ML20196J017

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Submits Brief Description of Eight Final Actions That NRC May Issue in Next 30 to 90 Days
ML20196J017
Person / Time
Issue date: 06/15/1998
From: Meyer D
NRC OFFICE OF ADMINISTRATION (ADM)
To: Godwin E
OFFICE OF MANAGEMENT & BUDGET
Shared Package
ML20196H655 List:
References
FRN-63FR50465, RULE-PR-30, RULE-PR-50 AF41-2-054, AF41-2-54, NUDOCS 9812090246
Download: ML20196J017 (2)
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{{#Wiki_filter:_ _ _ _ _ f% g 1 UNITED STATBE t j g } NUCLEAR REGULATORY COMMISSION j. -{ waawasaton,o.c.nu m a n f. k***** i June 15, 1998 f i i i Mr. Erik Godwin Omco of information and Regulatory Affairs i Offloe of Management and Budget l Washington, DC 20503 1 i Deer Mr. Godwm: i Under the Congressional Review provisions of the Small Business Regulatory Enforcement Falmess Act ("the Act") (5 U.S.C. $$ 801808), your offloe determines whether final agency [ ] actions are " makr rules'for purposes of the Act. Endosed you will find brief descriptions of i eight final actions that the Nuclear Regulatory Commission may issue in the next 30 to 90 days. These are new actions which have ne; yet been submitted for your review. We believe that 1 these actions are not " major rules" under the Act. i If you agree with our determinations, pleese indicate your concurrence on this ietter, an'd fax the letter to me at 301-4154144. You may also respond by retum e-mail to DLM1@nrc. gov. If you have any questions about these actions, please call me at 301-415-7162. Sincerely, W - %% David L Meyer, Chief Rules and Directwes Branch Division of Administrative Services Office of Adrninistration

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DATE-June 1998 AGENCY: Nuclear Regulatory Commission TITLE OF ACTION: Financial Assurance Requirements for Decommissioning Nuclear Power Reactors LEVEL OF SIGNIFICANCE: Major rule (This determination is based on estimated costs of about $11M per year and estimated values, not costs, to society ranging from $100M to $129M per year.) UPCOMING ACTION: Final Rule AGENCY IDENTIFICATION: RIN AF41 DATE OF ISSUANCE: Estimated September 1998 STATUTORY OR JUDICIAL DEADLINE: N/A DESCRIPTION OF ACTION: This final rule is being developed to amend the NRC's regulations relating to financial assurance requirements for the decommissioning of nuclear power plants. The rule is in response to the anticipcted rate deregulation of the power generating industry. The final rule will provide for adequate protection in the face of a changing environment not envisioned when the present rule was originally written in the mid-1980s. This final rule describes under what conditions a licensee may make use of the external sinking fund as the sole method of financial assurance for decommissioning. In response to comments on the proposed rule, the final rule identifies additional financial assurance mechanisms that may be used for decommissioning and that provide levels of assurance equivalent to those mechanisms currently allowed by the NRC. Further, the rule adds a definition of "Federallicensee" to address the issue of which licensees may use statements of intent, and requires power reactor licensees to report periodically on the status of their decommissioning funds and changes in their external trust agreements. The rule also amends regulations so as to expressly allow licensees to take credit for the earnings from decommissioning trust funds, both when the plant is operating and later'when it is being decommissioned, /f 1

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T'b RULEMAKING ISSUE July 2, 1998 (Affirmation) SECY-98-164 EQB: The Commissioners FROM L. Joseph Callan Executive Director for Operations

SUBJECT:

FINAL RULE ON FINANCIAL ASSURANCE REQUIREMENTS FOR DECOMMISSIONING NUCLEAR POWER REACTORS PURPOSE: To request Commission approval to publish in the Federal Reaister a final rule on financial assurance requirements for decommissioning nuclear power reactors.

SUMMARY

This final rule was developed to amend the NRC's regulations relating to financial assurance requirements for the decommissioning of nuclear power plants. The rule was in response to the anticipated rate deregulation of the power generating industry. The staff believes the final rule provides for adequate protection in the face of a changing environment not envisioned when the present rule was written in the mid-1980s. This final rule lets stand the definition of" electric utility" contained in 10 CFR 50.2 as it applies to financial qualifications for operating plants as provided in section 50.33(f). However, this definition is no longer being used with respect to decommissioning funding assurance. Rather,10 CFR 50.75(e) describes the circumstances under which licensees may use the external sinking fund method of financial assurance for decommissioning exclusively. This is one of the financial assurance mechanisms allowed by NRC, and is currently used by virtually all power reactor licensees. In response to comments on the proposed rule, the final rule identifies additional financial assurance mechanisms that may be used for decommissioning, which, the staff believes, provide levels of assurance equivalent to those mechanisms currently allowed by the NRC. As provided in the proposed rule, the final rule adds a definition of " Federal licensee" to further clarify the issue of which licensees may use CONTACT: Brian J. Richter, NRR (301)415-1978 Y O M 6_I8}Ay g6 I

s The Commissioners 2 statements of intent, and requires power reactor licensees to report periodically on the status of their decommissioning funds and changes in their eWernal trust agreements. The rule also amends the regulations to expressly allow licensees to take credit for the eamings on decommissioning trust funds during operating and decommissioning periods. BACKGROUND: 4 The staff submitted a proposed rule on financial assurance requirements for decommissioning nuclear power reactors (SECY-97-102) to the Commission on May 16,1997. The Commission issued a staff requirements memorandum (SRM) on June 30,1997, approving publication of the proposed rule subject to some modifications. Subsequently, on August 15,1997, the Commission issued COMSAJ-97-009, directing the staff to further modify the proposed rule. On the basis of the Commission's comments, the proposed rule was resubmitted to the Commission 3 and published in the Federal Reaister on September 10,1997 (62 FR 47588). The attached final rule responds to the comments received on the proposed rule and contains the final amendments to be published in the Federal Reaister. DISCUSSION: The proposed rule, published in the Federal Reaister on September 10,1997, was wntten to accomplish three objectives. First, the NRC proposed modifications to decommissioning financial assurance mechanisms to address concems resulting from the potential deregulation of the power generating industry. Second, the NRC proposed that power reactor licensees report periodically on the status of their decommissioning funds and on the changes in their external trust agreements. Third, the NRC proposed that licensees be allowed to take a specified credit for the eamings on decommissioning trust funds. A total of 33 commenters submitted more than 200 comments on the proposed rule. Some of the comments simply endorsed the Nuclear Energy Institute (NEI) positions. The commenters i represented 25 utilities and utility groups,5 State agencies or Public Utility Commission groups, and 2 public interest groups; one individual did not state any affiliation. In general, the commenters were supportive of the Commission taking action at this time on financial assurance requirements for decommissioning nuclear power reactors. However, the industry expressed concern that the proposed rule needed clarification and that the proposed assurance mechanisms were too stringent. In particular, commenters expressed significant concern regarding the Commission's proposed definition of ' electric utility" because they objected to the linking of decommissioning costs with the costs of operations and maintenance in the definition of

  • electric utility" or any surrogate definition. The commenters were concemed that as a health and safety issue, decommissioning funding assurance is a separate issue from financial qualifications for operations. Specifically, the proposed rule continued the distinction currently codified in the Commission's financial assurance regulations between " electric utility" licensees and others in terms of providing decommissioning funding assurance and assurance of financial qualifications for operations. Second, in the proposed rule, the definition of " electric utility" in 10 CFR 50.2 was expanded to address non-bypassable wires charges that some States have imposed to recover decommiss!oning costs. The proposed rule contained other definitions in section 50.2 to clarify what the NRC means by " cost-of-service regulation," " Federal

e e The Commissioners 3 licensee," and other related terms. Finally, NEl, with many of the licensee commenters endorsing the NEl position, proposed an alternative concept of " qualified nuclear entity " because NEl believes that " electric utility" is no longer a valid concept. These commenters also requested additional financial assurance mechanisms and a liberalizing of the existing mechanisms, including the financial test criteria for a parent company and self guarantees in 10 CFR Part 30, Appendices A and C. After evaluating the comments, the staff decided not to revise the definition of " electric utility" in the final rule, nor to define a new entity for the purposes of finatcial assurance for decommissioning. In view of the lack of action by same States on restructuring and deregulation, the staff believes that the concept of " electric utility" will remain valid for quite some time. However, the staff recommends including directly in section 50.75(e)(1)(ii), the types of { licensees that could make use of an "extemal sinking fund" as a method of financial assurance for decommissioning. !n section 50.2, several definitions have been revised to clarify what the j NRC means by " cost-of-service regulation," " Federal licensee," " Incentive regulation," "Non-l bypassable charges," and " Price-cap regulation." Further, in view of the guidance to the staff in the Commission's January 15,1998, SRM (" Staff Requirements -SECY-97-253-Policy Options for Nuclear Power Reactor Financial Qualifications in Response to Restructuring of the Electric Utility Industry"), the staff believes that the existing definition of " electric utility" should continue to apply at this time to financial qualifications of operations. Regarding the comments requesting additional flexibility, the staff has added provisions in the rule for certain long-term contracts and case-specific proposals that licensees may use under specified circumstances. The staff has also identified directly in section 50.75(e)(1)(ii) under which circumstances licensees would be able to make use of an "extemal sinking fund" as a method of financial assurance for decommissioning. Also, the staff has modified appendices A and C to 10 CFR Part 30 to address the issue of combining assurance mechanisms (i.e., extemal sinking funds combined with parent or self-guarantees.) 3 3 Regarding the proposed reporting requirement, commenters generally did not oppose reporting to the NRC on the status of decommissioning funding assurance. However, several did oppose the proposed frequency and the NRC endorsement of a Financial Accounting Standards Board 1 (FASB) exposure draft (through draft Regulatory Guide 1060 (DG-1060)) or any other FASB-based position that is not final. The staff believes that the wording in the rule is explicit in identifying the financial assurance data required for decommissioning. Therefore, the staff has suspended work on the regulatory guide and will not resume work on it, nor endorse the FASB standard, until that standard is made final. Lastly, the commenters generally favored the NRC's proposal to allow credit for earnings on licensees' prepaid decommissioning trust funds or external sinking funds. However, the proposed 2 percent real rate-of-return was considered too low by some commenters and too high by others. The staff continues to believe that the 2 percent value is appropriate, but has modified the final rule to allow licensees, at their discretion, to use values up to a 2 percent annual real rate of return, if the licensee's rate regulator has not authorized some other rate.

4 i The Commissioners 4 i RESOURCES: Resources needed for review of the reports required by this rule are expected to be minimal (2-staff-weeks) and will be subsumed within existing resources. COORDINATION: ) The Office of the General Counsel has no legal objection to this paper. The Office of the Chief Financial Officer has reviewed this Commission paper for resource implications and has no objections. The Chief Information Officer has reviewed the final rule for information technology and information management implications and concurs in it. l RECOMMENDATIONS-I j That the Commission: l 1. Approya for publication in the Federal Reaister the final amendments to 10 CFR Part 50 (Attachment 1). 2. Certify that this rule, if promulgated, will not have a significant economic impact on a substantial number of small entities, pursuant to the Regulatory Flexibility Act, 5 U.S.C. 605(b). 3. N9.tg that a. The Chief Counsel for Advocacy of the Small Business Administration will be informed of the certification regarding the economic impact on small entities and the reasons for it as required by the Regulatory Flexibility Act; b. The NRC made a determination that this action is a major rule under the Small Business Regulatory Enforcement Faimess Act of 1996 and will confirm this determination with the Office of Management and Budget. This determination is reflected in correspondence to the President of the Senate, the Speaker of the House, and the General Counsel of the General Accounting Office (Attachment 2); The appropriate Congressional committees will be informed (Attachment 3); . c. d. A press release will be issued (Attachment 4); e. A regulatory analysis (Attachment 5) will be available in the Public Document Room; f. This rule amends information collection requirements that are subject to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). The Paperwork Reduction Act aspects of this rule have been approved by the Office of Management and Budget.

a The Commissioners 5 g. It is estimated that this action will result in an additional annual NRC burden of approximately 2 staff-weeks; I t h. The staff intends to prepare the final " Standard Review Plan on Power Reactor Licensee Financial Qualifications and Decommissioning Funding Assurance" (NUREG-1577) to reflect the Commission's decision on decommissioning funding i in this final rule; and r 1. The staff will issue Regulatory Guide 1060, after the FASB standard becomes final. c c L. !ph Callan Exe e Director f Operations Attachments:

1. Federal Register Notice of f

Final Rulemaking

2. Letters to Congress and GAO under SBREFA
3. Congressional Letters
4. Press Release
5. Regulatory Analysis i

Commissioners' completed vote sheets / comments should be provided directly i to the Office of the Secretary by COB Monday, July 20, 1998. j Commission St'aff Office comments, if any, should be submitted to the Commissioners i NLT Monday, July 13, 1998, with an information copy to the Office of the Secretary.' If the paper is of such a nature that it requires additional review I and_ comment, the Commissioners and the Secretariat should be apprised of when comments may be expected. i -This paper is tentatively scheduled for affirmation at an Open Meeting during the l Week of July 27, 1998. Please refer to the appropriate Weekly Commission Schedule, i when published, for a specific date and time. i DISTRIBUTION: Commissioners I OGC i OIG i OPA OCA I CIO-I 'CFO EDO REGIONS SECY b = i

l l i 1 ATTACHMENT 1 l FEDERAL REGISTER NOTICE 1 OF l FINAL RULEMAKING l I l l l i l l l l

[7590-01-P] NUCLEAR REGULATORY COMMISSION 10 CFR Parts 30 and 50 RIN 3150-AF41 Financial Assurance Requirements for Decommissioning Nuclear Power Reactors AGENCY: Nuclear Regulatory Commission. ACTION: Final rule.

