Thursday, August 4, 2011

Georgia PSC passes on cost-over run rule for Vogtle

It adopts a “look back / look forward” strategy for rate increase reviews

Fianncial riskThe Associated Press reports that Georgia utility regulators on August 2 rejected a financial risk sharing deal for twin new Westinghouse AP1000 nuclear reactors at Southern's Vogtle site. Instead, the agency adopted a rule that allows it to to check costs long after they've been incurred in construction of two new nuclear reactors.

Last week FCW's coverage accurately predicted the vote outcome and the reasons for it.

The story of how they reached this compromise is told in my coverage published in Fuel Cycle Week, V10:N435 07/28/11 by International Nuclear Associates, Washington, DC.

The plan would have reduced the profits of the Southern Co. [NYSE:SO] if it had cost over runs while building the reactors. AP reports the elected members of the Georgia Public Utility Commission voted 5-0 on August 2 to approve an alternative plan that is supported by the PSC staff and Southern. It allows the PSC to look back at prior costs to see if they are "imprudent," as well as evaluating current rates and costs.

stanwise PSC Chairman Stan Wise, left, also interviewed by FCW, told the AP that his agency will now have the ability to disallow past costs if they are determined to be imprudent. In the past the Southern Co. had argued against that type of review. The company agreed to it in lieu of the more complicated risk sharing program prepared earlier this year by PSC staff.

The proposal would have set a cost overrun threshold of $300 million for each of the two reactors Southern plans to build at the Vogtle nuclear site in Georgia. But several stakeholders have told FCW that the regulator was unlikely to adopt it. Instead, they said construction of twin 1,110 AP1000s would continue under normal oversight.

Southern had argued that the $600 million total would have to be listed on the balance sheets of the partner companies involved in the project as a “probable and measurable liability.” That would kill chances of attracting investor support, even though the federal government would be willing to extend a loan guarantee for $8.8 billion of the project costs to mitigate financial risks.

The loan-guarantee risk premium, which is believed to be less than 2% of the total price, might also be forced up under the due diligence process of the U.S. Office of Management and Budget. Each 1% increase in the risk premium would add $8 million to the cost of the overall project, shrinking profits.

PSC Gets Reality Check

Georgias PSC sealThe PSC staff had proposed to create a “risk-sharing” mechanism whereby the utility would see a cut in its return on equity proportional to any cost overruns. If costs for either reactor climbed over the $300 million threshold, the mechanism would trigger a reduction in profits, which would affect all five partners in the project. Georgia Power, a subsidiary of Southern, owns 45.7% of the project; Ogelthorpe Power owns 30%, MEAG owns 22.7%, and Dalton 1.6%.

The scheme aimed to address the concerns of an internal consultant from the Public Advocate’s Office. The consultant, Tom Newsome, whose role is to scrutinize projects from the ratepayers’ perspective, questioned when or even whether the U.S. Nuclear Regulatory Commission would certify the safety of the Westinghouse AP1000 reactor. He also asked when the company would receive its Combined Operating License from NRC, which expected by the end of this year.

Delays either in the reactor safety certification or in the grant of a COL license could add hundreds of millions in costs. Southern Spokesman Jeff Wilson told FCW that the company “could not do business with that plan.” He added that the utility had agreed to retrospective reviews of costs which gives the PUC a lot of oversight power related to costs.

Georgia Power Chief Financial Officer Ann Daiss told the commissioners on July 6 that had Southern known in advance that the commission would impose this cost overrun restriction, “we very likely would not have proceeded with the [Vogtle] project” and chosen a natural gas plant instead.

Subsequently, as one commissioner, Stan Wise, told FCW in a telephone interview on July 25, the PSC staff has withdrawn its support for the plan. It was, he said, an “aggressive plan prepared by some smart people [but] the accounting rules mean that it just won’t fly.”

The financial impact on Southern would be “devastating,” he added. “We will continue our role of determining whether the costs charged to rate-payers are prudent or imprudent.”

