility company.

Income Tax Considerations Internal Revenue Service (IRS) Regulation 1.167(a)-11(d) requires that the cost of dismantling, demolishing, or removing a plant in the i

process of retirement be treated as expense in the year incurred. There-

' fore, the annual provision for depreciation (as in the case of the 15

1 l

s 1 utilities noted in the GAO study) or addition to the reserve fund (as herein recommended) would not be deductible for Federal income tax pur-poses under present regulations.

Ferguson urges that: ,

I==ediate consideration should be given to having nuclear decommissioning costs specifically collected from the customers and to having this collection considered exempt funds to the utility by virtue of such monies being collected and paid into a tax-exempt fund. Under current tax regulations, the actual expenditures for decommissioning would be deductible in the year incurred. Delaying the collection of taxes would help the situation, but the most realistic approach would be to currently defer taxation of the fund receipts and earnings until used by th'e utility in payment of decommissioning cost [7, p. 39).

Wood discusses this matter at length and reports on the results of discussions between the NRC and IRS (18, pp. 14-15]. He indicates that the IRS would approve the arrangements suggested by Ferguson, provided tnat the utility does not have even short-term use of these funds. He describes the IRS' reasoning for refusing to allow decommissioning de-ductions until the expense is incurred by distinguishing it as an expense rather than a depreciable asset.

We recommend that IRS regulations be changed to allow estimated de-commissioning costs to be treated as " negative salvage value" and pro-

~

vided for through periodic depreciation charges over the life of the plant. There is ample precedent in tax law that salvage value must be taken into consideration in computing allowable depreciation. Thus, a

$100,000 piece of equipment with a $5,000 estimated salvage value at the end of its 10-year estimated life, would be depreciated at the rate of j l

$9,500 per year on a straight-line basis. We believe that decommission.ing 1

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represents negative salvage value by definition, end thus chsuld be

. added to the equipment cost and be depreciable currsntly. In the above illustration, a S5,000 negative salvage value would result in annual depreciation of,$10,500.

• In addition, this treatment would be in consonance with economic reality and sound utility economic theory which calls .for customers to pay for services they currently receive. It would also be consistent a with generally accepted accounting principles.* (It should be noted that the effects of decommissioning costs on a utility's rate base is a major financial issue which is beyond the scope of this study.)

?o sible Effects of Cecommissioning Costs on Ratepayers If ratepayers are charged for future decommissioning costs on the basis of current consumption, the cost per kilowat t hour can be calculated in three steps:

1. Estimate decommissioning costs at the time of plant retirement:

Cdec(1 + *)

where: Cdec = estimated decommissioning costs in today's dollars r = expected annual rate of inflation over remaining life of facility n = estimated years of remaining facility life

• For example, the AICPA"s Accounting Research Study No. 7 notes that " costs of sales and expenses should be appropriately matc *.ed against the periodic sales and revenues" and " appropriate charges should be made for depreciation and depletion of fixed assets and for amortization l of[ other deferred costs." [8} (Emphasis supplied) Also, Statements of International Accounting Standards provide, with respect to the use of salvage or residual values in esiculating depreciation: "The gross

'. residual value in all cases is reduced by the expected costs of disposal-1 at the end of the useful life of the asset. [3] In a situation somewhat similar to that encountered with nuclear power plants, the eight companies that own interests in die Trans-Alaskan Pipeline System are currently pro-viding in their financial statements for expected future dismantling costs.

' 17

2. Determine the annual deposit required to accumulate the fund needed at the time of retirement, by dividing estimated future decommissioning costs by a factor representing the compounded amount of an annuity of S1 in arrears :*

C *#

dec

[ (l '+ 1)" - 1]/i where: i = expected average annual earnings rate on decommissioning fund over remaining life of facility

3. Divide the amount of the required annual deposit by the estimated number of kilowatt hours to be generated each year, calculated as folicws:

uxKxH where: u = expected average capacity utilization rate during remaining life of facility K = maximum capacity of facility in kilowatt output per hour H = the expected average number of operating hours per year (24 x 365, or 8760, if the plant is operated continuously)

Th,ese steps may be combined into the following formula to obtain the appropriate cost or charge to ratepayers per kilowatt hour:

C dec X 1 kwh =

[(1 + 1) - 1]/i (u) (K) (H) or more simply e

C dec Il + "I"III

[(1 + i)" - 1] (u) (K) (II)

• Quantities for the future value of an amount, (1 + r)", and for the compounded amount of an annuity are readily available in standard mathematical tables.