SUMMARY

The Nuclear Regulatory Commission (NRC)is amending its regulations on financial assurance requirements for the decommissioning of nuclear power plants. The amendments respond to (1) the potential rate deregulation in the power generating industry and (2) NRC concerns regarding whether current NRC decommissioning funding assurance requirements will need to be modified. The amendment requires power reactor licensees to report periodically on the status of their decommissioning funds, and on changes in their external trust agreements and other financial assurance mechanisms. The amendment also allows licensees to take credit for certain earnings on decommissioning trust funds.

EFFECTIVE DATE: (60 days from the date of publication in the Federal Register.) FOR FURTHER INFORMATION CONTACT: Brian J. Richter, Office of Nuclear Reactor Regulation, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001; telephone: 301-415-1978; e-mail; bjr@nrc. gov.

5 f SUPPLEMENTARY INFORMATION:

1. Background

The NRC published an advance notice of proposed rulemaking (ANPR) for " Financial Assurance Requirements for Decommissioning Nuclear Power Reactors" on April 8,1996 (61 FR 15427). This action was developed to amend the NRC's regulations relating to financial assurance requirements for the decommissioning of nuclear power plants in anticipation of rate deregulation of the power generating industry. In response to the comments received on the ANPR, the NRC published a proposed rule on September 10,1997 (62 FR 47588). The NRC proposed to: (1) revise the definition of " electric utility" and related definitions contained in 10 CFR 50.2; (2) add a definition of the term " Federal licensee" to address the issue of which licensees may use statements of intent; and (3) require power reactor licensees to report periodically on the status of their decommissioning funds and changes in their external trust agreements. The rule also would have amended 10 CFR 50.75 to expressly allow licensees to take credit for the earnings on decommissioning trust funds during the operating and decommissioning periods. II. Comments on the Proposed Rule The Commission received 33 letters containing more than 200 comments on the proposed rule representing 25 licensees or licensee organizations,5 State agencies or Public Utility Commissions,2 public interest groups, and an individual with no affiliation provided. 2

4 Copies of the letters are available for public inspection and copying for a fee at the Commission's Public Document Room, located at 2120 L Street, NW. (Lower Level), Washington, DC 2055-0001. The comments have been organized by topic and an analysis of them follows. 1. Definition of Electric Utility A. Linkage Between Decommissioning Financial Assurance Requirernents and Financial Qualification Requirements (i.e., Linkage Between Costs of Operation, Maintenance, and Decommissioning) Several commenters, including the Nuclear Energy Institute (NEI), stated that NRC should not use the term " electric utility" in its decommissioning financial assurance rules because the term is used for different purposes in the context of NRC's financial qualification requirements in 10 CFR 50.33(f). These commenters stressed that only decommissioning costs are of concern with respect to the financial assurance requirements, whereas only operation and maintenance costs are of concern with respect to the financial qualification requirements. By referencing all these costs as well as the cost of

  • electricity," the proposed definition of electric utility is both unclear and problematic.

The commenters cited several specific problems. First, the definition does not adequately express NRC's intent that an entity can demonstrate adequate assurance if it can " conclusively demonstrate a govemment-mandated, guaranteed revenue stream for all 3

unfunded decommissioning obligations" by virtue of a non-bypassable charge that covers only decommissioning costs. (For example, one commenter stated that, in Califomia, licensees are assured of recovering decommissioning costs in distribution rates through non-bypassable means, although recovery of the costs of operation and maintenance may not be assured.) Second, the definition could unnecessarily invite challenges to the rates established by regulators. Specifically, by requiring that an electric utility's rates be " sufficient for the licensee to operate, maintain, and decommission its nuclear plant safely," the proposed definition could imply that NRC may in the future evaluate the sufficiency of rates established by other regulatory authorities to cover costs of operations and maintenance. Third, by referencing " operation," the definition could create or imply some responsibility for decommissioning funding on the part of nonowner operators that, they argued, may inhibit the formation of joint operating companies. t l The NRC believes that commenters' concerns in this area were addressed by the third i sentence of the proposed definition, that states that "An entity whose rates are established by a regulatory authority by mechanisms that cover a portion of its costs will be considered to be an ' electric utility

  • only for that portion of the costs that are collected in this manner " NRC did not intend to have all licensees consider only the combined costs of operation, maintenance. and decommissioning. Nevertheless, even some commenters who understood NRC's intent suggested modifying this third sentence. One suggestion was to replace it with "An entity whose rates are established by a regulatory authority by mechanisms that cover only i

decommissioning costs will be considered to be an ' electric utility' with respect to its l i decommissioning funding responsibilities." (Presumably an additional parallel sentence would 1 address " costs of operation and maintenance costs.. with respect to its financial qualification 9 i 4 I 1 t

requirements.") Another suggestion was to clarify the third sentence by referring t.o recovery of a certain portion or discrete cateaorv of costs. Either of these suggestions would also obviate any need to include the 10 percent de minimis threshold for non-recovered costs that was suggested by one commenter (i.e., because the relevant category of costs - for decommissioning - would be recovered, even if they were less than 10 percent of all costs), and would allay the concerns of several commenters that an entity recovering only decommissioning costs through non-bypassable charges might be considered less than a 100 percent electric utility for purposes of the decommissioning requirements. One possible remedy, as suggested by NEl, would be for NRC to construct and define a new term such as " qualified nuclear entity" that would apply only to the decommissioning financial assurance requirements. NEl would define a qualified nuclear entity as one that obtains decommissioning funds through: (1) a rate-setting mechanism; (2) a non-bypassable charge established by legislative or regulatory mandate; or (3) a binding contractual agreement with another party that is equal in amount to the entity's decommissioning funding obligation. Only the third option in NEl's definition is not generally consistent with NRC's proposed definition. NEl's comment does not fully or adequately explain the meaning or implications of the binding contractual agreement included as the third option in its definition. However, other commenters specifically referenced NEl's comments, and objected to the binding contractual agreement portion of NEl's suggested definition. Some of these commenters stated that a binding contractual agreement would provide inadequate assurance unless the party offering the contract were appropriately qualified. 5

i As a final point, NEl noted that the term " electric utility" may take on a different meaning as a result of industry restructuring, but would not alter the existing definition of electric utility which would, under NEl's proposal, remain applicable to NRC's financial qualification requirements. The logic of this position is that the current rule is intended to address the decommissioning financial assurance requirements rather than the financial qualification requirements. Nevertheless, the loss of regulatory oversight as a potential consequence of industry restructuring is as relevant to NRC's financial qualification requirements as it is to NRC's decommissioning financial assurance requirements. Therefore, the NRC has adopted another approach that is intended to address commenters' concerns, but that does not have some of the shortcomings of NEl's approach. The Commission has decided not to change the current definition of " electric utility" as it applies to financial qualifications requirements in 10 CFR 50.33(f). Rather, the NRC is clarifying the applicability of extemal sinking funds and other mechanisms directly in 10 CFR 50.75. B. Direct vs. Indirect Cost Recovery Some commenters argued against the proposed deletion of the phrase "either directly or indirectly" in the first sentence of NRC's existing definition of electric utility, which states that

  • Electric utility means any entity that generates or distributes electricity and which recovers the cost of this electricity, either directiv or indirectiv. through rates established by the entity itself or i

by a separate regulatory authority." These commenters stated that allowing cost recovery [ based only on regulated rates and non-byoassable charges might restrict licensees from competing in the open market. Specifically, the change might prevent licensees with Public 6

Utility Commission (PUC)- or Federal Energy Regulatory Commission (FERC)-approved, long-term power sales agreements from qualifying as electric utilities. It is not clear whether PUC-or FERC-approved, long-term power sales agreements would qualify as cost of service regulation or as non-bypassable charges (and hence as cost recovery through regulated rates) under either the current definition or the proposed definition. Assuming that PUCs or FERC analyze these agreements to ensure that they are consistent I with the entity's recovery of all reasonable and prudent costs, it would be reasonable for NRC to interpret these agreements as acceptable under either definition. Because this interpretation would not be obvious under either definition, however, such an interpretation by NRC would have to be implemented through existing or new guidance documents, whether or not the phrase is added to the definition. If these agreements are not consistent with the entity's recovery of all reasonable and prudent costs, then the phrase "either directly or indirectly" has been deleted appropriately. Another commenter stated that NRC should not delete the phrase "directly or indirectly" because the deletion could be interpreted as eliminating the exemption from financial qualification requirements applicable to nonowner operators who cover their costs under contracts with owners. The commenter claimed that NRC has traditionally held that nonowner operators are " electric utilities" exempt from the regulated rates of the owners who are contractually committed to pay the operators' expenses. The logic of the commenter's argument seems to be that nonowner operators recover the costs of their electricity from owners, whose rates are directly regulated, thereby making the operator's cost recovery indirectly regulated. For the reasons that follow, the final rule should render this concem moot. 7

C. Consequences of Not Meeting the Definition One commenter suggested that the proposed definition could result in the premature shutdown of nuclear power plants that have insufficient funds set aside to pay for decommissioning. This comment appears to argue that premature shutdowns may result if, as a result of an entity's loss of status as an electric utility, it must (but is unable to) provide up-front financial assurance for decommissioning. This issue is analyzed in Section 7.B. Prepayment /Up-front Assurance. D. Implications for State Ratemaking Authority Some commenters suggested that NRC clarify that it does not intend to infringe upon State ratemaking authority. To this end, one PUC stated that the NRC should remove from the definition the requirement that utilities recover 'the cost of electricity," which is only an intermediate consideration in the development of rates. This commenter suggested that the definition should be changed to "any entity that generates, transmits, or distributes electricity." In response, the NRC has neither the intention nor the authority to infringe on State ratemaking authority. The NRC believes that the final rule described below will obviate these commenters' concerns. 8

E. Regulatory Efficiency Some commenters suggested that the proposed regulation at @ 50.75(e)(3) be revised to avoid repeating the definition of electric utility. This comment has been adopted, de facto, by the final rule. F. Application of Definition to Public Power Agencies Some commenters noted that the proposed definition does not appear to require public power agencies to recover all of their costs in their rates, only that they set their own rates. In a competitive market, it does not follow that the authority of such agencies to set their own rates will, in and of itself, provide assurance of decommissioning funding. These comments appear to address the last sentence in the proposed definition of electric utility: Public utility districts, municipalities, rural electric cooperatives, and State and Federal agencies, including associations of a'1y of the foregoing, that establish their own rates are included within the meaning of " electric utility." This sentence automatically classifies any licensee that falls in one of the above-referenced groups (collectively referred to by the commenter as "public power agencies") as an electric utility. Thus, public power agencies automatically qualify as electric utilities without consideration of any of the definition's other conditions on rate recovery. The commenters' assessment appears sound in that, in a competitive market, such entities might not recover all 9

their costs even if they can set their own rates. The ability to set rates cdequate to achieve full l cost recovery would be undermined by the loss of an exclusive service territory. Although the NRC is retaining, unmodified, the definition of

  • electric utility" for purposes of financial qualifications, the NRC has adopted this comment in its revised section 50.75(e).

