Wednesday, June 13, 2012

Southern contends with costs at Vogtle

Who really owns them and why remains open to dispute
 
This is my updated coverage from Fuel Cycle Week, V11:N476, for 6/7/12 published by International Nuclear Associates, Washington, DC
 
ProjMgtFlowSouthern Co. through its subsidiary Georgia Power, together with its equity partners, is in negotiations with the consortium of Westinghouse and The Shaw Group over $400 million in costs attributed to schedule delays, design changes, and construction change orders for the twin 1,100 MW AP1000 reactors being built at its Vogtle site.

The utility has not agreed to the $400 million in proposed adjustments to the $6.1 billion contract price, its 45.7% share of the total of 14 billion in costs for the two new nuclear reactors. Steve Higginbottom, a spokesman, told FCW the utility is taking a hard line.

“Georgia Power has not agreed with any of these proposed adjustments or that the owners have any responsibility for costs related to these issues.”

What has been characterized as a cost overrun in the mainstream news media is in fact a major vendor dispute and a headache for all concerned. Higginbottom says there are three broad categories of possible cost increases resulting from submitted and potential change orders.
  • Pending change orders submitted by the consortium
  • Design changes made by the consortium during the Design Control Document (DCD) review process.
  • Costs associated with possible delays in the commercial operations date.
The “so what” question about costs
 
What’s at risk is who will pay them? Georgia is a state that supports “construction work in progress” or CWIP. It means Southern can come submit a rate case to the Georgia Public Service Commission (PSC) for reimbursement of costs as the reactors are being built. The practice saves hundreds of million in interest costs. Reviews are done in six month increments.

The problem for Southern is that if the EPC consortium succeeds in pushing these costs on their customer, Southern will have to either eat them or add them to a future rate case which will set off a contentious public debate over whether it is a “prudent action.”  And this is where the rubber meets the road. Southern and its equity partners do not want these costs showing up in a rate hearing.
Anti-nuclear groups have already extrapolated the $400 million to include the other equity partners claiming the total cost overrun is more than twice that amount at $900 million. The figure has made its way into media headlines.

Higginbottom disputes it. He calls it a number “prepared by others” and says it has no relevance to the cost issues at hand.

It is in Southern’s interests to contain the costs. The firm doesn’t want to eat them any more than the consortium does hence the reason the two groups are at loggerheads.

The Georgia PSC has already fired a warning shot across Southern’s bow. PSC Chairman Tim Echols said May 9 that he’s concerned Southern may ask ratepayers to foot the $400 million bill.

What’s driving the DCD costs?
 
Of the three cost categories, the second and third groups are explicitly called out by Higginbottom as being types of costs that Georgia Power does not agree to accept. In the 10-Q filed May 7 with the SEC, the company says the outcome of failed negotiations with the consortium may result in litigation.

What’s not clear is what’s driving either of these new costs. Design changes that took place during the DCD process, leading up to the NRC license, could have resulted from several factors. Southern won’t say when these design changes took place or what they were for. The design control document (DCD) went through 19 iterations before being accepted by the NRC.

One possible reason for the changes is that the NRC said in its review of one or more iterations prior to the 19th revision that data on components or design did not meet regulatory requirements, or, were incomplete. Georgia Power believes the responsibility for costs associated with these changes are the responsibility of Westinghouse and The Shaw Group.

Another possible reason is that the consortium, as vendors, changed some things through their procurement process resulting in new components being ordered to save money, construction time, etc. Paradoxically, an effort to save money may have wound up costing more.

Shaw was tagged by the NRC last January over its quality assurance program. Since then, both the company and the NRC say this issue is largely resolved. Dave McIntyre, a spokesman for the NRC, told FCW “the staff found the manufacturing process at Shaw to be acceptable.”

Problems in the basement no bargain
 
For proprietary reasons, George Power won’t go into detail about what’s in the $400 million in disputed costs that could affect the third category which is the completion date for each reactor. Two recent findings by the NRC about construction at the Vogtle site  have risen to the top on the short list of possible cost drivers.

Vogtle-new-nuclear-plant-foundation-workThe first is the rebar, or steel reinforcing rods, that is eventually covered with concrete in the foundation and primary containment structure. The second is the basemat which is the concrete floor on which the rest of the entire reactor structure sits.

Both issues involve the NRC’s review of construction work. Dave McIntyre, a spokesman for the agency, told FCW the license amendment request for the basemat relates to tolerances regarding its thickness. The NRC is reviewing a requested change in tolerances, but won’t make a decision until next October.

The big issue regarding the rebar, which was revealed in April, is more serious. The NRC said in an inspection report that Southern Nuclear “departed from the referenced certified design without NRC approval.”

McIntyre says Southern has two options. The first is rip out some or all of the rebar that is in place and install new steel correctly. The second is submit a license amendment request, or LAR, to get acceptance of the rebar that is in place accepted by the NRC.