18

1 Assuming . charges are made to ratepayers on the, basis of this formula, l 1

proceeds are placed in a fund at the end of each year and invested at a rate of earnings i, estimates are reasonably accurate, and charges are adjusted annually in response to changing conditions, the fund will accumulate to an amount sufficient to'co r decommissioning costs at the time of normal plant retirement.

In Table 1, this formula is used to calculate costs per KWH under several possible sets of assumptions. The reader is not restricted to these assumptions; the formula allows complete flexibility in the use of any set of assumptions appropriate in a given set of circumstances.

This formula, anJ the calculations in Table 1, do,no,c, reflect the effect of income taxes. This effect will vary from cne state to another, and will depend in part upon a particular company's recent tax' history, its depreciation policies, and future changes in state and Federal tax laws and regulations. Nevertheless, appropriate allowance must be made for tax effects in a given situa;; ion before an accurate estimate of cost to ratepayers can be made.

It should further be noted that this formula assumes equal annual deposits to an accumulating decommissioning fund. It may instead be desirable to provide for annual deposits that reflect constant purchasing power but that increase in nominal terms in response to inflation.

The various decommissioning costs per KWH mentioned in the House report range from .04 mills to 1.4 mills [17, pp. 131-2]. The. estimates in Table 1 are within this range for decommissioning costs of $25,000,000.

19

l Table 1. Illustration of Decommissioning costs, in Mills per IOfH, for a 1 Million Kilowatt Plant Under Various Assumptions.

Rate of Igflation (r)

Decommissioning Plant Capacity .07 .10 .12 .15 .18 Cost (Cdec) Life Factor (n) (u) Return on Decommissioning Fund (i)

.08 .12 .10 .15 .17 4

75% 0.22 0.22 0.80 0.57 0.91 40 65% 0.25 0.26 0.92 0.66 1.05 55% 0.30 0.31 1.09 0.78 1.24 75% 0.26 0.28 0.69 0.58 0.84

$25,000,000 30 65% 0.30 0.32 0.80 0.67 0.97 55% 0.35 0.38 0.95 0.79 1.15 75% 0.32 0.36 0.64 0.61 0.80 20 65% 0.37 0.41 0.74 0.70 0.92 55% 0.44 0.48 0.87 0.83 1.09 75% 0.44 0.45 1.60 1.15 1.82 40 65% 0.51 0.52 1.85 1.32 2.10

- 55% 0.60 0.61 2.13 1,56 2.48 75% 0.51 0.55 1.39 1.16 1.69 l $50,000,000 30 65% 0.59 0.63 1.60 1.34 1.94 55% 0.70 0.75 1.89 1.58 2.30 i

75% 0.64 0.71 1.28 1.22 1.60 20 65% 0.74 0.82 1.48 1.40 1.85 55% 0.88 0.97 1.75 1.66 2.19 75% 0.88 0.90 3.20 2.29 3.64 40 654 1.02 1.04 3.69 2.64 4.20 55% 1.20 1.22 4.36 3.12 4.97 75% 1.02 1.10 2.77 2.32 3.37

$100,000,000 30 65% 1.18 1.27 3.20 2.67 3.89 55% 1.39 1.50, 3.78 3.16 .4.60 75% 1.29 1.42 2.56' 2.43 3.21 20 65% 1.49 1.64 2.96 2.81 3.70 55% 1.76 1.94 3.50 3.32 4.37 20

l l

l As indicated in Appendix A, however, such costs are sometimes estimated to run to $50,000,000 or even over $100,000,00b. In such cases the charge to ratepayers per GH could be 3 or even 4 mills per GH, depending on the inflation and earnings rates, useful life, and capacity factors experienced. Based on a typical residential rate of $0.05 per GH, a 3 mill additional charge would represent an increase of 6%, or about

$24 per year at an annual usage of 8,000 KWs.

Whether a charge to ratepayers for decommissioning would be signi-ficant depends on the several variables as well as the circumstances of the individual ratepayer. If a plant should be forced into a premature and permanent' shutdown, however, a d_J;; raat si:uation arises. The ccm-pany would probably be faced with substantial costs without having had the opportunity to a: cumulate a'n' adequate fund through charges to rate-payers. In the Three Mile Island case, shutdown occurred ab,out three months af ter the plant began generating power. The NRC's Mr. Wood states the situation clearly:

A compounding problem arises in the case where a utility is forced because of accident or for other reasons to permanently shut down ita reactor prematurely. If one or 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 decommissioning obligations. Cer-tainly the accident at Three Mile Island indicates that a utility can rapidly find itself in a precarious financial position with the resulting uncertainties that such a position raises [18, p. 3].