2. Definition of Non-Bypassable Charge A. Stricter Definition Needed s One commenter suggested revising the definition to require that monies collected via the non-bypassable charge be available to the licensee, either through assignment or some other mechanism. This comment seems reasonable. If charges are not available to the { licensee (e.g., if the revenue stream resulting from the charge has been assigned to an unrelated party as a result of a securitization), then the non-bypassable charges would not provide reasonable assurance of decommissioning funding. The final rule has been modified to l reflect that non-bypassable charges should be available to the licensee as part of funds for decommissioning deposited in an extemal sinking fund. I l One commenter stated that because decommissioning funding must be secured and insulated from market risk, the preferred funding method should be a non-bypassable charge established by a regulatory mandate.' According to the commenter, this approach better assures adequate funding while removing decommissioning as an issue in future competition, and also would help utilities in making optima! business decisions in the competitive environment. Regardless of the validity of t 1e comment, the NRC believes that it would be 10

_. = _ _. _. = _. l i encroaching upon the responsibilities of other regulators if it were to establish a single method for cost recovery. i B. Link Between Operation, Maintenance, and Decommissioning i One commenter stated that the definition's reference to " costs associated with operation, maintenance, and decommissioning" is problematic for the same reasons that were noted in the " electric utility" definition. [See discussion and analysis in Section 1-A.] Another commenter stated that NRC's proposed definition of non-bypassable charge could be interpreted to mean that operation, maintenance, and decommissioning costs must all be covered by a charge in order to meet the definition. This may be inconsistent with actual i charges established by PUCs. For example, a PUC could decide to establish a charge for decommissioning costs, but not for operation and maintenance costs. One feasible solution was suggested by several commenters, who stated that the l definition should be revised to read " costs associated with operation, maintenance, or decommissioning. " They noted that this is more consistent with the intent of the rule and would not exclude licensees that recover only decommissioning costs through a non-i i bypassable charge, but that recover all other costs through competition. The final rule reflects this modification. 11

C. Types of Non-Bypassable Charges One commenter stated that it is not clear whether the proposed definition encompasses wire charges, stranded cost charges, transition charges, exit fees, other similar charges, the securitized proceeds of a revenue stream, or price cap regulation. If NRC decides to defer to State regulatory of'icials, the final rule should be clear in stating the types of charges covered by the definition. Similarly, other commenters suggested expanding the definition to include other funding mechanisms imposed or established by a governmental authority. One commenter suggested the definition might include a decommissioning liability covered by State securitization legislation. Another suggested it might include binding contracts secured by legislation or a regulatory commission order or both. The proposed definition, as stated, includes .. charges imposed by a govemmental authority which affected entities are required to pay [over an established time period] to cover costs associated with operation, maintenance, and decommissioning of a nuclear power plant. As noted in the previous section, the NRC has modified the definitions of "non-bypassable charges" in the final rule to focus solely on " costs associated with decommissioning of a nuclear power plant." With that modification, this definition seems to provide an effective performance standard for any type of charge that might be developed by State regulatory officials to cover decommissioning costs. Consequently, there seems to be little benefit to the commenter's suggestion, and some possible danger if any specific charges that might be listed in a revised definition were ultimately implemented by State regulatory officials in ways that did 12

not meet the currently proposed definition. Nevertheless, the NRC has cited examples of non-bypassable charges in its definition, without limiting such charges only to the cited examples. i l Finally, one commenter stated that NRC's commentary that securitization of a licensee's i interest in non-bypassable charges "may" be an acceptable method of providing decommissioning funding assurance seems to suggest that the existence of a licensee's t entitlement to non-securitized irrevocable, non-bypassable charges may not be sufficient to meet the definition and avoid up-front funding. This comment, however, seems at odds with the t plain meaning of the definition of non-bypassable charges. l D. Other i Finally, one commenter suggested revising the definition to replace the phrase "govemmental authority" with the phrase " regulatory authority " As pointed out by the commenter, this would make the definition more consistent with the definitions of " electric utility" I and " cost of service regulation." The NRC is aware of the difference and believes the definition I as presented better represents the NRC position because the term "govemmental authority" is more inclusive and allows for actions by non

  • regulatory authorities," such as State legislatures.

i 3. Definition of Cost of Service Regulation 1 The comments addressing the definition of " cost of service regulation" seemed, in general, more directly applicable to other parts of NRC's proposal, as discussed below. f i l 1 13 i 1 i. 1

One commenter stated that the modifier "all" should be deleted from the " cost of service" definition. This commenter argued that a definition requiring that "all" reasonable and prudent costs be recovered invites a challenge to the sufficiency of a licensee's rate regulation. i Similarly, another commenter stated that the definition should account for the possibility of " partial" cost of service regulation. The NRC believes that commenters' concerns in this area i were addressed by the third sentence of the proposed definition of electric utility, that states "An l entity whose rates are established by a regulatory authority by mechanisms that cover only a portion of its costs will be considered to be an ' electric utility' only for that portion of the costs that are collected in this manner." NRC did not intend to imply that a licensee was subject to i cost of service regulation only in the event that all its reasonable and prudent costs are recovered per the definition, but rather that the licensee would be deemed to be regulated under cost of service regulation for whatever portion of its reasonable and prudent costs are covered per the definition. This comment has been rendered moot by the NRC's revised final i rule. { t Another commenter stated that the proposed definition of " cost of service regulation" l t should not exclude " performance based" and " incentive" ratemaking adopted by some State ratemaking authorities. This commenter proposed adding the following to the definition: " Cost of service regulation includes, but is not limited to, alternative forms of ratemaking which provide for a portion of costs to be recovered based on reasonable benchmarks and incentives for good performance." i i This comment does not seem to recognize that the term " cost of service regulation" is i actually referenced as "traditionalcost of service regulation" by the proposed definition of 14 i

electric utility, which distinguishes cost of service regulation from indirect cost recovery through non-bypassable charge mechanisms. In the final rule, this reference to traditional ratemaking is contained in the definition of " cost of service regulation." In this broader context, the NRC's intention to keep the present focus of " cost of service regulation" seems clear and, moreover, the licensee's suggested additions seem inappropriate (because they are not precisely consistent with traditional direct recovery of reasonable and prudent costs). However, given i that the NRC believes that incentive or price-cap-based ratemaking provides reasonable assurance of decommissioning ' nding, the NRC revised the definition of " cost of service regulation" to reflect this concern. l l 4. Need for General Flexibility The flexibility issue has two dimensions. First, several commenters wanted the maximum number of financial assurance options available to reactor licensees. Second, these commenters urged NRC not to include specific or detailed criteria in its rules, which should be kept general, but to address implementation details in a regulatory guide or similar non-binding form. Among the various financial assurance mechanisms, there are differences in cost, availability, and risk (i.e., degree of assurance). Similarly, because licensees vary in their financial situations and prospects, they pose different degrees of risk in terms of their abilities to provide funding for reactor decommissioning. Making riskier financial assurance mechanisms l available to riskier licensees compounds risk to the public that adequate funds will not be available when needed. Thus, prudent public policy may limit the range of mechanisms that 15 i

o should be ol'ered to certain categories of licensees. This is recognized by the commenters themselves, who more or less endorsed the NRC framework, which distinguishes a category of licensees that should not be afforded the option of using an external sinking funding, by itself, as a mechanism of assurance. The commenters did not contend that alllicensees should be allowed to use all mechanisms; however, they wanted the external sinking fund option to be made available to more reactor licensees than might qualify under the NRC proposal. If this mechanism were equal to the others in terms of risk, the NRC could make it more available in the interests of flexibility. Because this option has more risk than other available assurance options, the NRC believes it is prudent to restrict its use to licensees with stronger financial or rate regulatory characteristics. With respect to keeping the rule general and reserving details for a regulatory guide, there are two key considerations. First is a matter of regulatory philosophy and enforcement posture. Reserving details for regulatory guides is an approach that the NRC has used. However, regulatory guides are statements of one way in which licensees can meet regulations and do not establish requirements. The second consideration is the potential naed to change the requirements. It is much easier to change, add, or delete methods as acceptable for meeting requirements in regulatory guides than in regulations. Inasmuch as the NRC's power reactor licensees have begun on a path of economic restructuring, and will be in a period of transition for a number of years, the flexibility afforded by using a regulatory guide as a vehicle for decommissioning financial assurance requirements may be an advantage. On balance, the NRC is maintaining a level of detail equivalent to previous rulemaking in this area, and reserves the right to issue more 16

detailed guidance where necessary. The NRC, in acknowledging the use of combinations of assurance methods, cannot list all possibilities, but includes as an example, the recent New Hampshire legislation that provides for the proportionate liability of the co-owners of the Seabrook Nuclear Power Station in the event that another minority owner, Great Bay Power Company, defaults on its obligations. 5. Applicability of Requirements to Plant Owners and Operators Two commenters urged the NRC to clarify that the requirements for decommissioning financial assurance apply only to owners or entities that have assumed decommissioning liability under contracts and not to entities that are solely operators. The commenters argued that this clarification is important to the formation or use of specialized operating service companies with no ownership interests in the facilities they operate. Applying financial assurance requirements to both owners and operators provides flexibility, since either can demonstrate compliance. This approach also recognizes scenarios in which the operator has greater financial resources or creditworthiness or bott ti.cn the owner Such a scenario is conceivable following the economic restructuring ( f the electric power industry. To provide greater flexibility and assurance, the NRC will not specifically exempt operator licensees from the financial assurance requirement. This is unlikely to affect the formation or use of operating service companies, because they can negotiate with reactor owners regarding which party or parties will be responsible for demonstrating financial assurance for decommissioning purposes. 17

6. Site-Specific Cost Estimates Four commenters addressed the desirability of allowing licensees to use site-specific decommissionir.g cost estimates as the basis for financial assurance and reporting, even if these estimates are less than the current minimum amounts prescribed in 9 50.75. The primary advantage asserted would be to avoid unnecessary assurance expenses when a site-specific estimate is less than the current NRC minimum. Other asserted benefits of allowing licensees to use site-specific cost estimates below the NRC minimums include greater consistency with PUC approaches, tax treatment, and possible Financial Accounting Standards Board (FASB) requirements. Moreover, acceptance of site-specific estimates might enhance the integrity of the rule, given the perception stated by severallicensees of problems with the current minimum amounts and the acceptance by PUCs of site-specific cost estimates as the basis for financial assurance even where the site-specific estimates are less than the NRC minimums. However, given other potential weaknesses in current implementation (primarily relating to the adequacy of cost estimates and the potential under-funding indicated by current balances in decommissioning trust funds), such an allowance could aggravate the risk of potential under-funding associated with the external sinking fund mechanism. Submittal of site-specific estimates to the NRC would enable it to better eva!uate the funds needed for decommissioning. However, the Commission has decided to defer allowing site-specific estimates that are lower than the amounts specified in 10 CFR 50.75(c) until additional decommissioning data are obtained. (Staff Requirements Memorandum, SECY 97-251 - Proposed Rule on Nuclear Power Reactor Decommissioning Costs, February 5,1998.) 18

._q 1 I 7. Attemative Methods of Assurance ~ 4 A. Alternative Framework Proposed by NEl i J l NEl's proposed framework for financial assurance for decommissioning resembles in ) t ] broad outline NRC's framework, which broadens the range of allowable assurance mechanisms i for reactor licensees that lose the ability to recover decommissioning costs through regulated i rate fees or other mandatory charges estaolished by a regulatory body. Although the extemal E sinking fund, standing alone, is not allowed for the licensees losing such regulatory oversight, the NRC framework also offers opportunities for case-by-case consideration of non-standard '1 financial assurance arrangements. Examples include section 50.75(e)(1)(v), which allows - unspecified, other guarantee methods; and certain contractual arrangements in section 50.75(e)(1)(ii)(C). I 1 t 9 I I The NEl's framework involves three, rather than two, categories of power reactor licensees. Under the NEl framework, the broader set of assurance mechanisms (includirg the current external sinking fund approach) would be available to: first, licensees meetng the criteria for " qualified nuclear entities" and second, licensees that do not meet the requirements 4 4 for " qualified nuclear entities" but that satisfy a set of financial criteria. NEl does not specify in its comments what these financial criteria would be. Third, licensees that satisfy neither the criteria for qualified nuclear untities nor the attemate financial criteria would not be allowed to i use the extemal sinking fund option, but would be able to use the other mechanisms. NEl also includes an option for non-standard demonstrations of assurance. 19