NRC Review of AP1000 Winding Down

ap1000The certification concern issue sprang in part from NRC Chairman Gregory Jaczko’s unusual press release on May 20, complaining that Westinghouse had to resolve additional technical issues before the agency would certify it the AP1000. Westinghouse has told FCW that the information required was minor. Westinghouse submitted the requested information in June (FCW #430, June 23).

NRC spokesman Scott Burnell told FCW that the NRC had issued its final Safety Evaluation Report last December, and the proposed rule to certify the amended design went out in February.

“At this point the staff’s preparing to send final rule language to the commission for approval,” said Burnell. But NRC had not yet set a date for a commission meeting to vote on the final rule, he added.

The concern about the Combined Operating License first arose in a June 9 report by William Jacobs, a Marietta consultant and nuclear engineer hired by the Georgia Public Service Commission with Georgia Power funding. Jacobs expressed concern that the utility may not get its COL from the Nuclear Regulatory Commission until late December 2011 or early 2012. But those dates are consistent with Southern’s timetable for the project.

Update Southern CEO Tom Fanning said the company now expects its NRC license in early 2012 for the two reactors proposed to be built at the Vogtle site . The license hinge on the NRC also certifying the safety of the design of the Westinghouse AP1000. Both actions are pending at the regulatory agency. Spokesman Scott Burnell declined to provide FCW with a definitive schedule saying only that the NRC’s staff is working on both items.

Opponents try to get NRC's attention

Opponents of the reactor project didn't think much of the risk sharing plan in the first place. Bobbie Paul, who heads a Georgia anti-nuclear group that historically has focused on nonproliferation issues, is one of 24 organizations that filed a joint petition with the NRC last April asking it to stop all reactor licensing, including renewals, until the lessons emerging from Fukushima can be incorporated into safety regulations.

Paul told FCW she didn't think the risk sharing idea did very much to protect rate payers or deal with the more fundamental issue, as she sees it, of reactor safety.

"Georgia ratepayers are having their pockets picked by CWIP," Paul said.

CWIP is an acronym that stands for "construction while in progress," and it means Southern can charge the rate base for the costs of constructing the reactor while it is being built. It saves the utility a bundle in interest costs. It also exposes the rate base to the potential for paying for cost overruns which is where PUC oversight comes in.

On the safety issue, Paul said the heart of the group's contention is whether Southern can deliver the reactors safely on time and within budget.

"If Georgia Power can't handle the human, structural, and financial risks, they shouldn't be in the business of building nuclear reactors," she said.

Paul's attorney, Mindy Goldstein, based in Atlanta, told FCW there has been no response from the NRC to the group's petitions and she doesn't know if or when there will be one.

Costs to Go Down?

Southern told the Georgia PSC that it could finish the first of the two reactors by April 2016, two months ahead of schedule, and that it would cost less than the original estimate. A combination of production tax credits, the federal loan guarantees and other financial tools may lower the eventual price, said Jeff Burlson, a vice president at Southern.

“Our confidence is high that when this project is completed, it will have a more favorable impact on customers in terms of electricity costs,” he noted.

Once the production tax credit kicks in, which takes place after the reactors are in revenue service, Southern will ask the PSC to pass the savings along to customers, he added.

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Wednesday, August 3, 2011

Turmoil at nuclear regulatory agencies

Japanese and U.S. counterparts face criticism albeit for different reasons

Fukushima_symbolLife in the post-Fukushima era for nuclear regulatory agencies in Japan and the U.S. is not  easy. In Japan the Nuclear Industrial Safety Agency (NISA) is in hot water over revelations it stacked the deck at public meetings with employees of the nuclear utilities it is supposed to regulate.

Two utilities told the Japanese government they complied with requests from NISA in 2006 and 2007 to send their employees to public meetings to support a licensing decision.