Wood later goes on to examine at length the possibility of purchasing insurance to cover premature shutdowns. Although insurance may become 21

available, it is not currently being written.

Recommendations Based on our evaluation of studies and proposals made by the House Committee on Government Operations, the General Accounting Office, the Nuclear Regulatory Commission and others, and af ter careful considera-tion of relevant accounting principles and of the public interest, we make the following recommendations:

1. Utility regulatory agencies should require utility companies to:

a. include decommissioning costs in rate-setting proceedings; and

,'[- b. finance decommissioning by means of a funded reserve through an external trust established in a financial institution and controlled to insure the safety and preservation of the fund.

2. The nuclear power industry should seek declining term insurance to cover the unfunded costs of deconmissioning in the event of a prematura shutdown. If private coverage cannot be developed, and if nuclear power generation is deemed to be vital to the public interest, consideration should be given to sponsorship of such an insurance program by the Federal government.

3. IRS Regulation 1.167(a)-ll(d) should be changed to permit a Federal income tax deduction for amortization of estimated decommissioning costs.

I 22 i

III. PIANT PRCDUCTIVITY AND COST RECOVERY

+

Introduction Because of their capital intensive nature, the economic viability of nuclear power plants depends substanti 11y on the productivity of these plants over their lifetimes. The two dete'minants r of a plant's produc-tivity are the average capacity factors attainable during its lifetime and the useful life of the facility. The former has received substantial attention during the past few years, while the latter has received very little. -

Industry and government expectations when nuclear plants were first authorized have been described by David Comey:

In order to conform to the requirements of the National Environmental Policy Act, the Atomic Energy Commission has been required to prepare Final Environmental Statements for all of the nuclear power plants in operation or under construction.

In these Statements, the AEC is required to conduct a cost-benefit analysis in order to determine whether the nuclear plant should be built or operated. In the Final Environmental State-ments for the nuclear plants currently operating, the AEC as:sumed in its cost-benefit analyses that the principal benefit was the fact that the nuclear plant would produce electricity over its 30-year life at an average capacity factor of 80%. In some Final Environmental Statements, the utilitien predicted even higher average capacity factors of 85% or 86s (2. p. 3].

In this section we will discuss each of these two vital cost factors and consider the rela *-tonship between them.

Plant Life One of the few undisputed facts about nuclear power is th,at no o,ne knows what the. usefuL111a of_a. plant -will be.

The reasons are relatively 23

simple. No commercial plant has been in existence long enough tre provide empirical evidence, and the technology itself differs sufficiently from mature forms of power generation to preclude meaningful extrapolation.

Nuclear plants are licensed for 40 years; most are considered to have an e?timated productive life of 30 to 40 years. Commonwealth Edison (Illinois) expects a useful life of 40 years for Dresden 1, and 35 or 36 years for its other nuclear plants. Portland (Oregon) Ceneral Electric uses 30 years for its Trojan plant. According to that utility company, however, "A new item such as a nuclear generating plant, of course, has very little history to be of value in determining life or salvage [13].

Several areas of concern have been raised by other obs cvers which could have a significant bearing on plant life. We take no position on these non-accounting issues, but offer them as background for our discus-sion and computations.

A. Aging The issue of the unknown effect of aging c,n nuclear power plants was raised in the peer review of the AEC-funded Reactor Safety Study (the Rasmussen Report). As stated in Appendix XI of that report, "It should be recognized that the study did not include extreme aging considerations since the applicability of its results is limited to only the next five years." [21] The significance of this uncertainty is noted by Yellin:

The problem of aging most severely affects those components of the primary core cooling system which are designed to serve without replacement through the 25 to 40 year life of the reactor pressure vessel . . . the principal issue is whether manufacturing, fabrication, and in-service testing, as presently practiced, are 24 1

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i

D adaquate to ensure pressure vessel reliability throughout design life. [23] .

3. Allowable Radiation "xposure Levels One regulation with a significant bearing on plant operability is the standard governing occupational exposure to radiation at nuclear plants.