The effect of the NEl proposal would be to make the current external sinking fund financial assurance option available to a larger number of licensees than would be allowed under the NRC proposal. This effect is the result of: (1) defining " qualified nuclear entities" in terms of criteria that may be less stringent than the proposed criteria for " electric utility"; and (2) allowing licensees that satisfy certain financial criteria also to take advantage of the external sinking fund option, which they would not be allowed to do under the NRC r>roposal. The NEl proposal would mean an increase in the risk that adequate funds will not be available when needed because of an inadequate funding rate, inadequate earnings on invested funds, or premature shutdown, it would decrease the cost to licensees. NRC's proposal entails less risk of inadequate funding, but greater cost to licensees. On balance, to make the external sinking fund option more available to reactor licensees, the NEl framework would result in greater risk that sufficient decommissioning funds will not be available when needed. The NEl proposal also would require the development of appropriate financial criteria, which would be challenging to duelop because of the unpredictable nature of the industry. An entity that meets the financial criteria, unlike those licensees who retain the ability to recover decc.nmissioning costs through regulated rates and l fees or other mandatory charges established by a regulatory body, would have no guarantee of l ( collecting sufficient funds for decommissioning and could encounter deteriorating financial i l conditions that could cause a reduction or cessation of payments into the external sinking fund. The NEl framework would produce the same result if the financial criteria were made an i attemate basis for being a " qualified nuclear entity." This would produce a two-tier framework parallel in structure to the NRC proposal, though different in content. 20 l

o Based on these considerations, the NRC is not adopting NEl's proposed approach. Rather, the NRC is specifying in section 50.75, a variety of mechanisms for providing decommissioning financial assurance that licensees may use, depending upon their circumstances. The revised regulations would also permit the use of *other guarantee e methods' that are not specifically identified in the regulations. B. Prepayment /Up-front Assurance One commenter addressed the issue of up-front assurance. The commenter stressed that it is unfair for NRC to require up-front funding for licensees that no longer meet the l definition of

  • electric utility." In particular, the commenter argued that licensees have presumed all along that they would be able to gradually fund decommissioning throughout their plants' h

operating lives an-i that, as a result, licensees who are no longer considered electric utilities may be unable to remain in business. NRC's current financial assurance requirements for decommissioning nuclear power reactors are based on the premise that the reactors are owned by regulated or self-regulating entities that recover their decommissioning costs through a rate-setting process overseen by the applicable regulating body. This regulatory oversight provides reason &ble assurance that l such licensees will recover reactor decommissioning costs and continue paying into external sinking funds for decommissioning. It is true that those licensees no longer able to recover decommissioning costs through regulated rates and fees or other mandatory charges established by a regulatory body may 21 l l

. i incur a greater burden by having to provide up-front assurance. This up-front assurance could take the form of prepayment or it could take the form of some type of surety mechanism (e.g., a letter of credit, or a partner or self guarantee), it is possible, under some restructuring scenarios, that this could lead to premature shutdown of some reactors. However, the likelihood of this occurring is highly doubtful. Many PUCs have already indicated their intention to allow for the regulated recovery of decommissioning costs, either through rates or through some type of non-bypassable charge, even for otherwise deregulated entities. For licensees that will not be able to collect funds through such a process after industry restructuring, up-front assurance is necessary to ensure that reasonable financial assurance is provided for all decommissioning obligations. In the more competitive environment that is likely to prevail after restructuring, some of these licensees may not remain financially viable for reasons not related to decommissioning financial assurance, further suggesting the need for up-front assurance. C. Accelerated Funding in the preamble to its proposed rule, NRC requested comment on whether accelerated funding should be considered as a financial assurance option for licensees no longer meeting the definition of " electric utility." Several commenters supported accelerated funding, provided that the accelerated funding period would be long enough. They generally stressed that, if the funding period were too short, non-electric utilities would be placed at a competitive disadvantage, potentially leading to insolvency and premature shutdown of plants. One commenter asserted that the burden of accelerated funding would be most severe for licensees with little time remaining before shutdown. Several commenters offered specific suggestions regarding the length of an accelerated funding period, stating that it should last most or all of 22

d the remainder of the license period, two-thirds of the remaining license term or 10 years a (whichever is greater), or five-eighths of the remaining license period. One suggested that the l licensee or the licensee's parent company should have to pass a financial test for any unfunded i amount in order to use accelerated funding. Others cautioned that accelerated funding could interfere with licensees

  • business planning or lead to negative tax consequences.

I i For licensees with reactors that have remaining operating lives of less than the i i accelerated funding period, the accelerated funding option would have no impact because I i licensees' funding schedules would be no different than they are currently. NRC would have l less assurance from these licensees, given that they would no longer recover decommissioning j costs through regulated rates and fees or other mandatory charges established by a regulatory I i i body. For licensees associated with reactors that have remaining operating lives longer than -i the accelerated funding period, the accelerated funding option wouU be a significantly less burdensome means of demonstrating financial assurance than full, up-front funding. In all cases, however, the relative decrease in burden to the licensee must be weighed against the l reduced level of financial assurance provided to NRC during any accelerated funding period. i o The length of an accelerated funding period would affect individual licensees differently, i deps.' ding on the amount of unfunded decommissioning obligation and on the time period that the licensees would otherwise have had to complete the funding. The greater the amount of money that must be funded on an accelerated schedule, the more significant the impact will be on a licensee. For example, assuming licensees are otherwise identical and have been i i adequately funding an extemal sinking fund all along, the impact of a 10-year accelerated funding schedule would be greater for a licensee with 25 years of operating life remaining than 23 i

for a licensee with 15 years of operating life remaining. (This contrasts with the comment asserting that impacts would be most severe for licensees with little time remaining before shutdown. In fact, the opposite is true, except for licensees that have been making inadequate contributions to their decommissioning sinking funds.) The NRC believes that the alternative of requiring accelerated funding for all plants over a defined period, to cover the possibility of premature shutdown at some plants, would be too arbitrary and would lead to wide variations in impacts on licensees. Accelerated funding results in the inequitable inter-generational problem of the present generation paying for the decommissioning costs, while the future generation may receive the benefits of future electricity generation without incurring the costs of decommissioning. The suggestion that NRC should allow licensees to use accelerated funding only if they or their parent companies have sufficient assets is analogous to combining a self-guarantee or parent company guarantee with the extemal sinking fund mechanism. This idea has significant advantages to licensees, and is discussed in Section 7.J, " Combinations of Methods." Another way to reduce the burden of accelerated funding on licensees would be to ensure that the accelerated contributions are tax deductible. Under current Internal Revenue Service (IRS) rules, accelerated payments into decommissioning funds may not be deductible. However, these tax changes are beyond the NRC's mandate and Congressional or IRS action would be required to accomplish them. Consequently, unless these rules are changed, licensees may be ineligible to receive tax breaks on deposited funds. 24 I

For the reasons stated above, the NRC does not consider accelerated funding to provide reasonable decommissioning financial assurance. D. Parent Guarantees /Self-Guarantees The commenters generally endorsed parent company guarantees and self-guarantees as a reasonable method of assurance for licensees no longer meeting the definition of " electric utility." However, a number of commenters stated that the financial tests specified in l Appendices A and.C to 10 CFR Part 30 are inappropriate for these licensees and would be overly burdensome. Several commenters suggested specific revisions to NRC's existing i financial tests: 1 4 One commenter suggested that NRC allow non-electric utilities to use: (1) a parent company guarantee from a parent meeting the criteria for self-guarantees; and (2) a self-guarantee for licensees meeting at least two of the following criteria: Licensee has an investment grade bond rating; Licensee's pre-tax income (before interest expense) divided by interest applicable to debt is greater than or equal to 2; and Licensee's net worth is at least twice the current remaining unfunded cost of decommissioning in current year dollars. ) i One commenter stated that the self-guarantee test's "10 times requirement" for assets should be lower, but did not suggest an attemative threshold. 25

I 1-j One commenter suggested that the financial tasts should require total assets in the U.S. } and tangible net worth to be one to two timer the estimated decommissioning costs, l i rather than what is currently specified in the tests. One commenter suggested that the Commission consider ownership of other revenue-i generating assets (besides the nuclear power plant). j i l I One commenter suggested that the NRC should develop a process similar to the one j l used by bond-rating agencies to assess the ability of firms to continue repaying principal i k or to continue paying interest or dividends. i Finally, one commenter suggested that the NRC allow non-electric utilities to use parent company guarantees in conjunction with other allowable financial assurance methods, l l such as extemal sinking funds. (The issue of using parent company guarantees in l combination with other mechanisms is discussed in Section 7.J, " Combinations of Methods"). l NRC's parent company guarantee is based largely on a financial test developed by the l i EPA more than 15 years ago. EPA's test was intended to assess the financial condition of firms managing hazardous waste that were seeking to assure closure and post-closure care j obligations that are substantially smaller than typical decommissioning costs for power reactors. In' adopting these tests, the NRC believed that its objectives for financial assurance would be i reasonably met, but recognized that the tests were most appropriate for materials licensees, 26 i

although, at that time, the financial tests were also made applicable to nuclear power plant licensees who were not " electric utilities." The NRC realized that most power plant licensees would likely use external sinking funds rather than parent or self guarantees to provide decommissioning funding assurance, and thus did not perform a detailed analysis of their applicability to power plant licensees. Because deregulation is still in its earliest phases, it is not yet possible to identify or define the financial characteristics of entities that may ultimately be responsible for reactor decommissioning. Consequently, evaluating or improving the test's applicability to those licensees who are no longer able to recover decommissioning costs through regulated rates and fees or other mandatory charges established by a regulatory body may be difficult, and any criteria that might be developed could become outdated or misleading relatively quickly. Finally, developing and implementing attemative tests (such as those suggested by commenters) could i place a substantial burden on the NRC. For these reasons, the NRC is considering any changes to financial tests separate from this rulemaking. Nevertheless, the NRC is i implementing some changes to parent and self guarantees that may make these assurance methods more viable for power reactor licensees. Section 7.J describes these changes in more i detail. E. Surety Methods l l Three commenters addressed the issue of surety methods of financial assurance (i.e., surety bonds, letters of credit, lines of credit). The predominant issue raised by these commenters pertained to the limited availability of these mechanisms to licensees no longer 27

