ML20058P712

Responds to Commission 900508 Memo Requiring Preparation of Policy Statement Re Economic Performance Incentives & Development of Mechanism to Monitor & Evaluate Potential Safety Consequences of Programs Prior to Being Effective

ML20058P712
Person / Time
Issue date:	08/15/1990
From:	Taylor J NRC OFFICE OF THE EXECUTIVE DIRECTOR FOR OPERATIONS (EDO)
To:
References
TASK-PINV, TASK-SE SECY-90-288, NUDOCS 9008200017
Download: ML20058P712 (19)

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POLICY ISSUE August 15, 1990 (Notation Vote) 5ECY-90-288 For:

The Commissioners From:

James M. Taylor Executive Director for Operations

Subject:

POLICY STATEMENT ON ECONOMIC PERFORiiANCE INCENTIVE REGULATION AND ASSOCIATED PONITORING ACTIVITIES

Purpose:

To respond to the Comission's memorandum of tiay 8,1990, which required that the staff (1) prepare a policy statement that sets forth the views of the Commission concerning economic performance incentives, and (2) evelop a mechanism to monitor and evaluate the potential safety consequences of these programs before they go into effect.

Background:

The staff presented SECY-90-046 on February 13, 1990, in response to the Commission's request to update and evaluate economic performance incentives iniposed on power plant licensees by State regulatory comissions.

The staff made a presentation to the Commission on this matter on April 3, 1990.

That presentation included information on the current situation of State-imposed economic performance incentive programs, an analysis of those programs that could affect the public health and safety, and an evaluation of the options for NRC to deal with programs it deems unsatisfactory.

Discussion:

A draft Policy Statement on economic performance incentives is enclosed for the Commission's consideration. The staff suggests that the Policy Statement be published as a proposed statement for public coment. We would solicit comments from State regulatory commissions that regulate nuclear utilities and any other entity 1.siat cares to respond. A proposed cover letter request'ng coments on the proposed Policy Statement is included at. Enclosure 2.

This Policy Statement covers each NOTE:

TO B". MADE PUBLICLY AVAILABLE WHEF 'HC FINAL SRM IS MADE AVAI hTLE Darrel A. Nash, NRR 492-1256 qoO% A 000 I F M lll

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.,The*Comissioners

• of the Comission's five points of concern, (See COMKR-90-003 and COMJC-90-002, included as Enclosure 3) concentrating on the distinguisMng features of acceptable and unacceptable incen-tive programs from NRC's perspettive of public health and safety.

Additionally, the staff is establishing a tracking system to go substantially beyond the periodic surveys of licensees and 1

State regulatory commissions.

In response to the Commission request, we are pursuing three initiatives to obtain early notification and evaluation of incentive programs.

First of all, we are preparing a Generic Letter, described herein, which will be sent to all licensees of comercial nuclear reactors.

The Generic Letter will request from licensees that, on a voluntary basis, NRC be given early notification of any new, or significant change in, economic performance incentive programs imposed on commercial.eactor licensees and that licensees perform an evaluation of possible impacts that these new or changed programs will have on safety.

We will point out the advantages to licensees in keeping NRC apprised of safety concerns relating to incentive programs.

The second initiative will be to send the final Policy Statement, as approved by the Commission, to all State utility regulatory) commissions and the Federal Energy Regulatory Comission (FERC with a cover letter. The cover letter will explain the Policy Statement and will ask for their cooperation in keeping NRC informed of State and FERC initiatives to (1) develo programs that will apply to nuclear reactors, or (2)p incentive make I

major modifications to existing programs.

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Finally, the staff intends to subscribe to a newsletter which, among other things, focuses on actions planned or taken by rate regulatory commissions. This will supplement the first two actions and provide NRC with an independent source'of new or modified economic performance incentive programs.

The Policy Statement has been prepared to reflect the level of concernexpressedintheStaffRequirementsMemo(SRM). The Commission may wish to consider if a higher level of concern should be comunicated by stating that some incentive programs are unacceptable. The higher the level of concern or opposition, the greater the likelihood that an effort will be made by licensees to involve the NRC-in state regulatory commission i

proceedings.