The current maximum allowable exposure to an individual has recently been criticized as too lax. To quote from a recent Electric Power Research Institute article:

_As plants agh__the_long- term , trend is toward higher, radia-tion dose races _.ac individual _componentst while,the corresp_onding

-long:Mii Trend for reghtfon_is for _lovg. total , absorbed doses.

These two trends are f.nconsistent..... .

. [14].

C. Radiation Buildup The problem of radiation buildup, or increasing radiation levels,

- . ~ . _ . . . .. .

which could make maintenance so___dtf_f.i.citl_t _and,,ggen_sive a_s_ to impair, the economic usefulness of_the p.lant, has been described by David Comey:

One factor peculiar to nuclear plants that will virtually ensure a decline in performance With age is radiation buil. dup.

The primary coolant system in light water reactors is subject to the buildup of radioactivity from fission and activation products in the primary coolant.

This radioactivity accumulates as the plant gets older, and eventually means that repair work on this system consumes enor-mous amounts of time and personnel in order to avoid excessive radiation exposure to the workers during the repairs. A worke_I can receive his_ maximum permissible quarterly exposure after L working on the primary comi nOy:::: In Jun : f = =1em aa thus ourning hin give Fnr_the nere ehraa. months.

In order to avoid exceeding each worker's maximum permissi-ble radiation exposure, a large number of men past work sequen-tially within a confined space to make repairs. This has' meant in some cases that thousands of workers have had to participate 25 l

+

in the repair of a single nuclear plant, causing a long outage and thus lowering the capacity factor of the plant.

Since the radioactivity of these plant systems increases with plant age, repairs are likely 'to become even more tise-consuming as the ' plint ~gets older; leading to longer outages and decreased capacity factors [2, pp. 8-9].

D. Vaste Storage and Disposal Another possibility which must be considered is the potentisi inability of the govern =ent and other responsible organizations to resolve satisfac-torily the issue of acceptable disposal of nuclear waste. At the present time no permanent waste repository exists,, and nuclear plant spent fuel storage capacity will probably be saturated by approximately 1985 with some plants potentially in trouble several years before that date. While it is probable that additional temporary storage facilities will be built to reifeve this political / technical problem, another Three Mile Island-type accident could create an at=osphere which would make ic very diffi-cult or impossible to obtain public approval to site such a storage facil-ity in any one of the fifty states. In that eventuality a possible course of action would be the early shutdown of plants followed ultimately by the decision to permanently mothball or dispose of them. According to Professor Bupp: "Today, the nuclear indur;ry faces widespread shutdowns of operating plants starting as early as 1983 unless the problem of handling spent fuel can be resolved." [1, p. 221]

6 1

E. Safety Standards Because of the exacting safety standards required to protect the 26 l

\

4 public health and welfare in the case of nucl' ear accidents and the asso-ciated need to upgrade plants as operating eb urience is obtained, the need for retrofitting or for implementing such changing safety standards gives some indication that nuclear plants may not be able to achieve cal-C culated design life. As Bupp notes: "T'e h safety questions highlighted by Harrisburg (the Three Mile Island plant accident) could, obviously, force shutdowns at any time." (1, p. 221]

If a nuclear plant is retired sooner than originally contemplated because of any (or a combination) of the above factors, it is possible that the regulatory agency will have advance knowledge of that event some years beforehand and can provide for complete capital cost recovery through increased depreciation allowances.

This type of "early" retirement should be distinguished, however, from a " premature" retirement caused by the occurrence of an unforeseen event such as a serious accident. Should that happen early in the life of a nuclear plant, not only would there be a serious problem relating to decommissioning fund accumulations (as discussed in Part I of this report),

but there would also be problems with the recovery by the company of the undepreciated capital costs and the related continuing inclusion of a nonproductive asset-in the rate base.

The Three Mile Island accident has made this more than a remote and insignificant concern. Such a premature shutdown and retirement might produce one of the following consequencies:

- In the largest utility companies, a substantial loss borne by future 27 1

1

ratepayers to the extent allowed by the regulatory agency, and otherwise borne by stockholders.

- In smaller companies, default on bonds or even bankruptcy, possibly resulting in a public " bailout" or takeover using tax revenues.

These consequences would appear to be inconsistent with orderly markets in utility securities, continued availability of investment capital, and an equitable distribution of costs among ratepayers. The not insignifi-cant risk of premature shutdown and retirement points to a need for insur-ance that is not pr:sentiv availabla. 3acause of the magt..tude of possible losses, it may not be realistic to hope that private insurers will put together an acceptable insurance pool. Consequently, Congress along with the Nuclear Regulatory Commission should give immediate attention to (a) the appropriateness of spreading such costs among taxpayers genera 11'y, as opposed to ratepayers in a particular, impact locale; (b) the need for a nuclear power insurance pool, to cover both premature facility shutdown and possibly unfunded decommissioning costs; and (c) the desirability of Federal participation in developing and funding a nuclear power insurance pool.