I l l meeting the definition of " electric utility " One commenter claimed that because the majority of generating companies will have an assured recovery mechanism through non-bypassable charges, there will be no new market created for surety mechanisms after industry t restructuring, and that lice 1 sees required to obtain these mechanisms will be faced with significant costs. Another argued that NRC should ascertain the availability of these instruments before issuing a final rule t'ased on the assumption of their availability. This commenter proposed the creation of a Government-managed decommissioning insurance plan i to provide such mechanisms (discussed in Section 7.G, "Govemment-Managed insurance i Plan"). i NRC recognizes that there are likely to be limits on the availability of surety mechanisms j such as letters of credit, lines of credit, and, in particular, surety bonds, to licensees trying to demonstrate financial assurance. This limited availability would arise from two factors. First, the amount that would need to be assured under such a mechanism (i.e., the difference l 1 between the licensee's decommissioning cost estimate and the current balance in its external { sinking fund) could in some cases be quite large and could pose a significant risk to potential providers of the mechanisms. Second, mechanism providers also may view some licensees (those that lose the ability to recover decommissioning costs through regulated rates and fees or other mandatory charges established by a regulatory body) as financially risky ventures given their restructured operations and newly deregulated financial characteristics (e.g., licensees may no longer have guaranteed service areas). Some licensees may be able to obtain these mechanisms only after offering significant levels of collateral to the provider as security. Generating subsidiaries without access to substantial assets other than the nuclear plant may find it difficult to provide the necessary collateral and may be unable to obtain a 28 l

surety mechanism. Even if surety mechanisms are not available to some licensees, licensees may be able to use prepayment mechanisms (e.g., f'ill up-front funding of the external sinking l fund), possibly arranging for the necessary funding prior to restructuring (e.g., before a nuclear plant is placed in a generating subsidiary with few other assets). Licensees may also have access to parent and self guarantees, which are still less costly. f F. Power Sales Contracts i Commenters suggested two possible roles for power sales contracts in the financial assurance program: (1) as a threshold condition for being able to use the external sinking fund; and (2) as a mechanism for demonstrating financial assurance. One commenter recommended that power sales contracts be accepted as a means by which licensees not meeting NRC's j 4 proposed definition of electric utility can qualify to use the broader range of assurance mechanisms - such as the extemal sinking fund. Another commenter concurred, stating that i such contracts would be secured by legislation or a regulatory commission order or both. Commenters also recommended that, for licensees not qualified to use the extemal sinking fund, an assurance mechanism that would allow a licensee to show that power sales contracts are in place, could provide some or all decommissioning funding. There is an important difference between using power sales contracts as a threshold criterion, for reactor licensees that lose the ability to recover decommissioning costs through regulated rates and fees or other mandatory charges established by a regulatory body, and as a financial assurance mech 9nism. As a threshold criterion, power sales contracts would represent evidence of the financial status and prospects (e.g., sales backlog) of a company. I 29 1 }

o These contracts would be considered when private financial organizations assess the credit-worthiness of companies. However, power sales contracts have some disadvantages that work ) i against their use as a threshold criterion. First, power sales contracts may have contingencies that make it difficult to project revenues or earnings. Such contracts are not equivalent to a Government-mandated revenue stream that would fully fund decommissioning costs. It also i would be very difficult for NRC to define clearly how it would analyze and evaluate such contracts, potentially creating issues of faimess, consistency, and accountability. For example, the NRC would need to assess whether a given contract covers all licensee costs (including decommissioning), how binding it is, and its effective term. Unlike financial statement data, i which can be statistically associated with subsequent financial performance, there is no objective basis or validated test for linking sales contracts to future financial performance. By making it easier for licensees that lose the ability to recover decommissioning costs through regulated rates and fees or other mandatory charges established by a regulatory body, or that do not have access to a Govemment-mandated revenue stream to use the external sinking fund, acceptance of power sales contracts as a threshold criterion may increase the risk that funds will not be available when needed. However, under certain circumstances that the NRC has specified in this final rule, the NRC believes that long-term contracts can provide levels of decommissioning funding assurance that are equivalent to other acceptable methods. Power sales contracts also are unlikely to make good financial assurance mechanisms, unless they have terms that provide for payment of decommissioning costs under most likely occurrences. They often lack the provisions needed to ensure effective and continuing coverage (e.g., automatic renewal, notice of cancellation). For example, in Town of Boylston v. FERC (21 F.3D 1130, 305 U.S. APP.D.C. 382), municipal purchasers successfully challenged i 30 I L

an order to pay reactor decommissioning costs as a charge under their power purchase , contracts. Moreover, FERC has authority to impose alternative provisions in the public interest if it finds contracts to be unjust and unreasonable. Power sales contracts often contain contingencies that may make it difficult to determine corresponding levels of revenues. Long-term contracts for the supply of uranium, natural gas, and coal have all been subject to litigation at one point or another because of market or regulatory changes, which may be specifically addressed in contracts or covered under " force majeure" clauses. These contracts typically do not themselves effect the setting aside or guarantee of monies, although contracts could be written to serve as guarantees or to require that proceeds be deposited in external sinking funds. The NRC believes that power sales contracts that contain provisions to mitigate these shortcomings can provide reasonable assurance of decommissioning and have been allowed, under specified conditions, in the final rule. G. Government-Managed Insurance Plan Two commenters addressed the NRC's decision to eliminate from future consideration the concept of a captive insurance pool to pay unfunded decommissioning costs. One noted only that it agreed with the decision not to pursue this option. The other commenter, however, disagreed with the decision and urged the NRC instead to investigate the creation of a Govemment-managed decommissioning insurance plan. Under this plan, the licensee would be able to purchase an insurance policy from the Federal Government. The cost of the policy 1 " Force majeure" refers to items largely beyond the control of the contracting parties (e.g., recession, inflation, severe market changes) that make it equitable to terminate or renegotiate contract terms. 31

could be determined by each plant's performance history or Systematic Assessment of Plant l Performance (SALP) rating, with poorly run plants paying a higher premium and well-run plants paying a lower premium. The commenter noted that Federal Government participation in private insurance markets is not unprecedented, citing the example of Federal flood insurance. The commenter weakened the force of his example, however, by also pointing out that Federal Government participation in private insurance markets takes place "especially where the risk is not readily subject to management or the level of potential exposure is large." Clearly, basing premiums on plant performance history implies that the commenter would expect poorly-run plants to close more frequently than well-run plants, suggesting that the risk can be managed. I f The commenter advocating further examination of an insurance plan did not make clear whether the commenter favored a captive insurance pool entirely funded by the industry or an insurance system that was funded, completely or partially, by the Federal Government. i The arguments against a captive insurance pool are strong. The participants would be able to cause losses simply by not taking action to set aside adequate funds for decommissioning. Delay in setting aside funds could be beneficial because of the use value of the funds that a licensee could reallocate to some other purpose. In addition, the members of the insurance pool would be in competition with each other, and could shift costs to competitors by means of the insurance pool. Thus, an insurance pool for decommissioning would offer no incentive to licensees to reduce the magnitude of their potential claims on the pool, either from an insurance standpoint (because their decommissioning costs are insured) or from an economic standpoint (because of the advantages to them of delaying payment and of shifting costs to their competitors). 32

The commenter's suggestion that rates should be based on plant performance is unlikely to satisfactorily address the problem of adverse selection. Those posing higher risks might continue to be more likely to enter an insurance pool, despite being assessed higher rates, thus raising the proportion of high-risk insureds. This could increase the price of the insurance and cause other relatively low-risk entities to avoid entering the pool, even if they were being charged less. The nexus between plant performance, however measured, and likelihood of premature closure is not so clear that the Government agency responsible for the insurance would be able to set premiums accurately. Eventually the proportion of high-risk insureds could increase to the point that providing the insurance becomes unprofitable or impossible. Alternatively, mandatory participation by low-risk insureds could lead to situations in which they were subsidizing the high-risk entities, even with a rate differential. The commenter did not present any arguments supporting Government management of 4 a decommissioning insurance plan. If such a plan were set up without the inclusion of Federal funds, there seems to be little reason to assign a Government agency to manage it. Finally, insurance that is partially or wholly subsidized by the Federal Government, such as flood insurance, would require Congressional action, and is outside the scope of an NRC rulemaking. Thus, the Commission is not pursuing this option further. I 33

H. Regulatory Certification Only one commenter suggested that NRC should reconsider its dismissal of the possibility of PUC or FERC certification that licensees within theirjurisdiction would be allowed to collect sufficient revenues through rates to complete decommissioning funding. That commenter noted that NRC had relied upon the views expressed to the NRC that "no current commission can bind a future commission" and that a PUC "could not give a blanket guarantee that all licensees would be allowed to collect revenues to complete decommissioning funding." This commenter argued that these uncertainties are "no greater than those associated with cost of service regulation, which certainly does not constitute a ' guarantee' of availability of sufficient decommissioning funds," noting also that the underlying regulatory standard is only one of "' reasonable assurance'." The commenter, however, did not address a number of important considerations. First, the opponents of certification are particularly wellinformed. The comments upon which NRC relied in dismissing certification as an option came from the National Association of Regulatory Utility Commissioners (NARUC) and several State PUCs, that are particularly good sources of information concerning the limits of their own authorities and their ability to bind their successors. Second, the commenter did not address the argument, presented by NEl and endorsed by several PUCs, that new Federal legislation would be necessary to make such certifications binding. Third, the commenter did not address limitations on FERC's jurisdiction, and consequent limitations on FERC's ability to make binding certifications. Finally, the commenter suggested that NRC had adopted a

  • guarantee of availability" standard rather than 34

l the underlying regulatory standard. Given the weight of arguments in opposition to certification, however, NRC has concluded that certification is not a viable financial assurance mechanism. I l 1. "Any Other Method" ) i A number of commenters stated that NRC should permit more flexibility in the allowable methods for demonstrating reasonable assurance of decommissioning funding, particularly for licensees no longer meeting the definition of ' electric utility." Several commenters suggested that NRC review and evaluate licensee-specific funding proposals on a case-by-case basis. Another commenter recommended that NRC allow non-electric utilities to use mechanisms developed by governmental authorities and approved by NRC. Finally, one commenter suggested that NRC grant individuallicensees or States the flexibility to develop initiatives / mechanisms for providing reasonable assurance of funding. Licensees, as discussed in Sections 7.B and 7.E of this statement of considerations, may well encounter cost and availability issues in trying to use some of the financial metanisms allowed by NRC. In addition, the applicability of the NRC's parent company guarantees and self-guarantees to power reactor licensees is questionable (as discussed in Section 7.D.) because the underlying financial tests were developed primarily for other types of entities assuring smaller decommissioning obligations. Consequently, a case-by-case approach, through which reactor licensees that lose the ability to recover decommissioning costs through regulated rates and fees or other mandatory charges established by a regulatory body, could provide assurance equivalent to the other methods that the NRC is allowing. However, the NRC will need to ensure that the mechanisms used will, in fact, provide adequate 35

financial assurance. Although, the NRC expects that only a very-limited number of licensees will use a case-by-case approach, this will potentially place a resource burden on the NRC to review individual "non-standard" mechanisms. J. Combinations of Methods Several commenters stated that NRC should allow utility licensees and, in particular, non-utility licensees to use combinations of mechanisms to demonstrate 6nancial assurance for decommissioning. Two commenters suggested specifically that NRC allow non-electric utility licensees to use parent company guarantees or self-guarantees or both in conjunction with other allowable methods. NRC's current requirements already allow combinations of mechanisms, except that two mechanisms - the self-guarantee and the parent company guarantee - may not be used in combination with other mechanisms. Allowing combinations of funding methods increases the regulatory flexibility to licensees trying to meet the requirements. (Note, however, that a licensee using a combination of mechanisms faces a greater administrative burden to obtain its mechanisms and, similarly, NRC faces an increased burden in reviewing multiple mechanisms.) For rnechanisms that guarantee payment (e.g., trust fund, payment surety bonds, letters of credit), a combination of mechanisms that equals the total decommissioning cost estimate is unlikely to lead to any difficulty in assuring that decommissioning funds will be used for their intended purpose. 36

Some mechanisms, however, guarantee performance rather than payment. These mechanisms are self-guarantees, parent company guarantees, performance surety bonds, and some insurance. The terms of these mechanisms promise that the issuer will complete required decommissioning activities if necessary. It can be problematic to combine a performance mechanism with another mechanism (payment or performance) because of the inherent subjectivity in valuing performance. For example, a licensee may wish to combine a $100,000 parent company guarantee with a $100,000 letter of credit to assure a decommissioning cost estimate totaling $200,000. If the guarantor proves to be ineffici: 7t in conducting decommissioning, it may spend $100,000 on activities that should have cost less. In this case, the letter of credit would be inadequate to fund the remaining activities, even though the guarantor could claim to have fulfilled its performance guarantee.2 However, the NRC believes that this problem is of less concem in the specific case of a self-guarantee being used in combination with an external sinking fund because, in this case, the guarantor has no incentive or ability to shift costs or to avoid greater responsibility. However, if the self-guarantee were to be combined with a mechanism such as a letter of credit, that required the licensee to offer collateral to the issuer, then it is possible that if NRC 2 in addition, firms providing guarantees must pass an underlying financial test which is not " divisible" under the regulations. For example, parent company guarantors must meet a criterion that they have tangible net worth at least equal to six times "the current decommissioning cost estimates (or prescribed amount if a certification is used)." Either a potential guarantor passes this criterion (and other similar and related criteria) in its entirety or the guarantor fails the test. If the guarantor cannot pass the criteria, then it is ineligible to provide a guarantee in any amount. In this case, combining the guarantee with another mechanism would not be an option. This final rule amends the financial test sections in Appendices A and C to 10 CFR Part 30 to address, in part, this issue. 37

