Synthesis/Regeneration 11   (Fall 1996)

Competition & Nuclear Power: A Dangerous Combination

by James Riccio, Public Citizen's Critical Mass Energy Project

The nuclear power industry is about to face the greatest threat to its continued relevance as a source of electricity. This crisis has not been brought about by the insoluble problems of long lived radioactive wastes or the all too prevalent safety problems at U.S. reactors. The nuclear power industry is threatened because, for the first time, it will have to compete with other sources of electricity.

For the first 30 years of its existence the nuclear power industry operated as a regulated monopoly. Within this environment, it did not matter how efficiently utilities produced electricity ; electric utilities were essentially guaranteed a lucrative rate of return on their investments.. In general, state regulators allowed electric utilities to recover their costs plus approximately 10 to 12%. With a guaranteed rate of return on their investments, many utilities opted to construct highly capital intensive power plants-nuclear power plants.

At the dawn of the nuclear age the public was promised "energy too cheap to meter." However, the rosy picture painted by nuclear proponents has not come to pass. Rather than providing an inexpensive source of electricity, nuclear power has proven to be an extremely complex and costly means of boiling water. The change to a competitive, market based regulatory environment has left many reactor owners attempting to justify continued operation of expensive nuclear power plants.

. . .nuclear power has proven to be an extremely complex and costly means of boiling water.

In 1992, Congress mandated that utilities allow other generators to use their transmission lines at a reasonable price. This prompted states to propose various ways of allowing competition in the electric utility industry. California, Rhode Island, New Hampshire and Massachusetts have proposals to allow retail competition in the next few years. Federal legislation that will be debated on Capitol Hill next year will likely mandate that all states implement retail competition; but can nuclear power compete?

In 1993, the Edison Electric Institute, undertook a study of competitiveness in the nuclear industry. The results were so abysmal that EEI refused to release its findings to the public. Reports in the trade press indicated that only a quarter of US nuclear plants produced electricity more cheaply than the average cost of replacement power. Even if reactors could cut their operations and maintenance costs by 30%, one third of US reactors would still be more expensive than the cost of electricity available in their own region. The study concluded that premature shut downs of noncompetitive nuclear reactors are likely.

However, shutting down nuclear reactors is not as simple as it might seem. Many of these reactors have cost billions of dollars to construct. That cost has been written off over the forty year license of the reactor. If a nuclear plant is shut down prior to the expiration of the license, the utility may not have recouped its investment. Additionally, the utility will not have sufficient funds set aside to decommission the nuclear reactor or deal with the high level radioactive wastes remaining at the reactor site.

The significance of the impact that competition will have on nuclear utilities has not been lost on the financial community. Wall Street analysts acknowledge that utility bondholders are facing greater financial risk due to the change from a regulated to a competitive market. Several nuclear utilities have already witnessed a down rating of their bonds to reflect the new competitive reality.

Michael Yokell, a utility analyst with RCG/Hagler Bailly, a Colorado-based consulting firm predicts that with the advent of competition, unrecovered costs for nuclear plants, called "stranded costs," could total as much as $70 billion. Bankruptcies and large federal bailouts can not be ruled out for those utility companies with high cost nuclear plants.

The problem of stranded nuclear assets has many utilities between a rock and a hard place Utility executives don't want their shareholders to have to eat the stranded investment and are seeking means to shift the cost to rate payers. Even if nuclear utilities can avoid bankruptcy by shifting the cost of stranded nuclear reactors to the consumer, they will place themselves at a competitive disadvantage. The recovery of stranded nuclear investments will be reflected in higher electricity rates, which in turn makes the utility less competitive. If utilities continue to operate high-priced nuclear reactors the consumers will not see the benefits of competition reflected in lower utility bills. A 1995 study conducted by the ICF/Kaiser consulting group found that if nuclear reactors are allowed to operate until their licenses expire, consumers would be charged an additional $551 billion over market prices. Rather than being "too cheap to meter," nuclear reactors have proven to be too expensive to tolerate.

If nuclear reactors prove too expensive to operate but too costly to shutdown, we could have an economic recipe for a nuclear disaster.

At the Nuclear Regulatory Commission's (NRC) regulatory information conference, held in Washington this April, a panel discussion addressed the impact of competition on nuclear power plants. In a paper presented at the conference, David Penn, deputy executive director of the American Public Power Association, warned that stranded cost "should in any case be identified for what it really isūcompensation for uneconomic assets. . ." Penn argued against full recovery of stranded investment stating that "this is a proposition that has no economic justification, is inherently anti-competitive and unlikely to withstand judicial scrutiny."

The NRC has long been aware of the problems posed by a changing regulatory environment. Former NRC Chairman Ivan Selin acknowledged that economic pressure brought on by competition provides utilities with an incentive to cut corners. In a press briefing prior to resigning his chairmanship, Selin noted that"(e)ven financially sound utilities are under great pressure to reduce their rates, to be competitive. They may be tempted to put off capital additions we consider necessary to maintain equipment in top shape. We have to be much more alert about the safety implications."

Selin's successor as NRC Chairman has voiced similar concerns regarding the impact of competition on reactor safety. In a speech before the Korean Atomic Industrial Forum this April, NRC Chairman Shirley Ann Jackson acknowledged that "economic pressures might cause electric utilities to cut costs and safety upgrades."

While acknowledging that competition may make nuclear reactors even more dangerous, the NRC has done little to improve the situation. The agency's response to the competitive conundrum faced by utilities has been to allow nuclear reactors to continue splitting atoms when regulations require that they be shut down. This policy is known as "enforcement discretion." Since 1990, the NRC has used this policy over 400 times to allow nuclear reactors to violate regulations and either restart or continue operating. While the agency has attempted to justify this policy from a safety perspective , it is little more than an attempt at boosting reactor availability and thus the economic performance of nuclear utilities.

Chairman Jackson has said that she doesn't believe in regulation by exemption and, to her credit, she has severely limited the practice of enforcement discretion. However, this doesn't mean nuclear reactors will operate more safely. Rather than allowing nuclear reactors to violate NRC regulations, like her predecessors, her agency is busy obliterating the regulations. Under the guise of adopting new and improved technical standards, the NRC is currently in the process of removing 40% of the requirements that limit the operation of nuclear reactors. These requirements, known as limiting conditions of operation or LCOs have been in place since the reactors received permission to split atoms. Once nuclear reactors adopt the new standards, they will no longer need to request NRC enforcement discretion because the regulations will no longer exist. It seems to make little difference whether requirements are not enforced or simply deregulated. In either case, safety is compromised.

Competition and nuclear power may prove to be a dangerous combination.

The NRC and the nuclear industry have already shown a remarkable disdain for reactor safety regulations. There seems to be little hope that this situation will improve under the increased economic pressure of competition. If nuclear reactors prove too expensive to operate but too costly to shutdown, we could have an economic recipe for a nuclear disaster.

James Riccio is the staff attorney for Public Citizen's Critical Mass Energy Project. Public Citizen is a consumer advocacy organization founded by Ralph Nader in 1971. Critical Mass was founded in 1974 to address the problems posed by nuclear reactors and the radioactive waste they produce.

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