Although not an eccounting issue, the question of whether nuclear power development is essential to the public interest clearly must be resolved before any public funds are contributed to such a nuclear power insurance pool.

1 I

Capacity Factors j

Capacity factor may be defined as the ratio between actual use and 28 i

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maximum use. The capacity factor of a power plant is the ratio of electric energy actually delivered during the period in question to that which would have been delivered if the plant produced throughout the period at the maximum level for which it was designed.

The importance of the capacity factor is clearly stated by invest-ment bankar Saunders Miller: .

It is a critical number because it directs the ultimate price of power. The cost of building a plant is a fixed amount that must be amortized over the number of kilowatt-hours produced; thus, the more electricity sold, the lower the allocation of fixed cost per KWH. With numerous questions being raised about nuclear plants because of capacity factors signifi-cantly lower than projected, an inquiry into the reliability of nuclear and coal plants is essential to a thorough economic analysis [12, ;. 67].

The ef fect on unit electricity costs can thus be quite dramatic because of the relationship between capital-related charges and the total costs of generating nuclear power. Comey states that electricity produced by a plant operating at a 43% capacity factor is approximately 70% more expensive than that produced by a plant operating at an 80%

capacity factor [2, p. 10]. Miller asserts that, at a capacity of 55%,

the effective capital cost is 36% higher than that projected _at the base level of 75% [12, p. 68).

Pacific Gas & Electric Co., in testimony before the California Public Utilities Commission on December 3, 1?63, submitted information on the Diablo Canyon 1 nuclear plant which indicated a 4.3 n111s/KWH cost of power at 90% capacity and 7.1 mills at 50% capacity.

Although the relatively brief history of the never genera, tion of large nuclear plants does not offer definitive evidence of what capacity 29

factors can be expected in the future, there seems to be no other more

- reliable evidence on which to base projecticns. *We therefore set forth a few of the public comments on historical and projected capacity factors in Appendix B. As in the cases of decommissioning costs and useful lives of nuclear plants discussed above, we take no position on the accuracy of these past ca?culations or future predictions. They are presented as back-ground information to the reader, and to provide parameters for the range of assumptions used in the computations in Table 2 below.

Relationship Between Plant Life and Capacity Factors It will be many years, perhaps many decades, before sufficient histori-cal data exist to accurately predict how long nuclear plants will last and the average capacity factors they can expect to achieve. However, it is c'1early not too early to question the reliance on the original 30 yeir/80s formula set forth by the Atomic Energy Commission.

We now know that capacity factors have fallen far below 80% on the average, especially for the larger, newer generation plants. We have also reviewed the reasons that nuclear plants may not last those 30 years. We believe that these two critical and related cost factors should no longer be considered separately. The crucial element is the number of units of electricity which the plant will produce, other things being equal, the same number of units of electricity would be produced if a plant runs at 80sfor30 years,60sfor40 years,or40sdor60 years.* For this reason, I

• It would appear that lower than expected capacity factors would result in a longer life for a nuclear plant (such as might be the case with 30

we believe that the units-of-production method of depreciation should be used for nuclear power plants.

Effects of Useful Lif1 and Capacity Factors on Depreciation To facilitate evaluation of the cost effect of capacity and useful life interaction, Table 2 presents the_ depreciation cost, in mills per kilowatt hour (calculated on a units-oflproduction basis), for different combinations of capacity utilization and useful life based on a 1 million kilowatt plant costing $1 billion net of future salvage value.

The costs in Table 2 may be compared with the cost of 4.76 mills per KWH for the same plant using the AEC's aarlier estimates of 80s capacity and 30 year life.

Clearly, the costs per kilowatt hour are quite sensitive to car : ty factors and estimated useful lives. The analyst, regulator, legislator or voter must decide which combination is most realistic. A 60% capacity factor for 20 years of estimated life results in depreciation of 9.51 mills per KWH, which is double the amount based on the AEC's original estimates. On the other hand, a 75% capacity factor for 40 years produces a cost of 3.81 mills per KWH, 20% lower than the AEC's estimate.