If the stated level of concern is lower, there will be less~ likelihood of an argument by licensees that the NRC would prohibit such programs. The staff recommends the balanco expressed in the SRM and has prepared the Policy Statement accordingly.

The' primary concern with economic performance incentives relates-to penalties applied to operational measures. These tend to

2 The,'ommissioners C direct 6ttention to decisions on when to shut down a reactor or to maintain operations at some level.

In addition, con-struction cost di* allowances have been identified as economic performance incentives by some State regulatory commissions.

In a few instances, the staff has been concerned that very large construction cost disallowances can impact funds needed l

for safe plant operation. Our response to these actions has been to emphasize to licensees that financial difficulties were ia no way to be a justification for less than full commitment to safe plant operation.

In selected cases, we have increased inspection resources at f eilities where licensees were under financisi stress during certain phases of startup and operation. We are evaluating whether actions beyond the Policy Statement and Generic Letter are warranted for these retrospective cost disallowances.

DISCUSSION TO BE INCLUDED IN GENERIC LETTER The HRC is primarily concerned with safety impacts of incentive programs that focus on short-term operational or performance goals. The NRC supports econcmic performance incentive programs that reward a licensee for a sound operctions and maintenance prograr and for correcting recurrent or predictable failures or other potential prcblems that could lead to an operational transient, unplanned plant outage, or derating.

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Licensees are requested to advise NRC whenever a State rate regulatory commission or FERC takes an official action relating to the establishment of an economic performance incentive program, including a notice of hearing, and craft or final programs adopted.

The followir,9 information is to be provided where availaole:

(1) the beginning and ending dates of the incentive program, (2) the performance reasures to be used for the rewards or penalties, (3) the period covered by a aerformance measure to assess a reward or penalty, (4) the met 1od of determining rewards or penalties including matters such as the existence of null zones, identification of sharp thresholds between rewards and penalties, (5) an indication of whether the rewards and penalties are established according to (i) prede-termined formulae, (ii) the discretion of FERC or State commissions, or (iii) negotiations to be conducted between a

licensees and commissions; and (6) indicators of whether any programs make use of SALP, or performance indicators developed either by NRC or another entity-l In addition, licensees will be requested to provide to the NRC an analysis of the expected safety consequences of new or substantially modified programs before they are implemented.

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.The' Commissioners

• t finally, licensees are requested to report significant rewards or penalties from implementation of the incentive programs and provide the results of their assessment of the potential safety impact.

Significant penalties will be determined by effects on a licensee's (1) return on common equity, (2) net cash flow, and (3) interest coverage on long-term debt.

Recommendation:

It is recommended that the Commission approve the enclosed draft Policy Statement for public comment in the Federal Register.

Coordination:

This paper has been reviewed by the Office of the General Counsel and it has no legal objection to it.

M 4 Jam s M. Taylor E

utive Direc or for Operations

Enclosures:

1.

Policy Statement on Economic Performance incentives 2.

Letter to be Sent to the Federal Energy Regulatory Commission and to State Utility Regulatory Commissions 3.

COMKR-90-003 and COMJC-90-002, Economic Peformance incentive Regulation Commissioners' comments or consent should be provided direct.ly to the' Office of the Secretary by COB Wednesday, August 29, 1990.

Commission Staff' Office comments, if any,.should be submitted t

to the Commissioners NLT Wednesday, August'22, 1990, with-an

information copy to the Office of the Secretary.

If the paper is of such a nature thatLit_ requires additional time for.

' analytical review and comment, the Commissioners and the-Secretariat should be apprisect of when comments may be expected.

