Wednesday, March 21, 2012

Is Progress Energy out of the woods on rates in Florida?

The utility is still in hot water over repairs for Crystal River

This is my updated coverage from Fuel Cycle Week V11:N464 March 15, 2012, published by International Nuclear Associates, Washington, DC.

OLYMPUS DIGITAL CAMERAProgress Energy (NYSE:PGN) is a consumer advocate's headache in Florida and a lightning rod for rate protests by the elderly on fixed incomes. The utility has high costs, which it estimates to be in the range of $900 million to $1.3 billion, for repairs associated with the damage the firm did in Fall 2009 to the containment structure at the 860 MW PWR Crystal River reactor during the replacement of the steam generator and a planned 20% uprate. The reactor was supposed to reopen in April 2011. That never happened.

It has rising costs, estimated by the utility to be in the range of $17-22 billion, associated with the planned construction of two new Westinghouse 1,100 MW AP1000 nuclear reactors in Levy County on Florida’s west coast. The PSC has its own estimate with numbers that are closer to $25 billion.

The reason the numbers are so high for the two new reactors is that utility has applied for an NRC license to build and operate them at a green field site that will require extensive and costly upgrades to transmission and distribution infrastructure to get the electricity to customers. Progress has also applied to extend the license at Crystal River, opened in 1976, for another 20 years, but this process is on hold.

Yet, there may be hope dawning for the utility which is also poised to merge with Duke Energy by July of this year. On Feb 22 Progress inked a multi-year agreement with the Florida Public Service Commission (PSC), which handed down a unanimous vote for it, that may provide some certainty in moderating electricity rates. But there is a dark side to the plan which could set the stage for new troubles in future years. (Florida PSC Fact Sheet)

The disastrous break-in at Crystal River

The trouble started at Progress Energy in September 2009 when it dismissed advice from its own engineers to use an experienced team of contractors to cut into the heavily reinforced concrete of the containment structure at the Crystal River reactor to replace a steam generator. The utility chose an option to save money, as much as $150 million, by doing the job itself.

delamination damage at crystal riverInstead of asking the obvious question of third-party experts, e.g., who else besides Progress executives thought this was a good idea, the firm charged ahead. Things did not work out well. Damage to the concrete during the cutting job, called "delamination," (right) was so extensive that the plant has been shut down since 2009 and is likely to remain out of service until at least 2014. That's at least four years of no revenue from a huge capital asset.

According to Charles Rehwinkel, Deputy Public Counsel at the Florida Public Service Commission (PSC), fossil fuel replacements costs are running at $300 million a year. He told FCW that by the time the utility gets the reactor back on the grid in 2014, total costs could be $600-900 million.

Asked if the public counsel's office views the problem with the containment structure to be a "botched job" as alleged by consumer groups, Rehwinkel’s answer shows that the rate settlement on repair costs is decisive in mitigating the potential for a much harsher legal finding.

"There is a big difference between what is foreseeable and what happens because of mistake or even negligence. Since we settled the case before the PSC, we never filed any pleading that formalized our position regarding whether PEF was imprudent or negligent (the standard the PSC uses for assessing costs between shareholders and ratepayers). Having settled the case we will never make such a filing or take a formal position on fault."

In effect, Progress dodged a legal bullet biting a financial one instead.

Rate settlement for repairs

In the settlement, Progress provides a refund of $288 million refund to customers of replacement power costs associated with the current outage. It removes the Crystal River reactors, commonly known as CR3, from base rates, starting in 2013, while the company prepares an engineering study to determine the best way to effect repairs. In return, consumer advocates, or "interveners" agreed not to file new challenges to fuel replacement costs through 2016. The reason is the settlement includes a big stick.

Progress has until the end of 2012 to begin repairs and must complete them by 2014. Otherwise, under the terms of the settlement, it could face financial penalties of $40 million if the plant isn't producing electricity by 2015 and another $60 million in penalties if the repairs stretch into 2016. Progress can charge the customers for power from the plant once it returns to service.

Progress spokesman Suzanne Grant told FCW there is no date at this time for completion of the engineering study. Critics of the utility point out that a key challenge is the first of a kind engineering work involved since no one has ever had to make these kinds of repairs to a containment structure. Given the cost of the repairs, up to $1.3 billion, and their complexity, getting a bid out the door and a contractor on-board by the end of 2012 will require a lot burning of midnight oil.

High expectations are one thing but dim prospects for payments are another

dim prospects[6]According to Grant fuel replacement costs through 2011 have totaled $478 million. Insurance coverage has included $162 million, or just one-third of fuel replacement costs, and $136 million for repairs. Given the expectation of considerably larger tabs in both categories, the question is how much of the total will be paid by insurance? Grant said that the insurance coverage provides up to $2.5 billion for repair costs per accident and $490 million in fuel replacement costs.

Progress CFO Mark Mulhern said in February during a teleconference with analysts, "it is not probable" that the insurer will voluntarily pay the full coverage amounts.

A spokesman for Nuclear Electric Insurance Limited (NEIL), which holds the insurance coverage for Progress, refused to comment to FCW on any payments it has made or scheduled for Progress. Complicating the issue is the fact Progress CEO Bill Johnson sits on NEIL's board. For his part, Johnson has said to Wall Street analysts he remains "optimistic" that the insurer will pay up.