Recommendations Based on the foregoing analysis, we make the following recommendations certain types of machinery, equipment, and motor vehicles). This assump-tion has bon, questioned, however, by MHB Technical Associates: "Until additional experience and quantification of aging effects are available, it should not be assumed that reduced capacity factor operation will result in longer operating plant lifetimes." (10]

31 l

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s Table 2. )epreciation Cost, in Mills per KWH, of a 1 Million Kilowatt, $1 Billion Plant for Various Useful Life and Capacity Factors.

Capacity Years of Useful Life Factor 20 25 30 35 40 75% 7.61* 6.09 5.07 4.35 3.81 70% 8.15 6.52 5.44- 4.66 4.03 65% 8.78 7.02 5.85 5.02 4.39 4, 60% 9.51 7.61 6.34 5.44 4.76 55% 10.38 8. 7,0 6.92 5.93 5.19 50% 11.42 9.13 7.61 6.~52 5.71

• 111usrvation of calculation: KWH generated = 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> per day X 365 days X 1 million kilowatts X 75% = 6,570 million KWH per year; 6,570 million KWH X 20 years = 131,400 million KWH over life of the plant; $1 billion divided by 131,400 million KWH = $0.00761 per KWH, or 7.61 mills per KWH.

32

relating to nuclear power plant productivity and cost recovery:

1. Utility regulatory bodies should recommend the use of the units-of-production method for computing depreciation of nuclear plants as a more appropriate method for recovering costs and charging users with the power actually consumed. Under the pre-sent method (straight-line) used by most electric utility com-panies, consumers pay the same amount for depreciation whether a plant operates at 30% of capacity or 90%. Under the recommended method, the regulatory agency would decide, before a plant com-mences operations and based on the latest available technical infor=ation, how long the plant would be expected to last and the average capacity factor it would be expected to achieve.

Periodically thereaf ter (perhaps every two years) the data should.be re-evaluated so that the then-remaining unrecovered cost can be divided by the newly estimated remaining productive capacity to arrive at a revised depreciation rate per KWH to be used until the next review. One possible by-product of the use of this method relates to an extensive outage and the utility's need.to purchase supplementary power to meet customers' needs.

In these circumstances, it has been traditional for the utility to seek approval from the regulatory commission for a surcharge, to pay for the replacement power. With the units-of-production method, it would be possible for the commission to partially offset this surcharge by reduced depreciation related to the 33

i l

lower-than-expected production caused by the outage, thus elimi-nating part of the double charge and offering some relief to .

ratepayers.

If units-of-production depreciation iT not required by a regulatory agency, it should, as a minimum, provide for periodic review of assu=ptions concerning capacity and useful life of nuclear facilities, and revision of depreciation rates as appropriate.

2. If further. development of nuclear power is deemed to be re-cuired by the public interest (a question without significant accounting ramifications and thus not addressed in this analysis),

Congress and the Nuclear Regulatory Commission should give immediate considerat on to the need for the appropriateness of a nuclear power insurat.ce pool, partially or wholly supported by tax revenues, to provide for unrecovered capital costs and possible unfunded decommissioning costs in the event of premature shutdown. (Also see recommendation 2 on page 22 regarding insurance for unfunded decommissioning costs.)

t 34

APPENDIX At REFERENCES ON ESTIMATED COSTS OF DECOMMISSIONING

• The Atomic Industrial Forum estimated the costs in 1975 dollars to be $31 million for the removal / dismantling option of a large boiling water reactor (BWR) and $27 million for a pressurized water reactor (FWR) ,

not including a 254 contingency factor as used by others [11}.

. An international nuclear magazine recently indicated that a study in Germany quoted a cost of $100 million for a 1,200 megawatt PWR, and concluded, "The general consensus is that the cost of dismantlieg a nuclear station will be about 10 to 15% of the original capital cost, escalated to the time of dismantling." [5]

In a study for the NRC issued in August 1979, Battelle Pacific Northwest Labs estimated that, in constant 1978 dollars, it would cost

$31 million for inmediate dismantlement. The combination mode of safe storage followed by dismantling deferred for 30, 50, and 100 years (to allow for reduced radioactivity and safer and easier handling) was esti-mated to cost $40.8, $35.8, and $39.7 million respectively [22]. (It should be noted that these cost estimates have been reduced by from $11 to $12 million each by excluding costs for building demolition and ship-ments of final core of fuel elements which were included in the AIF study referenced above.)~

According to testimony of W. A. Verrochi before the Pennsylvania Utility Commission concerning the Three Mile Island #1 plant, the costs in 1974 dollars for in-place entombment were estimated to be $40 million, and for dismantling, $117.5 million.