In response to these revelations, Japanese Prime Minister Naoto Kan has questioned whether NISA should continue to exist in its present form. He also called for a phase out of dependence on nuclear power for the Japanese economy.

In the U.S. an aggressive plan to apply "lessons learned" from Fukushima to the regulation of the U.S. fleet of reactors has hit the rocks. The so-called 90-Day report, supported by the controversial chairman of the U.S. Nuclear Regulatory Commission (NRC), will not be quickly acted on due to opposition from three other commissioners.

The report and a fast timetable to implement its recommendations, has also been criticized by the Nuclear Energy Institute (NEI).

However, it is supported by critics of nuclear energy including Rep. Ed Markey (D-Mass.) and Sen. Barbara Boxer (D-Calif.).

Read the full details of how nuclear regulatory agencies are in turmoil in the post Fukushima era at the ANS Nuclear Cafe online now.

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Sunday, July 31, 2011

Areva sailing in uncharted waters

New CEO says it is too soon to assess the full consequences of the Fukushima disaster on its long term strategy

Clipper shipAreva, the French and mostly state-owned global nuclear giant, is sailing in uncharted waters as its new CEO seeks to get a grip on the firm’s strategic direction.

The uncertainty has affected the firm’s publicaly traded shares and reduced investor confidence in the organization’s future. Some of these assessments may be premature since most of the rest of the global nuclear energy industry is in the same boat.

Since March 11, the firm’s shares fell by 30% to {e}24.80. That price is actually an improvement over an early July traded price of {e}17/share.

The firm’s financial statement [press release with links to 1st half reports] doesn’t tell the whole story. The firm’s new CEO Luc Oursel, told financial analysts July 27, “The full long-term impacts of Fukushima remain extremely difficult to assess at this time.”

Oursel promised to publish a strategic plan by the end of 2011. He also delayed releasing new financial targets. However, in the interim, he tried to reassure investors who include some of the financial community’s largest institutional investors. He said, “The fundamentals underpinning the development of the nuclear market are strong.”

Market size?

China nuclear construction siteThe Bloomberg wire service reported July 28 that Areva expects global new construction of nuclear reactors, in addition to the current fleet, to represent an added 304 Gwe of power by 2030. The current global fleet is 440 reactors providing 377 GWe of power.

This would yield a total of 681 GWe, but does not account for decommissioning of Germany’s 17 reactors and closing reactors elsewhere.

Areva estimates total global nuclear power generation by 2030 will be 584 GWe down from a previous estimate of 659 GWe. This produces a net gain of 207 Gwe or the equivalent of about 170 new 1,200 MW reactors.

On the other hand, there may be new market opportunities to carry out decommissioning of nearly 100 future closures. That isn’t a market Areva is in right now so it may need partners who know the business.

Oursel said key market drivers for new reactors are strong electricity demand growth, the need to build carbon emission free base load generation capacity to address climate change, and the need for nations to have energy security.

Market uncertainties equal market opportunities?

Uncertainties have been created by Germany’s retreat from nuclear power and the confusion unleashed by “personal comments” made by Japanese Prime Minister Naoto Kan, who called for his country to lower its dependence on nuclear energy. Paradoxically, Areva does not have any of its reactors in either nation.

luc-oursel-portraitCEO Luc Oursel (right) thinks the current dent in market demand will be fixed in the future. He told financial wire services that so-called “stress tests” of operating reactors may delay the construction of new reactors, but that the market for safety upgrades could be a new source of revenue for the firm. He said the firm estimates the average costs will be in the range of {e}100-200 million for each plant.

New build opportunities

Areva has plans to sell new reactors in China, India, and the U.S. The firm is building two in China and is negotiating to build the first two of six in India. Prospects in the U.S. now hinge on the ability of its partner EDF to find a U.S. investor for the Calvert Cliffs project in Maryland.

In China the current suspension of new projects may be lifted, Oursel told Bloomberg on July 28. According to the wire service, Oursel told financial analysts China is not giving up on its plan to push for a large nuclear fleet of reactors to provide power to develop its economy.