DISTRIBUTION:

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EDO ACRS ACNW ASLBP-ASLAP SECY l-

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9 Commission Draf t Policy Statement on the Possible Safety Impacts of Economic Performance Incentives AGENCY: Nuclear Regulatory Commission ACTION: Draf t policy statement

SUMMARY

This statement presents the policy of the Nuclear Pegulatory Commission (HEC) with respect to the possible safety impacts of economic performance incentive programs established by State commissions regulating electric utilities. The policy statement (1) contains a discussion of the potential impact of the policies and actions of St6te regulatory bodies, emphasizing' that such actions can have either a positive or negative impact on public health and safety; (2) reflects the Commission's concern that certain forms of economic perforrence incentive regulatico have the potential for adversely affecting nuclear plant operation and public heelth and safety; (3) specifically identi-fies those methods or approaches that are of particular concern (e.g. use of sharp thresholds, measuren'ent of performance over very short time intervals, lack-of " null zone," and inap; ropriate reliance on SALP scores); (4) indicates that the !!RC will centinue to monitor the application of economic performance incentives and performance criteria to nuclear power plant operations; and (5) urges licensee:: and State regulatory commissions to apprise the NRC of econonic perfornance incentive progrens that are being considered for appli-cation to NRC licensees.

DATES:

The comment period expires 75 days after publication in the Pederal Register.

Comments received after this time will be considered if it POLICY STATEMENT

Eaclosure 1 is practical to do so, but assurance of consideration cannot be given except for comments received on or before this date.

ADDRESSES: Mail written comments to the Secretary, U.S. Nuclear Regulatory Commission, Washington, D.C. 20555, Attention: Docketing and Service Branch Deliver commerts to One White Flint North,11555 Rockville Pike, Rockville, flaryland between 7:30 a.m. and 4:15 p.m. federal workdays. Commerts may also be delivered to the f1RC Public Document R00u, 1717 H Street NW. Washington, D.C.,

between 7:45 a.m. and 4: 15 p.m.

Copies of comments received nay be examined at the NRC Public Doct!r;ent Roor.:.

FOR ftlRTHER lilf0RMAT10tl C0t. TACT: Martin J. Virgilio. Chief, Policy Development and Technical Support Branch, Office of Nuclear Reactor Regulatior, U.S. Nuclear Regulatory Commission, Washington, D.C. 20555, Telephone: (301) 452-1254.

SUPPLEl:EliTARY INFORMATION:

==

Introduction:==

After reviewing the information on economic performance incentive I

programs put in place by State regulatory corraissions that regulate the economic returns of utilities operating nuclear power plants, the~ Commission has decided that it would be appropriate to set forth its views on the possible safety

' impacts of such programs _ in e Commission Policy Statement.

Background:

A nurber of State regulatory commissior s have established economic perferrance incentive programs relating to electric power plants.

Some programs

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POLICY STATEf'ENT i

have existed unchanged for a nuraber of ye6rs, whereas others have been substan-tially modified or are newly established.

NRC monitors and evaluates these incentive progrens to determine their possible impact on the safe operation of nucleer power reactors. The NRC firmly believes that these programs should not create incentives to operett a plant when it should be shut down for safety reasons.

Policy Statement:

The Commission's views on economic performance incentive programs are as follows:

Potential Impacts The NRC recognizes that the exi!. ting programs vary considerably from State to State and that the plans. are not r.$.sily classified, especially as to their pos-sibic impact on safe plant operations. However, certain general characteristics of prograns can be evaluated and found to be either desirable (or at least neutrel) or undesirable in their safety impact.

A desirable plan provides incentives to make improvements in operatian and main-tenance that result in long-term improvement in the reliability of the reactor, main generator and their support systems. An undesirable plan provides incentives to operate a facility with potential safety problems or to start up before fully ready merely to meet an operational goal.

A desirable economic performance incentive rewards a utility for a sound opera-tions' and maintenance prugram and for correcting recurrent or predictable 3-POLICY STATEMENT

failures or other potential problems that could lead to an operational transient, unplanned plant outage or derating.

Such an incentive is a desired result b,cause a well run plant and prompt correction of problems enhance safety.

Unanticipated transients and shutdowns challenge operators and safety systems and, although a low probability, could initiate a more serious event.

Improved performance in a utility's operational organization, which can be encouraged by economic performance incentives, can be conducive to improving both safety and economic performance.