But PSC's Rehwinkel isn't so sure telling the St. Petersburg Times Feb 16 the claims Progress has made with NEIL are bigger than anything the insurer has ever seen or expected to see.

It appears from the numbers that Progress has burned up its maximum fuel replacement coverage. As for repairs, it is possible the insurer is waiting for the engineering study before it commits to further payments for them. Since they're not talking, it's unclear what they will do.

Two new reactors for Levy County

While Progress is struggling with repairs for Crystal River, it is also working to convince rate payers, under Florida's version of CWIP, to cover costs for licensing and construction of two new reactors. Progress expects the NRC to issue licenses by the end of 2013 to construct and operate the twin reactors.

Under the utility's current schedule, the first unit would enter revenue service in 2021 and the second 18 months later. Including transmission and distribution infrastructure, the total cost, or "all in" as characterized by Grant, would be $17-22 billion. Grant says the utility will reassess its schedule and costs after it gets the licenses. That's an important caveat given the terms of the recent rate agreement with Florida's PSC.

The PSC's Public Counsel estimates the "all in" costs to be in the range of $22-25 billion. In effect, the starting point for the PSC on costs at the low end is the high point of the costs as estimated by Progress. Differences in cost estimates also reveal a problem in cost recovery from rate payers.

The settlement with the PSC limits what Progress can charge customers for construction through 2017. That provision could delay construction of the reactors. It is a squeeze play that will limit how much Progress can recover through CWIP for construction costs in the early stages of the project.

The settlement provides that Progress can collect an estimated $350 million to cover construction costs for the period 2012-2017. It will need at 15-20 times that amount in the same period to meet its self-imposed deadline of hot start for the first unit in 2021. Taken together with uncertainty about "all in" costs, and it looks like the nuclear renaissance is in trouble in Levy county.

Balbis3In fact, Florida PSC Commissioner Eduardo Balbis (right) said as much in February with regard to the settlement. He's concerned that delays in the project "could result in a reduction in the cost-effectiveness to the point where the project is no longer viable."

Balbis tempered his remark by also saying the delay of any rate impacts are "in the best interest of consumers."

What he's talking about is Florida's elderly population, which is 6% higher than the national average. Led by AARP, and other organizations representing the elderly, this group has repeatedly descended on the PSC's offices in Tallahassee raising the black flag of intergenerational conflict over CWIP for the new reactors.

PSC's Rehwinkel told FCW, "The settlement acknowledges there will be significant delay in completion" of the reactors if Progress decides to pursue construction once it receives the licenses.

He also told FCW that the Public Counsel's office will not claim it would be "imprudent" for Progress to cancel the EPC contract to build the reactors or "ultimately the project itself if that happens."

Progress merger with Duke still on

Prospects for one of the biggest planned mergers between electric utilities could end abruptly in July without completion unless a rat's nest of regulatory issues is resolved and soon. Progress and Duke Energy had planned to close last December, but that didn't happen due to concerns over markets and rates from the Federal Energy Regulatory Commission and the North Carolina Utility Commission.

On Feb 22 Duke and Progress filed a second wholesale market mitigation plan with the regulators which they hope will work. Duke spokesman Thomas Williams told FCW that despite two rounds of filings, the North Carolina regulator hasn't yet made a decision on the merger.

Williams said the merger "expires" on July 8, 2012. If that happens with no agreement, he said no decision has been made whether to try a third time to close at a later date.

Asked about financial troubles at Progress over repairs and replacement fuel costs at Crystal River, Williams would only say, "we're watching the issue."

Since May 2011 three of eight leading wall street firms who follow or who initiated coverage have downgraded Progress stock. A fourth firm which started covering the stock in 2011 initiated its rating at "underperform" relative to the recession blasted NYSE. Progress stock closed March 12 at $54.17 near its 52-week and five-year high of $56.39, which it hit on Dec 26, 2011.

Interestingly, that price was recorded two weeks after Duke and Progress announced the closing on their merger would be put off due to the rejection of their filings by FERC over the issue of market power of a combined firm.

Basics of the merger

Duke Energy announced Jan 10. 2011, it plans to buy Progress Energy for $13.7 billion in a deal that will create America’s largest utility. The new company, to be called Duke Energy, will have a combined value of $65 billion and about 57 GWe of domestic generating capacity from a diversified mix of coal, nuclear, natural gas, oil and renewable resources.

About 16% of the generating capacity of the combined firm would come from nuclear energy. It would become the largest regulated single fleet of nuclear reactors in the U.S.

Duke Energy operates the Catawba, McGuire and Oconee nuclear plants, which between them have seven nuclear units. Progress Energy operates the Brunswick, Crystal River, Harris and Robinson nuclear plants, with a total of five reactor units.

Duke has applied for licenses to build two new Westinghouse AP1000s at the William States Lee III site in South Carolina. Progress has applied for licenses to build twin AP1000s at the Levy County site on the west coast of Florida and at the Harris site in North Carolina.

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1 comment:

Robin said...

If I recall correctly, Progress did not exactly dodge a bullet. The claim that they were negligent in cutting the containment was only real if you're a journalist. After Progress presented their case to the PSC, the office of People's Counsel went direct to the negotiating table: effectively, they had no case and they knew it.