Areva’s challenge will be how much market share it can capture in a smaller future new build. It will be competing with Russian and Japanese nuclear firms which have their business plans looking at the same market factors and prospects.

Areva and EDF now partners

EDF and Areva appear to have buried the hatchet with the departure of former CEO Anne Lauvergeon. On July 25 the two firms joined hands in a public display of affection presided over by French Industry Minister Eric Besson.

Henrio prolioAreva CEO Luc Oursel told EDF CEO Heri Prolio (right) the agreement is “new momentum for the French nuclear industry.”

He’ll need it because the joint effort is facing still competition. Another reason for the new level of cooperation is that EDF is no longer pushing to increase its stake in Areva which now former CEO Lauvergeon strongly opposed and which was a source of contention.

One of the immediate benefits of the new found agreement between the two firms is that Areva announced it is in discussions to supply up to six more 1,600 MW EPR reactors in the U.K. beyond those it is is already committed to provide to EDF.

Potential customers include Horizon, owned by a consortium of German utilities, and NuGeneration, which is composed of Span’s Iberdrola and France’s GDF Suez. To succeed, Areva will have to convince them the 1,600 MW EPR is technically uperior and has a better business case than the 1,100 MW Westinghouse AP1000.

Finland and Flamaville projects haunted by first-of-a-kind challenges

There have been some setbacks. The most recent is a delay of two years in completion of the EPR under construction in Flamanville, France. Adding to an atmosphere is doubt and uncertainty are the high profile schedule delays and cost overruns at a similar EPR under construction in Finland.

Work at the Flamanville site was slowed down for almost two months as a result of two fatal accidents at the site. In addition other “first-of-kind” difficulties have slowed the schedule for the reactor to now enter revenue service in 2016 instead of 2014 and to cost {e}6 billion instead of {e}5 billion.

project_managementAt July 2011 currency conversion rates, the new cost of of the 1,650 MW reactor at $8.64 billion puts the cost at $5,200/Kw which is way above competitive costs for other reactor projects globally.

To compete in the market, Areva will have to convince potential customers that it can deliver a reactor on time and within budget at competitive prices. It lost the coveted UAE contract for new reactors to South Korea because it could not do so.

The causes were reported at the time to be a combination of price issues and a proposal effort hampered by the difficulties that then existed between Areva and EDF.

What about uranium?

Areva said in its comments to analysts it might revise the value of some of its African uranium properties, but did not highlight any planned changes in its Canadian uranium holdings, which are among the richest ores in the world.

Another question is whether it might delay its planned start of construction of the Eagle Rock Enrichment Facility in Idaho. The $2.4 billion plant is expected to get its NRC license later this year. Areva has set ground breaking for 2012 once the harsh Idaho winter lets go of the land. The firm reiterated at a July hearing held by the NRC in Idaho Falls that it plans to proceed with the project.

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63rd Carnival of Nuclear Energy Blogs

The heat is on across the United States. The nation’s 104 nuclear reactors are providing electricity to keep people cool without warming the planet. Nuclear energy can help save habitat for polar bears.

polar-bearThe 63rd Carnival of Nuclear Energy Blogs is online now at Next Big Future. This post is the collective voice of the best pro-nuclear blogs in North America.

If you want to hear the voice of the nuclear renaissance, the Carnival of Nuclear Energy Blogs is where to find it.

Past editions have been hosted at NEI Nuclear Notes, ANS Nuclear Cafe, Yes Vermont Yankee, NuclearGreen, Atomic Power Review, and CoolHandNuke, as well as several other popular nuclear energy blogs.

If you have a pro-nuclear energy blog, and would like to host an edition of the carnival, please contact Brian Wang at Next Big Future to get on the rotation.

This is a great collaborative effort that deserves your support. Please post a Tweet, a Facebook entry, or a link on your Web site or blog to support the carnival.

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