However, the Commission's concern with incentive plans is that, in the interest of real or perceived short-term economic benefit, utilities might hurry work, take short cuts, or delay a shutdown for maintenance in order to meet a deadline, a cost limitation, or other incentive plan factor. Such a program could encourage, directly or indirectly, the adoption of actions designed to maximize measured performance in the short-term at the expense of plant safety (public health and saf ety).

If a licensee keeps a reactor online when it should be taken down for preventive or corrective maintenance and uses shortcuts or compressed work schedules to minimize down time, these actions could adversely impact safety.

l Potential Adverse Impacts on Plant Operation and Public Health and Safety l

L Some specific features of incentive plans now used by some States could adversely affectpublichealthandsafety.-Thesefeaturesare(1)sharpthresholdsbe-l tween rewards and penalties, (or between penalties and null zones, or rewards l

andnullzones)and(2)performancemeasurementshavingshorttimeintervals. POLICY STATEMENT

A sharp threshold occurs when a licensee misses a target capa:ity factor and must bear a large part or all of the resulting replacement power costs. A sharp threshold provides an incentive to continue plant operation to achieve a target capacity factor to avoid the large replacement power cost or to earn a sub-stantial reward.

This type of incentive could deflect attention from safe plant operation.

Performance measurements for short-term intervals provide incentives to focus on a short-term target, such as a higher capacity factor or availability factor.

This target could become the primary focus, diverting attention from long-term goals of reliability and operational safety.

In contrast, performance measure-ments for long-term intervals provide incentives to the utility to follow sound maintenance and operational practices and make system and component changes so that the licensee improves operating performance in terms of availability and capacity factors.

Short-term measurements tend to make safety and economic goals conflict; long-term measurements tend to make the two goals complementary.

Specific Features That Cause NRC Concern

. Sharp thresholds and short-term performance measures can adversely impact safety.

In addition, plans that use NRC periodic performance assessments.and performance indicators of the NRC industry as a basis for rewards or penalties present POLICY STATEMENT

several major concerns.

First, the NRC's Systematic Assessment of Licensee Performance (SALP) was developed to assist the NRC in assessing the performance relative to the safety of individual facilities and to serve as a basis for comunicating to the licensee. The NRC staff expects licensees to focus on the facts.in the SALP report, the issues identified, and the apparent root cause of problems. The prospect of financial rewards or punishments for licensees based on SALP ratings causes concern in that it may change the focus of the SALP process from the underlying issues, where it should properly be, to the numerical ratings themselves.

If the issues identified in a SALP report are obscured by concerns over the financial consequences incurred as a result of that rating, the process may not achieve the desired results.

Similarly, performance indicators were developed to assist NRC, and the licensees in identifying trends and areas of performance that should receive a more detailed assessment. Basing rewards or penalties on the indicators could direct a licensee's attention toward improving the scores by possibl_y inappro-r

-priate means rather than toward identifying and correcting underlying safety conditions.

Continued NRC Monitoring Program The NRC will periodically survey State regulatory commissions having rate regu-lation over power reactors and the Federal Energy Regulatory Commissior. (FERC) to determine any new or substantial changes in programs and to ascertain how the programs have been implemented, including the imposition of large penalties. POLICY STATEMENT

The survey results will be evaluated to identify safety concerns f rom inappro-priate prograr.s and penalties that detract from safety performance. We plan to update the survey annually. We will periodically assess the frequency of the surveys to determine the need for schedule adjustments, l.icensees ar.c Utility Commissions Urged To Inform NRC of Program Initiatives The NRC should be apprised of economic performance incentive prograns that are being planned by State rcgulatory concissions and that can impact safety.

Frequently, these programs are developed in coordination with regulated utilities.

Toward this er.d, the NPC vill be requesting that licensees report whenever these commissions are developing or substantially revising economic performance incentives. The objective will be that NRC be informed of the principal features of. the progran so that their likely impact on plant safety can be assessed.

Further, khC will be reovesting licensees to report the penalties assessed through these progrant as they occur.

NRC also will be seeking the. cooperation of FERC er:d the Statt utility rectl6 tory' commissions te edvise the NRC of initiatives to impose or change an econcmic perfermance incentive program that applies to an NRC licensee.