=. ..- - -.~ ) were to draw on the letter of credit, the bank might seize the licensee's collateral which, !n turn, might prevent the licensee from performing under the self-guarantee. The combination of a parent or self guarantee and an external sinking fund also appears to provide a relatively low-cost means for licensees to demonstrate financial assurance while continuing to gradually fund decommissioning costs over time (either on the current schedule or t I on an accelerated schedule). Because of the low costs of guarantees, however, allowing this combination of mechanisms could create an incentive for licensees to delay or cease payments into the sinking fund and, instead, to rely on the guarantee for as much of the cost as possible. Given the magnitude of typical decommissioning costa for reactors, this possibility could hinder the timely conduct of decommissioning. In other words, decommissioning could be significantly delayed if, because of a licensee's inadequate contributions to its sinking fund, a guarantor had to come up with large amounts of money at the time of decommissioning. f 9 The NRC generally believes that it should not allow licensees to use parent company guarantees and self-guarantees in combination with each other to assure decommissioning i obligations. Because parent companies typically consclidate the financial statements of all their subsidiaries into their own financial statements, combining parent company guarantees and self-guarantees could result in double counting of the same limited financial strength to pass separate financial tests (e.g., one for costs covered by a parent company guarantee, and one i-for costs covered by a self guarantee). 38

In sum, the NRC has eliminated the prohibition on combining parent company or self guarantees with external sinking funds. The NRC will also consider other combinations of mechanisms on a case-by-case basis when the aforementioned concerns are addressed. K. Required Timing of Alternative Methods Several commenters wrote that the NRC should allow affected licensees an extended period of time to secure alternative financial assurance mechanisms. One commenter stated that NRC's current regulations allow a licensee 30 days to develop a submittal describing how decommissioning funding will be assured if the licensee no longer satisfies a given criterion (e.g., the definition of " electric utility"). This commenter recommended that NRC allow licensees 180 days in these instances, and also suggested that NRC allow licensees to continue making payments to their existing decommissioning funds until.NRC approves the alternative funding submittal. Another commenter stressed that NRC should allow " adequate transition time for legislative and regulatory changes to accommodate the new definition of ' electric utility'." The comments presented the argument that licensees will need more time to obtain alternative financial assurance mechanisms (e.g.,180 days) than they would in the event of the cancellation of an existing mechanism (only 30 days). This argument ignores the fact that deregulation will not occur instantly and unexpectedly. Licensees are likely to have months or even years to evaluate whether they may be able to recover decommissioning costs through regulated rates and fees or other mandatory charges established by a regulatory body and what 39

m mechanisms they might use to demonstrate financial assurance if and when that occurs. Consequently, no additional time should be provided to licensees in response to this comment. 8. Federal Licensees A. Applicability to Federal Licensees A number of commenters argued that financial assurance requirements for electric utilities should apply equally to Federal licensees, that no special treatment should be afforded Federallicensees, and that alllicensees should satisfy the same requirements. One stated explicitly that " Federal" licensees should be required to provide the same level of financial assurance as other power reactor licensees, but qualified his comment by stating that 'the proposed rule should ensure that at such time as these Federal entities become private enterprises, they are subject to the definition of ' electric utility.' in doing so, they must provide the same. measures of financial assurance currently required to electric utilities, i.e., they must provide the same level of external funding or other assurance that would otherwise have been required of them from the initialissuance of their operating license." This commenter apparently did not oppose the use of statements of intent by Federal licensees, until the point at which they become private. The Tennessee Valley Authority (TVA), the only current Federallicensee for a nuclear power reactor, was the sole commenter that argued in favor of special provisions that would apply only to Federal licensees. It noted, in particular, that under Federal law it is required to charge rates for power that will produce gross revenues sufficient to cover all operating 40 I

l expenditures of the power system, and that such operating expenses are considered to include decommissioning costs. TVA's arguments are evaluated below. B. Definition of " Federal Licensee" Several commenters made identical, or almost identical, recommendations concerning the definition of Federallicensee. Each supported the intent of the definition, which they considered to be to exclude from the definition any Federal agency whose obligations do not constitute the obligations of the United States. However, each recommended that the definition be modified to define a Federallicensee as "any NRC licensee, the obligations of 1 which are guaranteed by and supported by the full faith and credit of the United States Government." Each argued, without explaining fully, that the term " full faith and credit backing" is neither defined nor commonly used in other legislation relating to Federal agencies. Presumably, the commenters who found the phrase ' full faith and credit backing" ambiguous did so because it does not specify that all obligations of the entity are backed by the credit of the Federal Government, nor does it say explicitly that the obligations are " guaranteed," as does the proposed replacement definition. The proposed replacement definition thus is slightly more precise. Much of the suggested definition has been used previously and commonly in legislation pertaining to Federal agencies. Thus, it would have the advantage of removing any ambiguity that might arise from using a totally new definition. A preliminary search of the United States Code, Annotated, uncovered a number of situations in which the proposed phrase is used. For example, under Chapter 50 of Title 7, the Secretary of Agriculture is empowered under 7 U.S.C.A.1928, to guarantee certain agricultural credit real 41

estate loans and emergency loans. Section 1928 specifies that contracts of insurance or guarantee executed by the Secretary under Chapter 50 "shall be an obligation supported by the full faith and credit of the United States." Similarly, the Secretary of the Interior is empowered under Title 16 of the U.S. Code to insure certain loans of private lenders. Section 470d of Title 16 provides that "Any contract of insurance executed by the Secretary under this section. shall be an obligation supported by the full faith and credit of the United States. " Finally, under Title 42, Chapter 7 (Social Security) of the U.S. Code, the Secretary of the Treasury can issue obligations for purchase by the social security trust fund. Section 401 of Title 42 provides that "the obligation is supported by the full faith and credit of the United States.

  • The commenters appear to have identified the phrase generally used to describe such an obligation, and therefore replacement of the current definition of " Federal licensee" with the definition suggested by the commenters appears warranted.

TVA argued against the proposed definition of Federal licensee because the proposed definition would preclude TVA's use of the statement of intent. In its view, there are " ample reasons" to support the continued use of the statement of intent by TVA. In particular, TVA argued that with respect to decommissioning funding assurance, 'the key fact is that Federal law requires TVA to adequately fund the conduct of TVA's power activities, and this includes operat:ng, maintaining, and decommissioning its nuclear facilities." TVA pointed out that even before decommissioning funding assurance requirements from NRC, TVA was taking action to ensure that funds would be available to decommission its nuclear units. TVA argues, in effect, that a financial assurance requirement other than the statement of intent amounts to " imposing separate regulatory requirements to oversee the manner in which TVA is meeting its statutory requirements. 42 1

These arguments amount, in sum, to an assertion that because TVA is subject to an existing statutory requirement to fund decommissioning, the Commission should not impose i any different, or additional, requirements. TVA maintains that the NRC should have reasonable t assurance that 1VA will have adequate funding to ensure the conduct of decommissioning activities "because Federal law requires TVA to provide such funds." (emphasis in original) it also could be correctly said, however, that Federal law requires other reactor i licensees to provide reasonable assurance of decommissioning funding. The purpose of financial assurance is to present a second line of defense, if the financial operations of the licensee are insufficient, by themselves, to ensure that sufficient funds are available to carry out decommissioning. TVA apparently concedes that its obligations are not supported by the full j i faith and credit of the United States Govemment; therefore, if TVA cannot fund the t decommissioning, the Federal Government is not obligated to do so. Although the TVA board l has the authority to set electric power rates to meet power system obligations, including decommissioning, it may not, contrary to its assertions, have the " unfettered ability" to do this, because its markets may not support such rates, TVA noted that its current business plan recommends an offer to its distributor customers to change their power contracts after five years from a rolling 10-year term to a rolling 5-year term. TVA appears to misunderstand the purpose of the statement of intent, which is to obtain a commitment by another, and superior, govemmental entity that the obligations of the subordinate govemmental entity will be paid by the superior entity if the subordinate entity cannot pay them. Absent such a commitment, which would be represented by support for the 43

obligations by the full faith and credit of the United States, there is no

  • statement of intent" upon which TVA can " continue to be able to rely,"

Following publication of this rule, the NRC will review TVA's current decommissioning financial assurance arrangements and determine whether any actions are required in light of i the added definition of " Federal licensee." The publication of this rule, by itself, does not constitute an action of the NRC with respect to TVA's current decommissioning financial assurance. 9. Reporting on the Status of Decommissioning Funds f i A. Use of Financial Accounting Standards Board (FASB) Standard 5 t The commenters generally did not oppose reporting to NRC on the status of decommissioning funding assurance in accordance with the requirements of a final FASB promulgation, on the grounds (as expressed by NEI) that a standard reporting mechanism should be used that does not add unnecessary burden. However, several commenters did oppose a requirement that they use the preliminary FASB exposure draft, or any other FASB-based position that is not final. They argued that changes from the proposed to the final FASB standard, which cannot be predicted because the standard is still under development, could make it inappropriate for meeting NRC's endorsement. Unless the FASB standard is adopted soon, these commenters argued, other reporting options should be adopted. Some commenters suggested that regulatory language need not be changed, but that the contents of DG-1060 would need to be amended to reduce the reliance on the FASB draft. I 44 i l

4 Some commenters went further, and expressed criticisms of the FASB exposure draft, indicating that even if it became final in its current form they would not find it appropriate for 1 use. In the view of these commenters, merely recognizing the liability and periodic expense for 't decommissioning, which is the focus of the FASB draft, is not sufficient to ensure adequate funding. In their view, the FASB standards establish accounting procedures but are not the appropriate computations for determining necessary cash flows for funding external trusts. One commenter stressed that the focus of the FASB draft, as well as issues concerning the appropriate discount rate, also made the FASB standard questionable for NRC's purposes, Neither the timing nor the ultimate contents of a FASB standard can be predicted at this time, and therefore the conclusion is warranted that alternative requirements should be found, According to a FASB report of January 14,1998, the Board reviewed the status of the project in its October 2,1997, meeting and decided it should proceed toward either a second Exposure Draft or a final Statement. However, at its November 26,1997, meeting, the Board eliminated certain key provisions in the exposure draft relating to the scope of the Statement. According to FASB's " Current Developments and Plans for 1998"- FASB will be developing a refined definition of closure / removal costs that would be applicable to a more general class of long lived assets than those covered by the Exposure Draft. The Board will also be addressing the question of whether the costs of closure / removal obligations should be capitalized and will develop criteria to identify constructive obligations. At this time, there is no time frame regarding the issuance of a document or final statement. Although the timing of future action on the draft is uncertain, reanalysis of the scope issue by the FASB staff during the first quarter of 1998, as well as FASB's statement that it is postponing other issues raised on the Exposure Draft until further progress is made on another 45

1 i l Exposure Draft, suggests that action by FASB to issue a final Statement, or even a revised Exposure Draft, will be delayed for a considerable time. Notwithstanding any final FASB action, j the NRC can proceed with its own requirement for reporting on the status of decommissioning funds. 1 B. Frequency of Reports i i L Most commenters endorsed " periodic" reports to monitor the status of decommissioning assurance. Several commenters, particularly those from State PUCs, supported requiring a report soon (nine months) after the rule becomes effective, and at least every two years thereafter. (Other commenters from utilities suggested every three years or every five years thereafter. The five-year period was suggested to correspond to the recommended five-year adjustment to site-specific cost estimates specified in Regulatory Guide 1.159.) A majority of the commenters also endorsed that utilities nearing decommissioning or in the process of l t decommissioning submit reports annually. However, commenters noted ambiguity in the requirement that reports should be submitted annually by licensees of plants that are within five years of their projected end of operations. Although agreeing with the concept of such annual reporting, they noted that "the projected end of operations" should be clarified so that it clearly covered premature shutdowns and notjust plants within five years of the end of their operating licenses. Several State commissions submitted almost identical proposed language amending $ 50.75(f) of the proposed rule to require reporting by licensees for a plant within five years of the project end of operations, "or where conditions have changed such that it will close within 5 years (before the end of its licensed life) or has already closed (before the end of its licensed life)..." Requiring annual reporting on a calendar-year basis would, in the opinion of one 46 t i

commenter, reduce the administrative burden of annual reporting because that is how licensees generally gather and accumulate the required information. Another argued that reporting trust fund balances on an annual basis suggested that reports should be required by March 31 for the previous calendar year. Other commenters noted that when State regulatory bodies require annual reporting on the status of decommissioning funds, as many do, NRC's interests are already protected. One commenter could find no added safety justification for requiring annual reporting within five years of decommissioning. A complete report could be required every five years, in the opinion { of this commenter, with updates annually or biennially. Another commenter recommended that NRC delay the reporting requirements until a Pacific Northwest National Laboratory (PNNL) study is final. However, the Commission's position is that such a delay would deny the NRC and the public the benefits of the information required to be reported while conferring negligible benefits on licensees. Given NRC's information needs, and the multi-million dollar size of the contributions that utilities make annually to their decommissioning funds, the potential pa -off per hour of staff labor that NRC invests in monitoring of funds is likely to be significant. Thus, the NRC is adopting a biennial reporting requirement. NRC also is adopting commenter suggestions that reporting frequency be increased for plants approaching the end of commercial operation or experiencing operating problems, or for plants involved in mergers / acquisitions. i l 1 i n i 2 47 i l 1 i