35

o a .

- In testimony before the California Public Utilities Commiseion in

, June, 1979, Pacific Cas and Electric Company representative William Callavan indiccted estimated decommissioning costs of $105 and $88 million respectively for Diablo Canyon plante 1 and 2, based on a pre 1Luinary report from Nuclear Utilities Service Corp.

According to the June 23, 1977, issue of Nucleonic Week, Commissioner Richard Jones of the Connecticut Public Utilities Control Authority, testi-fying before the Subcommite.ee on the Environment and Atmosphere of the House Science and' Technology Committee a week before, said: "The absence of reliable cost data is a serious problem . . . Connecticut finally decided on a figure of 10% of construction cost as an ' estimate of decommissioning costs, assuming mothballing as the technique to be used."

• Decommissioning costs for the Trojan plant in Oregon are estimated at $24 million in 1976 dollars, which represents about 5% of the original ConstruCCion Cost.

+ The Illinois Commerce Commission has recently raised its decommis-sioning estimate to $42 million, a figure which has been accepted by Commonwealth Edison.

1 36

APPEND 1X 5: REFERENCES ON CAPACITY FACTORS

. ~

Oavid Cemey found that nuclear plants operated at an average capa-city factor of 54.6% during the years 1973 through 1976. He further calcu-lated that plants larger than 1,000 =egawatts in size had cumulative capa-city factors over their lifetime (through 1976) of only 42.3% (2, p. 1].

The Federal Energy Administration publir'.ted data which indicated an average 57.6% capacity factor for those same years (6].

Charles Komanoff has been performing analyses of power plant perfor-mance since 1976, and has provided consulting services to the CAO and many state and local government agencies. His comprehensive third annual analy-sis of nuclear power plant operating reliability, for the year 1977, examines a number of variables, including reactor manufacturer, individual reactors, utility company ownership, regions, age, vintage, and prototype / duplicate status (9].

- of the 51 ommercial-size reactors in the U.S., the 19 BWR's (manu-faccured by Ce:wral Electric) had an average capacity factor in 1977 of 28%, raising their cumulative average from 55% to 56%.

The other 32 were PWR's (manuf actured by Westinghouse and two other companies) and had an average capacity factor in 1977 of 67%, raising the cumulative average from 59% to 61% (9 p. 7].

Large nuclear plants (over 800 MW capacity) have consistently had  ;

i lower capacity factors than smaller plants. Through 1977, the results were 53% and 65% respectively. This is particularly significant because only the larger plants are now being built (9, p. 241 ,

1 37 l 1

e. .

. The overall average was 63.9% in 1977, raising the camulative avetage frca 58.5% to 59.3% [9, pp. 6-7].

- Komanoff projects a 59% levelized capacity factor for 1,150 MW PVR's and 50% for similar-sited BWR's over the first ten years of operation--

the planning horizon given the present limited operating experience

[9, p. 4].

The NRC's Final Environmental Statement for Black Fox 1 and 2 in early 1977 indicates that a reasonable range of capacity factor expectations is 50% to 70%, and concludes, "The historical experience with plants over

~

1,000 MWs is insuf ficient to make conclusions frem a simple average of cap"acity factors to date."[19]

Pacific Cas & Electric Co., which had been predicting 80% or 90% (and probably 90%) in 1966, has since then substantially reduced its expecta-tions for Diablo 1, as indicated in the following table [4]:

1978 1979 1980 1981 1982 1983 Capacity factor 60% 60% 66% 66% 70% 73%

The U. S. General Acccenting Office, in analyzing costs of three nuclear power plants in the Pacific Northwest, suggested a capacity factor of 65 percent:

In calculating annual power costs both WPPSS and Ebasco assumed a plant capacity factor of 70 percent. This 70 percent capacity factor appears to be a common industry index but, we believe, may be som what optimistic in light of the annual power generation experience of currently operating nuclear power plants and the frequency of unscheduled shutdowns. Based on our analysis of available data, it appears that a more realistic capacity factor would be 65 percent [151 I

I 38 l

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1

l APPENDIX C: ORGANIZATIONS AND INDIVIDUALS CONSULTED DURING THIS STUDY., ,

As a matter of policy, strict independence and objectivity As i

( maintained during any API study. To insure that all sides were considered in this analysis of certain controversial aspects of the econcmics of

( nuclear power, the following organirations and individuals were consulted and were asked to provide information or to react to preliminary drafts of this report. Their assistance is gratefully acknowledged. They should not, however, be considered resnonsible for any part of this analysis or

, for the recommendations, which are 'those of API alone.

