Partly Cloudy with a Chance of Rate Hikes
This is my updated coverage from Fuel Cycle Week for 9/1/11, V10:N440 published by International Nuclear Associates, Washington, DC
Florida Power & Light (NYSE:NEE)) and Progress Energy (NYSE:PGN) want to build four new reactors in the Sunshine State, but first they have to persuade customers to pay for them—upfront.
This so-called “Florida model” for the construction of new reactors has come under scrutiny. The way it works is that rate payers cover the costs of building the reactors while construction is underway saving themselves and the utility a boatload of interest that would come from issuing bonds or taking loans. That matters because two massive power projects are proposed to be built and in revenue service a decade from now.
One is at Florida Power & Light’s (FPL) existing Turkey Point plant near Miami. The second is Progress Energy’s Levy County project on the state’s rural west coast, 120 miles southeast of Tallahassee. The combined cost of the two projects, which involve four Westinghouse 1,100 MWe AP1000 reactors, could be $25 to $30 billion.
Will rate increases rattle Florida’s elderly population?
But the new reactors will bring rate hikes. The Florida Public Service Commission (PSC) held hearings on the utilities’ nuclear cost recovery requests last month. A staff recommendation is expected from the PSC soon and a final decision in October.
In August FPL asked the PSC for an increase of $2.09/month for each 1,000 MW of power; Progress asked for more than twice that amount at $4.80/month for each 1,000 MW. For comparison purposes, an energy efficient bungalow of 1,200 sq feet kept at 72°F at $0.08/kWh will clock in at about 1,700 kWh or $136/month before taxes, fees, and other surcharges.
As of June 2011 Progress has spent $795 million on the Levy project, collected $471 million from customers, and is asking for another $141 million. FPL is asking for another $335 million, but this number includes $196 million for work on upgrades to the two existing reactors at Turkey Point. The firm said in its testimony it has spent $319 million on the new reactors so far.
Opponents: Utilities to pay licensing upfront
The state’s rapidly growing population will expand from 18.8 million in 2010 to an estimated 21.3 million by 2020, according to estimates prepared by the Census Bureau.
That growth will bring a lot more electricity-gobbling air conditioners on line in Florida.
A large percentage of that population growth will be fixed-income retirees with hair-trigger negative responses to electricity rate increases, and with political power because they vote. While the national average for most states in the 65 and older cohort is around 12% of the population, in Florida it is 18%.
The elderly are not the only ones that are angry about the rate increases in a bearish economy. Large commercial power users, especially those in the food-processing industry, and conservation groups and consumer advocates want both utilities to hit the brakes on rate increases.
What they particularly object to are the FPL and Progress requests for rate increases to pay for licensing costs. The opposition view is that utilities should absorb these costs upfront and then apply for reimbursement if and when the licenses are granted.
Even more aggressive is criticism that the plants will have cost overruns and schedule delays that put completion beyond the lifetimes of most of the people who would pay rate increases for them in the present. These inter-generational conflicts are particularly acute for the elderly who want to opt out of the rate increases.
Unfortunately, with the over 65 elderly making up 18% of the state's population, opting out would shove the burden of rate increases disproportionately on to everyone else. It would mean a quick death for the rate increases and the reactors. On the other hand, some experts view the prospects for reactors as less than promising regardless of who gets saddled with rate increases.
Dim prospects for completion?
Charles Rehwinkel, the deputy of the Office of Public Counsel, a state funded “watchdog” for regulated utilities, told FCW in a telephone interview he thought the outlook for actually building the four reactors is dim at best. He gave two reasons.
First, the price of natural gas has fallen to low levels and is likely to remain there for a long time. Second, there is little likelihood Congress will enact a carbon tax to mitigate greenhouse gas emissions.
“These developments have not improved the rate case for these utilities. The financial feasibility of the plants has diminished as a result,” Rehwinkel said.
Rehwinkel said that while Progress claims it will complete the Levy Country reactors in 2021, he thinks a more likely date is 2027—or not at all.
FPL & Progress “might get their licenses, but getting the plants built in a cost-effective manner does not look good,” he said.
State political leaders bullish on nuclear
This dour view stands in stark contrast to that of Art Graham, PSC chairman. He told the St. Petersburg Times editorial board on Aug. 9 that he believes nuclear power “remains the least expensive way to generate electricity,” and added that problems like those that arose at Fukushima should not stand in the way of future development of reactors.
A PSC spokesman for Graham confirmed to FCW that he stands by those remarks. He added that Graham is committed to keeping reactor new-build costs down.
Florida Governor Rick Scott (R) is also bullish on nuclear energy. Press Secretary Lane Wright told FCW, “Gov. Scott wants to define a comprehensive strategy that ensures everyone in the state has access to a reliable and affordable supply of energy. Right now, everything is on the table—including nuclear.”
Scott’s Energy Advisor Mary Bane told the PSC at an Aug. 2 hearing, “Nuclear energy is a resource that is unavoidable in a state which has few energy options.”
Bane did not return calls from FCW asking for her views on the rate increases.
Greens: Cost overruns vs. cheap natural gas
But a determined coalition of green groups, led by the Southern Alliance for Clean Energy (SACE), has been working with legal and financial experts to challenge the requests for rate increases at every step of the process. Jamie Whitlock, an attorney representing SACE, told FCW the group sees severe risks that raise the question of whether the plants will ever be built.
Whitlock says both utilities are well aware of the rapidly rising costs of building the plants that may make them unaffordable. He said that Progress and FPL, “are just paying for a place in line at the (Nuclear Regulatory Commission). They have no commitment to actually build the reactors. They must demonstrate a commitment to build or stop asking for the rate increases.”
Whitlock agrees with PSC Public Counsel Rehwinkel that a 2027 completion for the Progress reactors is a plausible date. He said that the struggling economy, lower energy demand, and long term prospect for low natural gas prices all work against the 2021 schedule Progress has indicated in testimony to the PSC.
Utilities: Reactors on-time, on budget
An FPL spokesperson disputed this type of argument, saying that once the nuclear reactors are built, ratepayers will not face the inevitable volatility of natural-gas prices in their electric bills.
Suzanne Grant, a spokesperson for Progress, disputes the claim by opponents of rate increase that the plants will not be completed or that they will be delayed until 2027. She added that Progress is looking for investors in the twin reactors, but declined to reveal any information about what interest the firm has received to date. She declined to comment on what effect, if any, the pending merger with Duke will have on the project.
“Right now we’re required to operate as separate companies,” she said.
In response to charges that the costs of the Levy project have been rising too fast, Grant pointed out that some of them are for transmission and distribution infrastructure to get the power from the reactors to customers.
She told FCW the current estimate of $17 to $22 billion is an “all-in estimate” including the reactors, land, transmission, fuel and financing costs. The transmission cost estimate for Units 1 and 2 is about $2 billion.
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