C. Contents of Reports Most of the commenters who addressed reporting did not question the need for reports on the status of decommissioning funds and they did not address in detail the contents of such reports. Similarly, most of the commenters who raised questions about reliance on the FASB draft for decommissioning status reporting did not recommend alternative reporting standards. Several commenters implicitly suggested that the contents of reports submitted to State PUCs would be sufficiently similar to NRC's requirements, by recommending that copies of State reports should be acceptable to NRC. 1 One commenter argued that NRC's proposed "per unit" reporting was unclear about whether individuallicensees of a jointly owned plant would each be required to submit their own i status reports, or whether the plant operator could submit reports on behalf of all co-licensees. The commenter suggested that having the operator submit the data for all owners could be the most efficient approach, assuming the aggregate of available funds is the most important question. In contrast, another commenter believed that it would be " prudent" for NRC to require annual filings from all co-owners. Requiring filings by all co-owners would provide NRC with more detailed information, but would also place on it the burden of combining and assessing the data. The NRC believes that plant owners and operators should decide who will submit the required information. However, even if allinformation is submitted by the operator, the information will need to be broken down by owner in order to evaluate each owner's contributions to decommissioning. 48 1

One commenter recommended a clarification to ensure that the amount accumulated to the date of the report means the "as of" date, and not the date of the report. The same commenter wanted to limit the report to the single item of accumulated trust fund balances, unless NRC had concerns, based on its knowledge of the plant, about whether the amount accumulated for decommissioning is sufficient. In that case, more detailed information could be required. The comments did not address several;ssues raised by commenters on the NRC's Advance Notice of Proposed Rulemaking (ANPR) of April 8,1996 (61 FR 15427) concerning the information needed by NRC to monitor the status of decommissioning funds. In particular, the comments on the proposed rule did not address the 50-plus reporting items suggested by commenters in response to the ANPR. How the industry will understand the core concept of the reporting requirement, the " status of the decommissioning fund," is not clarified by the comments on the proposed rule. At least one commenter suggested that " status" means simply the " amount" of the decommissioning trusts. Other commenters may be suggesting, by their emphasis on the responsibility of an operator to coordinate information from several co-c!wners, and on the possibility that NRC might need to obtain follow-up information, that " status" can include a quantitative or qualitative assessment of the " adequacy" of the fund relative to required or 4 estimated decommissioning costs. The extent of that assessment is not clarified by the comments received, which do not address whether " status" implies a general discussion provided by the licensee or a specific report prepared by the trustee. The NRC has addressed some of the commenters' concems discussed above by modifying the final rule. Because of 49

their level of detail, other potential concerns are better addressed by a regulatory guide. The NRC will consider issuing such guidance after evaluating the first set of reports received. 10. Rate of Return NRC's proposed language in 10 CFR 50.75(e)(1)(i) and (ii) allows licensees to take credit for earnings on their prepaid decommissioning trust funds or external sinking funds using a 2 percent annual real rate of return from the time of the funds' collection through the decommissioning period. If the licensee's rate-setting authority authorizes the use of another rate, that rate would be used in projected earnings. By specifying that earnings can be credited "through the decommissioning period," NRC is allowing licenseas to assume earnings credits for both the safe storage period and the period when funds flow out of the decommissioning financial assurance mechanisms. Many commenters generally supported NRC's proposed changes in 10 CFR 50.75. Some described the rate as being reasonable, conservative, and consistent with FERC's policy of recognizing earnings and inflation. One commenter specifically endorsed the provision that allows licensees to use assumed rates of return that are approved by State regulatory bodies. A few commenters supported the changes but stated that licensees also should be given the flexibihty to use a rate that is less than the proposed rate. Other commenters did not support NRC's selection of the 2 percent rate. One commenter claimed that the proposed 2 percent rate might result in underfunding if it does not account for the effect of income taxes. More typically, commenters argued that the rate is too 50 i

r i low and should be increased. Suggested rates were 3 percent and 7 percent. Two commenters noted that 3 percent and 7 percent discount rates are used in NRC's regulatory analysis guidance (in NUREG/BR-0058 and SECY 93-167). Other commenters stated that NRC should allow licensees to use any " realistic" rate of retum or any rate they can justify, possibly in conjunction with periodic reevaluation of the funds collected. ' A few commenters argued that a t NRC should not specify a 2 percent rate of return during the period following operations (i.e., the safe storage and outflow periods) and that different rates should be allowed if specifically I approved by a rate-setting authority. As stated in the preamble to the proposed rule, the 2 percent real rate of retum suggested by NRC is based on historical data on returns from U.S. Treasury issues, and represents "as close to a ' risk-free' retum as possible." Although this rate may seem relativelv l I low given that higher interest rates are frequently paid on common stocks and corporate bonds, i l the lower rates paid on Govemment securities pose considerably less risk and are likely to be achieved on a more consistent basis. Given the need for " reasonable" assurance of decommissioning funding, there is little justification for selecting a rate greater than 2 percent. As shown in the table below the historical average real return on long-term U.S. Govemment bonds has been very close to 2 percent, and the historical average real return on " risk-free" U.S. Treasury Bills has been less than 1 percent. Based on this information, NRC would have difficulty justifying a higher rate. 51

e o j Real Rates of Return for Sample Time Periods Rate U.S. Treasury Bills Long-Term Government Bonds Current (1997) 3.49% 13.91 % Contemporary Average (1975-1994) 1.96 % 7.65% Long-Term Average (1926-1997) 0.6% 2.1% Source; \\bbotson Associates, Chicago Stocks, Bonds, Bills andinflation: 1998 Yearbook, rable 4-1 and Table 6-8. Averages are calculated as geometric means. The commenter's concern that 2 percent is less than the 7 percent and 3 percent discount rates called for in NRC's regulatory analysis guidance is not relevant.' Discount rates are used for capital investment analysis and other decision-making purposes but, if used to calculate contributions to decommissioning funds, could result in financial assurance levels that are not adequate to pay for all assured obligations. 1 3 NUREG/BR-0058 generally calls for the use of a 7 percent discount rate, which is the rate recommended by the Office of Management and Budget (OMB), in the estimation of values l and impacts of a regulatory action. NUREG/BR-0058 also suggests use of an alternative discount rate of 3 percent for sensitivity analysis purposes and for cases in which costs occur over a period of more than 100 years. 52

o e i 11. Other J i i A. Cost Recovery through Rates 1 Several commenters opposed the inclusion of any mechanism that provides for a kanded cost bailout of the nuclear industry by ratepayers, arguing, among other things, that e such a bailout would be unfair, destroy real competition, inhibit employment gains, slow the i economic growth of more viable, cost effective, and less polluting power generating technologies, and harm the environment by allowing the continued operation of nuclear power stations that might otherwise shut down. These comments may reflect a misunderstanding of thr roles played by NRC relative to State PUCs and FERC. Specifically, PUCs and FERC can s i i determine whether decommissioning costs are stranded or whether they must be paio by j ratepayers. NRC, unlike the PUCs, does not have the authority to prevent or to allow dcensees to pass decommissioning costs on to customers. Thus, the issue of a " bailout"is not reievant to i NRC. In the event that NRC allows financial assurance mechanisms whereby licensees recover decommissioning costs from ratepayers (e.g., external sinking funds funded by wire charges), the mechanism for rate recovery (e.g., the wire charges) must be authorized by a PUC or by FERC. Furthermore, the asserted consequences of a " stranded cost bailout" are unsupported. t I B. Rate Recovery of Stranded Costs Using PNNL's Formula One commenter suggested that utilities be allowed to recover in their rates only a portion of their decommissioning costs. Specifically, the commenter suggested allowing 53

e o decommissioning costs to be recovered up to a maximum amount determined using PNNL's 1993 generic decommissioning cost formula. Estimated costs in excess of the generic PNNL estimate could not be recovered in rates and would have to be funded by shareholders. Also, in the event of premature shutdown, the commenter would make shareholders (rather than ratepayers) responsible for all decommissioning costs that are not yet funded, including any unfunded portion of the generic PNNL estimate. The comment described above addresses how decommissioning costs, including stranded decommissioning costs, might equitably be divided between ratepayers and shareholders. However, the comment is not directly relevant to decommissioning financial assurance. From NRC's standpoint, it does not matter whether the source for a licensee's financial assurance is the licensee's ratepayers or its shareholders, but only that the licensee has provided adequate financial assurance for decommissioning. The question of how much of the decommissioning cost should be bome by ratepayers as opposed to shareholders is one that has traditionally been answered by State PUCs. NRC, unlike the PUCs, does not have the authority to direct licensees to recover costs from ratepayers. Although the NRC did sponsor the development of PNNL's 1993 generic decommissioning cost formula, this formula, like its predecessor in 10 CFR 50.75(c), was designed to help answer a different question, namely, what constitutes a reasonable minimum level of decommissioning assurance for a given reactor. Within this more limited context (and outside the scope of this rulemaking), NRC is currently evaluating the 1993 formula relative to 10 CFR 50.75(c). 54

Exhibit 3-10 Implementation and Operation Costs Under Options D-1 and D-2 No Retail Managed Stranding Deregulation Ileregulation Deregulation Option D-1: No action NRC/ Licensees Option D-2: Clarify which licensees are eligible to use statements ofintent by defining the term " Federal licensee" NRC \\ \\ i - Review replacement financial $2,600 $2,600 $2,600 assurance (1998) Licensees - Secure and submit replacement $4,200 S4,200 $4,200 financial assurance (1998) i 1 i 3.4.5 Estimated Values and Impacts of Options E-1 and E-2 I Financial Assurance Values and Impacts Under Option E-1, the amount of financial assurance ultimately available at the time of decommissioning may be less than anticipated because the terms of the financial mechanism are assumed not to adequately protect NRC's interests. Under Option E-2, NRC would seek to minimize the risk ofinadequate financial mechanisms by (1) requiring licensees to submit periodically any modifications to their financial mechanisms to NRC for a detailed review, and (2) requiring revisions a ; needed to eliminate problematic provisions in the mechanisms. (Licensees would also be required to submit information on any contracts being used as sources of revenue for extemal sinking funds.) For a variety of reasons discussed in Section 2.5 and Section 3.3.3, flawed financial mechanisms are unlikely to actually fail until and unless deregulation occurs. Thus, in the no retail deregulation scenario, there is no difference in the value of ficensees' financial assurance regardless of whether Option E-1 or Option ' E-2 is implemented. As deregulation and increasing competition occur, however, the risk associated with flawed l mechanisms becomes more significant. Under managed deregulation, the effective level of financial l assurance provided by licensees is estimated to be in the range of $930 million less than the nominal value of that assurance due to the potential use by licensees of flawed financial mechanisms. Under stranding deregulation, the effective level of financial assurance is estimated to be in the range of $1,860 L million less than the nominal value of that assurance. In order to ensure that benefits are realized under I Page 65 I l

a this option, NRC would need to conduct, in the first reporting period, a complete and detailed review of i each mechanism currently in use. l There are no additional financial assurance costs (i.e., fees on surety bonds or letters of credit, or i opportunity costs of funded amounts) estimated to result from either Option E-1 or Option E-2 because neither the amount nor the method oflicensees' financial assurance demonstrations is assumed to change under either option. Rather, under Option E-2, licensees will work with NRC to perfect their current financial mechanisms (see implementation and operation discussion below). These values and impacts are summarized in Exhibit 3-11. i i i i Exhibit 3-11 Financial Assurance Values and Impacts Under Options E-1 and E-2 i No Retail Managed - Stranding Deregulation Deregulation Deregulation l l Option E-1: No action I l'alues/ Impacts l l Option E-2: Require modifications to mechanisms to be submitted periodically i for detailed review i I l'alues Increase in financial assurance $930M S1,860M coverage levels (1999 onward) L Implementation and Operation Values and Impacts Option E-1, the no-action alternative, would involve no implementation and operation costs for i NRC or licensees. Option E-2 involves a detailed review by NRC of any modifications to the currently 4 existing financial assurance mechanisms, with examination of the modified text of trust funds or other financial instruments, investigation of the current levels of funding, and follow-up to ensure licensees l with problems understand and correct the deficiencies in their financial assurance. This option would involve costs to NRC, Licensees would also incur costs to prepare periodic submissions of any modifications to their current mechanisms and respond to follow-up from NRC. Exhibit 3-12 summarizes the estimated costs of this option. E i I Page 66

e. + i Exhibit 3-12 l Implementation and Operation Costs Under Options E-1 and E-2 No Retail Managed Stranding Deregulation Deregulation Deregulation Option E-1: No action NRC/ Licensees Option E-2: Require modifications to mechanisms to be submitted periodically for detailed review l NRC l - Detailed review and follow-up (1999 - 2000)- $470,000 S470,000 $470,000 Licensees Preparation of submission of modifications to current financial assurance and follow-up $500,000 $500,000 $500,000 t-to resolve problems (1999 - 2000) l l-l- l Page 67

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a

4. BACKFIT ANALYSIS The regulatory analysis for the proposed rule also constitutes the documentation for the evaluation of backfit requirements, and no separate backfit analysis has been prepared. As defined in 10 CFR 50.109, the backfit rule applies to " modification of or addition to systems, structures, components, or design of a facility; or the design approval or manufacturing license for a facility; or the procedures or organization required to design, construct or operate a facility.