Atomic Industrial Forum, Washington, D. C.

Eugene P. Coyle, Economic Consultant, Berkeley, Californea Ray Czahar, California Public Utilities Commission, San Francisco l

Dr. Ian Forbes, Technical Director, Energy Research Group, I Waltham, Massachusetts l

l Charles Komanof f, New York City MHB Technical Associates, San Jose, California

! Zack Willey, Environmental Defense Fund, Berkeley, California i

l l

l l

I 39

,e*

• j REFERENCES

1. Bupp, I. C., Nu . ear Stalemate," in Energy Future, Robert Stobaugh and Daniel Yergin, editors (New York: Random' House, 1979).

2. Citizens for a Better Environment, Nuclear Power Plant Reliability (1977).

3. Co=merce clearing House, Professional Standards: Accounting, Current Text, vol. 4 (New York, 1980), p. 11,108.

4. Crane, Philip A., Jr. of Pacific Gas and Electric, letter to U. S.

Nuclear Regulatory Commission, June 29, 1978.

5. " Decommissioning Nuclear Power Plants," Nuclear Engineering International, June 1979, p. 38.

6. " Energy in Focus," Sasic Data, May 1977, p. 9.

7. Ferguson, John S., " Decommissioning a Nuclear Plants the Financial Implications," Management Accounting, September 1979.

8. Grady, Paul, Inventory of Generally Accepted Accounting Principles for Business Enterprises, Accounting Research Study No. 7 (New York:

American Institute of Certified Public Accountants, 1965) , p. 58.

9. Komanoff, Charles, Nuclear Plant Performance Update (New York, Council on Economic Priorities, 1977).

10. MHB Technical Associates, capacity Factor / Retirement Relationship, report to Accountants for the Public Interest, 1979.

11. Manion, William T., An Engineering Evaluation of Nuclear Power Reactor Decommist,1cning Alternatives, Summary Report (Washington: National Environmental Studies Project, Atomic Industrial Forum, 1976), p. 1.

12. Miller, Saunders, The Economics of, Nuclear and Coal Power (New York:

Praeger, 1976).

13.. Nuclear Decommissioning Accounting, before the Public Utility Commissioner of the State of Oregon, Studies in Response to PUC Order #79-055, March 16, 1979, p. 1.

14 " Scanning the Research Agenda," EPRI Journal, January / February 1979,

p. 17.

15. 'U. S. General Accounting Office, Analysis of, Estimated Cost for Three Pacific Northwest Nuclear Power Plants (Washington: U. S. Government Printing Office, 1979), p. 4.

40

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l

16. / #'% , Cleaning Ug the Remains of Nuclear Facilities - A Multi-5J111cn Dollar Problem (Washington: ,U. S. Government Printing Office, 977), -

. . S. House of Representatives, Nuclear Power Costs, House Report No. 95-1090, 95th Congress, 2d sess., 1978 (Washington: U. S.

Covernment Printing Office, 1978).

18. U. S. Nuclear Regulatory Commission, Assuring the Availability of, Funds for Decommissioning Nuclear _ Facilities, NUREG-0584 (';ashington:

U. S. Government Printing Office,1979).

19. ,

Final Environmental Statement - Black Fox Station, Units 1 and 2, NUREG 0176 (Washington: U. S. Government Printing Office, 1977), pp. 11-26.

20. ,

Plan for Reevaluation of NRC Policy on Decommissioning of, Nuclear Facilities, NUREG-0436 (Washington: U. S. Government Printing Office, 1978), p. 11.'

21. , Reactor Safety Study: An Assessment of Accident Risks in U. S. Commercial Nuclear Power Plants; Appendix XI, Analysis of Comments on the Draft WASH-1400 Report (U. S. Government Printing Office, 1975), pp. 3-61.

22. , Technology,_ Safety and Costs of Decommissioning a Reference Pressurized Water Reactor Power Station, NUREG/CR-0130, Addendum (Washington: U. S. Government Printing Office, 1979),

pp. 6-8.

23. Yellin, Joel, "The NRC's Reactor Safety Study," Bell Journal of, Economics, Spring 1976, p. 330.

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