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