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TEXT OF LETTER TO BE SENT TO THE FEDERAL ENERGY REGULATORY COMMISSION AND TO STATE UTILITY REGULATORY COMMISSIONS REQUESTING COMMENTS ON THE PROPOSED POLICY STATEMENT ON ECONOMIC PERFORMANCE INCENTIVES (Heading)

A number of State regulatory commissions and the Federal Energy Regulatory Commission (FERC) have esta'slished economic performance incentive programs relating to commercial nuclear reactors.

Some programs have existed for a number of years, whereas others have been substantially modified or are newly established. The U.S. Nuclear Regulatory Commission (NRC) has monitored these programs through periodic surveys of State commissions and licensees to determine whether they create incentives for reactor licensees to change operating or maintenance practices in such a way that safety is diminished.

In reviewing the programs in effect in 1989, the Commission has determined that a few economic performance incentive programs have the potential to direct licensees' attention away from the primary responsibility of safe' operation and toward attempting to meet an operational goal to avoid a penalty or' receive a reward. As a result, the Commission directed the NRC staff to develop'a proposed Policy Statement that describes desirable and undesirable features of these programs with respect to licensee's responsibilities for public health and safety. Enclosed for your consideration is a copy of the proposed Policy Statement.

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.perforniance incentive programs can meet beth the goals of economical!and safe operation.

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James M. Taylor s

Executive Director for Operations m

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May 8, 1990 onect oF THE COMKR-90-003 and srcRETAny COMJC-90-002 MEMORANDUM FOR:

James M. Taylor Executive Director for Operations

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kk5EelJ. Chilk, Secretary FRCM:

SUBJECT:

ECONOMIC INCENTIVE REGULATION P

At the recent staff briefing on Economic Incentive Regulation of Nuclear Power Plants various concerns were expressed by the commission. 'Upon further consideration, the Commission (with Commissioners Roberts, Rogers, Curtiss, and Remick agreeing) has agreed that it would be appropriate for the Commission to set forth its views on this matter in a Commission Policy Statement on Economic Incentive Regulation.

In addition, the Commission believes that the NRC should have some mechanism to monitor and evaluate the potential safety consequences of proposed economic incentive programs before such programs go into effect.

Accordingly, the staff should:

1.

develop ar.d submit a Policy Statement on Economic Incentive Regulation for the Commission's consideration.

The proposed policy statement should -- (i)-contain a discussion of the potential impact of the policies and actions of state regulatory bodies, emphasizing that such actions can have-either a positive or negative impact on public health'and safety; (ii) reflect the-Commission's. concern that certain forms of economic incentive. regulation have the. potential for

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adversely affecting nuclear power plant operation and public health and safety; and (iii) specifically identify those methods or approaches that'are of particular concern (e.g.,

use of snarp; thresholds,. measurement of performance over very short time intervals, lack of " null zone", 'tappropriate -

reliance on SALP scores); (iv) indicate that the NRC will continue to monitor the application of economic incentives i

and' performance criteria to nuclear power plant operations; and (v) urge licensees'and public utility. commissions'to apprise the NRC of-economic incentive programs that are being considered for application to NRC licensees.

(EDO)

(SECY Suspense:

7/1/90)

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establish a tracking system,, as originally recommended in SECY-85-260, to monitor proposals for, and implementation of, performance incentives applicable to nuclear power plants.J The tracking system should provide for early notification when an incentive plan is proposed, instituted, or substantially modified, or when significant rewards or penalties are imposed under such plans.

Additionally, the tracking system should provide sufficient information in a timely manner so as to permit the staff to evaluate the potential safety consequences of such plans prior to such plans' going-into effect.

(EDO)

(SECY Suspense:

7/1/90)

Chairman carr disagrees; he believes that the investment of resources proposed is inappropriate at this time.

He favors continuing with the program of monitoring by the staff as described in SECY-90-046.

If adverse impacts are noted, the Commission would then select from the options presented in the paper to protect public health and safety, cc:

Chairman Carr Commissioner Roberts Commissioner Rogers Commissioner Curtiss Commissioner Remick y

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