. " resulting from new or amended provisions in Commission rules. Such backfitting can be plant-specific or apply to multiple facilities (" generic backfitting"). The proposed amendments to NRC's requirements for the financial assurance of decommissioning of nuclear power plants address generic reguliements. The proposal would clarify the applicability of external sinking funds and other mechanisms under deregulation, and add several definitions that are generic in nature; amend generically the requirements penaining to the use of prepayment and external sinking funds; and impose generic new reporting requirements for power reactor licensees on the status of decommissioning funding that specify the timing and contents of such reports. NUREG-1409, NRC's Backfitting Guidelines, lists several criteria (provided belo.y in italics) for determining whether a particular proposed rule falls within the scope of the backfit rule. The criteria, proposed actions, and a description of whether the actions meet each criterion follow: The positions or requirements would bring about improvements in safety of nuclearpower reactors. The current proposal would enhance the safety provided by NRC's reactor decommissioning requirements, by helping to ensure that the reactor decommissioning is adequately financed and that delays or shortfalls do not occur in the funding of decommissioning that could create threats to health or safety. The positiom or requirements impose changes in hardware, procedures, or organi:att nuclearpower reactors. The current proposal would require no changes in hardware or organization of nuclear power reactors. However, the proposal could result in changes in the procedures for operation of facilities in that (1) external sinking funds, by themselves, would not remain as an acceptable decommissioning funding option for some licensees,(2) TVA might no longer qualify for use of a statement of intent, and (3) a specified rate of return on decommissioning funds during operation and the decommissioning period would be used in the absence of a different rate approved by a PUC or FERC. The backfit rule does not cover NRC actions that merely request information and do not impose changes in hardware, procedures, or organi:ation. The current proposal includes revisions to reponing requirements that constitute a request for information. Page 69

l The backfit rule does not apply topurely administrative matters. i The proposed rule is not purely administrative. It involves changes to the jurisdictional definitions pertaining to licensees and also affects the regulatory l options available to licensees. i The NRC has determined that the proposed action is a backfit for the reasons described above. Ilowever, in order for NRC to maintain assurance of adequate funding during the changing uncertainties of deregulation, this action is an " adequate protection" backfit. Consequently, the proposed change to the regulations is required to satisfy section 50.109(a)(5) and a full backfit analysis is not required l pursuant to section 50.109(aX4)(ii). i l i i I i 4 Page 70

5. DECISION RATIONALE 1.

Option A-2 would clarify the conditions under which nuclear power reactor licensees may use an external sinking fund that builds up to the required level of decommissioning funding, and under which such owners must provide "up-front" Onancial assurance for the full amount of decommissioning. Under Option A-2, entities that are no longer able to recover the cost of decommissioning through electricity rates or mandatory fees (and are also unable to recover costs through contractual cbligations) will be required to provide financial assurance for the full amount of their decommissioning obligation immediately. Without the clari6 cation that would be made under Option A-2, entities that no longer can recover costs of decommissioning through rates, but which are receiving decommissioning funds through non-bypassable system exit fees, line charges, or other means established in the course ofindustry deregulation, would still be required to incur costs, in total, of up to S704 million to $1,051 million (or more if deregulation occurs prior to 2006) for establishing financial assurance to supplement their external sinking funds (Exhibit 3-3). (Under both the existing requirements and the new requirements, entities that cannot recover the costs ofdecommissioning through rates, mandatory fees, or other means will be required to provide full assurance immediately.) Option A-2 therefore isjustified both as a cost saving measure and as a response to uncertainty about how electric industry deregulation will affect the recovery of decommissioning costs through rates and mandatory fees. 2. Implementation and operation costs of reviewing financial assurance submissions by entities that no longer are certain to recover decommissioning costs, as well as industry costs to prepare the submissions, will be incurred only when electric industry deregulation occurs that affects a nuclear power reactor licensee, and only if that deregulation causes the licensee to cease to be able to recover with certainty some or all ofits decommissioning costs. Option A-2 would allow NRC and licensees to avoid implementation and operation costs in cases where lhensees are receiving decommissioning funds through mandatory system exit fees, line charges, or other means established in the course ofindustry deregulation. 3. For the reasons stated in (1) and (2) above, Option A-2 is superior to Option A-1, the i no-action alternative. 4. Option B-2, allowing licensees credit for earnings following permanent shutdown but requiring use of an assumed real rate of return of up to 2 percent in cases where neither FERC nor PUCs approve of other assumed rates, would allow savings of $481 million (Exhibit 3-5) over Option B-1, the no-action attemative, if either no retail deregulation occurs or retail deregulation occurs that allows nuclear reactor licensees to continue to receive decommissioning funds through regulated rates and fees or other mandatory charges established by a regulatory body (as described in Option A-2). Under those conditions licensees could continue to use their own assumed rates of return (which may be reviewed and approved by State PUCs and/or FERC) until funds are spent on decommissioning. Savings could be substantially higher iflicensees begin selecting the SAFSTOR method of decommissioning early enough to take greater advantage of the earnings credit during the safe storage period. Page 71

7 s 5. Option B-2 would result in net costs to nuclear reactor licensees under scenarios where licensees may not continue to use their own assumed rates of return but must instead use the required 2 percent (or lower) rate of return established under Option B-2. In this case, the savings resulting from the extended earnings credit described in (4) would, on balance for all licensees, be offset by higher costs associated with the lower earnings assumption. Specifically, if nuclear reactor licensees cannot receive decommissioning funds from rates or mandatory fees (and therefore are presumed not to be supervised by State PUCs and/or FERC), Option B-2 would limit them to an assumed 2 percent (or lower) rate of return both before and after permanent shutdown. The net effect of the 2 percent rate and the extended earnings credit could increase financial assurance costs by $1 million to $1,189 million (or more if deregulation occurs prior to 2006), although these costs may be mitigated by additional savings as discussed in (4). 6. Option B-2 is superior to Option B-1, the no-action alternative, under any assumption about the form of electric industry deregulation. If retail deregulation does not occur, or occurs in the form hypothesized in (4), licensees will realize substantial savings (at least $481 million). If deregulation occurs in the form hypothesized in (5), licensees will incur net financial assurance costs under Option B-2 ($1 million to $1,189 million). The net costs will vary, depending on whether the licensees use prepayment or a third-party financial assurance mechanism to provide financial assurance for the difference between their existing external sinking funds and the full amounts of financial assurance that they must provide. The net costs will also vary, depending on the difference between estimated real rates of return the licensees had previously been using for their external sinking funds and the more conservative rate that they will be required to use by Option B-2 if they are no longer under the supervision of State PUCs and/or FERC. However, both components cf the increased costs will reduce the potential for significant underfunding of decommissioning. 7. Option C-2, requiring periodic reports by licensees to NRC on the status of decommissioning financial assurance, would allow NRC to address whether adequate decommissioning funds have been set aside to date. Option C-2 would impose implementation and operation costs on NRC and licensees (Exhibit 3-8). However, a reporting requirement coupled with strong follow-up action to address any cases of underfunding identified through the analysis of the reports received could result in avoidance of up to $2,700 million in unfunded decommissioning that could be experienced under the no-action alternative or if a reporting requirement is coupled with limited follow-up (Exhibit 3-7). 8. Option C.2 also has non-quantifiable benefits for regulatory efficiency, because it would allow NRC to develop and provide to Congress and the public detailed information about the current status of decommissioning funding. 9. For the reasons stated in (7) and (8) above, Option C-2 is superior to Option C-1, the no-action alternative. 10. Option D-2, defining the term " Federal licensee" to restrict the use of statements of intent by Federal power reactor licensees, would require TVA and NRC to incur limited implementation costs to secure and approve an alternative financial mechanism. TVA also would be required to incur costs of from $124 million to $243 million to provide Page 72

fs \\ alternative Gnancial assurance, depending on the type of assurance that is used. However, qualitative analysis suggests (Section 3.2.4) that the statement of intent has inherent flaws that make it a weak form of financial assurance. It may provide only a promise by the licensee to seek and obtain funds at some future time when they are needed. TVA's statement ofintent apparently was not the equivalent of a parent guarantee provided by the Federal government; NRC's Office ofInspector General has uncovered reasons to believe that the Federal government does not in fact intend to provide any guarantee that it wi!! provide funding for TVA's decommissioning costs. TVA's statement ofintent thus most closely resembles a self-guarantee, based on its commitment to set rates or issue bonds, notes, or other indebtedness sufficient to provide finds for decommissioning. Option D-1, the no-action alternative, represents the situation if TVA cannot meet this self-guarantee commitment. Under Option D-1, unfunded decommissioning costs of up to $1,663 million could be incurred. Option D-2 therefore is the preferable alternative. 11. Option E-2 would involve a detailed examination of changes to licensees' financial assurance arrangements, particularly any modifications to their financial assurance mechanisms such as trust funds and other contractual instruments, that were last examined in 1990 when they were initially set up. Under Option E-2, both NRC and licensees would incur implementation costs to conduct and follow up on such an examination, primarily in the first reporting period after the rulemaking. However, flaws in financial assurance mechanisms putting at risk the ability of NRC to draw on the funds when necessary are expected to become more critical as the electric utility industry is deregulated, due to increased pressures on working capital and investment capital of firms in a competitive environment, and the possibility that such capital might be taken from funds supposedly set aside for decommissioning. The estimated shortfalls in decommissioning funds that could result from Option E-1, the no-action alternative, are sensitive to estimates concerning the proportion of financial assurance mechanisms that currently contain or may in the future contain problematic provisions, and the estimates of the proportion of cases in which attempts might be made to use the funds for other purposes. NRC has obtained information, based on experience in review of financial assurance mechanisms by non-reactor licensees, that approximately half of all unreviewed mechanisms may contain flaws; NRC has no information about use of decommissioning funds for other purposes. NRC and licensees could incur combined implementation costs for a detailed review of modifications to mechanisms with follow-up of approximately $1.0 million (Exhibit 3-12). Such a review could avoid unfunded decommissioning costs of from 5930 million to $1,860 million (Exhibit 3-11). j Page 73

T I 1 t \\ 1 1 1 i i ) i i I l Page 74 \\ \\ l

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6. IMPLEMENTATION This action has been enacted through an Advance Notice of Proposed Rulemaking and public comment, a Proposed Rule Notice and public comment, and a Final Rule. Implementation can begin immediately following the enactment of the final rulemaking. No impediments to implementation of the recommended alternatives have been identified. Regulatory Guides for licensees would be required to provide an explanation of the financial assurance mechanisms allowed under the rulemaking, the regulatory requirements and methods for applying NRC's assumed 2 percent (or lower) real rate of return, the periodic reporting requirements, and the requirements for regulatory compliance for licensees seeking to use external sinking funds or to apply the definition of" Federal licensee."

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