Rebar results in delays
 
According to a review of the cost issues gaining attention by the Georgia Public Service Commission, William Jacobs, an independent construction monitor hired by the PSC, says some of the rebar will have to be removed, replaced according to the correct specifications, and in compliance with industry standards for concrete related to the basemat reinforcement.

Southern’s Higginbottom told FCW that the firm is working with Westinghouse to revise the construction drawings to comply with the requirements in the DCD.

Jacobs notes that the decision to remove some of the rebar, rather than contest the NRC report, came after lengthy negotiations between Southern and its EPC contractors.

Jacobs claims this path forward could add a three month delay, from June to September, for pouring concrete. No concrete can be poured in the affected construction areas until the NRC inspector signs off on the rebar.

Jacobs also warns that in his assessment, which is heavily redacted due to the proprietary design information in it, that the Vogtle project could be up to 12 months behind schedule when you take the rebar and basemat issues into account.

Southern disputes the analysis telling FCW “the company believes the targets related to schedule and cost to customers are achievable. With Unit 3 coming on line in 2016 and Unit 4 in 2017.”

Jacobs estimates the change in completion time will be about seven months, from April 2016 to November 2016 for Unit 1, and from April 2017 to November 2017 for Unit 2.

While the seven month change in the commercial operation date (COD) still has each unit coming online in the same calendar year, in a $14 billion project, a schedule delay of even a few months can run into significant money.

Jacobs’ judgment about schedule juggling
 
There’s a another question about Southern’s claim. It is based on a separate element of Jacobs’ report that there is no integrated schedule for the entire project taking it to completion. He says it is being managed in 60-to-90 day increments.

Jacobs’ judgment is that the causes of project delays, responsibility for them, and for their associated costs, must be resolved before all parties, the equity partners, and the EPC consortium, can agree on an integrated schedule.

The lack of an integrated schedule also has downstream implications for future cost issues. Jacobs writes that design engineering packages, which drive procurement, are running late. However, without an integrated schedule, it is impossible to tell what these delays cost.

Finally, Jacobs says that even without an integrated schedule, he estimates the commercial operation dates for the two reactors will be pushed back by seven months each.

Southern believes it can make up the lost time, but Jacobs is not so sure. He writes that a first of a kind project “of this magnitude and complexity” can’t be managed effectively with 60-to-90 day forecasts or over the long term.

If the EPC consortium prevails, either through negotiations, or as an outcome of litigation, then two predictions in Jacobs’ report will come to pass. He wrote the company will need to request an increase in the certified cost and a change in the certified schedule which will be later than the current completion date.

Southern VP for Nuclear Construction David McKinney appears to agree. He told AP on June 2 the current completion dates can’t be sustained “without some kind of potential adjustment if these cost pressures continue to mount.”

Southern spokesman Higginbottom told FCW any cost overruns would be balanced against $2 billion in cost savings from lower than expected interest rates, lower commodity costs, and production tax credits. He adds in the possible benefits of a federal loan guarantee, but at this point few are betting on it.

No loan guarantee in sight

Two years ago, when U.S. President Barack Obama announced with great fanfare the $8.3 billion federal loan guarantee for the Vogtle project, only a few fiscal experts knew how hard it was going to be to execute it.

The reason is the loan guarantee term sheets don’t apply equally to each of the equity partners in the Vogtle project. There is no umbrella limited liability company or other corporate entity that owns the new reactors or the financing of the project.

Instead, each equity partner brings financing to cover construction costs based on its respective share. Southern, through its Georgia Power utility subsidiary, owns 45.7% of it.

This separation of equity shares creates a cascading series of loan guarantee issues. First, the guarantee coverage is allocated based on partner shares of the expected $14 billion in costs. Second, each equity partner winds up with its own risk premium for its share of the coverage—and these numbers turn out to vary quite a bit.

According to Energy Department documents released May 23 to anti-nuclear groups under a Freedom of Information Act request, Georgia Power would be assessed a credit subsidy fee of 0.5- 1.5% for its 45.7% share. Oglethorpe Power (31.6%) could be hit with a fee of 2.5-4.3%, while the Municipal Electric Authority of Georgia (22.7%) could see fees as high as 5-11%.

None of the equity partners have signed off with DOE for their part of the loan guarantee. Southern spokesman Higginbottom told FCW completion of the two reactors doesn’t depend on getting the loan guarantee, but the company will take it if it can get it.

”Southern Company’s exceptional financial strength and 30-year history of safely operating nuclear plants make it a solid, credit-worthy candidate for the DOE loan guarantee.”

It seems unlikely the other equity partners would sign up a loan guarantee at higher rates than offered to the anchor partner.

In statements released after this article went to press, both sides said they would continue to negotiate on the issues to seek an equitable solution for loan guarantees for the project’s partners.

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