September 1999

POWER POKER: NUCLEAR FLUSH VS. DEREG STRAIGHT

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 10/99)

The U.S. is going through deregulation of the electric industry now because the nuclear power revolution launched in vertically integrated, monopoly franchised utilities failed. Federal legislation may be stalled partly because allocation of the costs of transition away from nuclear power are intertwined with the introduction of market economics into electric power supply.

Three nuclear-related developments arising out of deregulation must be dealt with: the sale and write down of nuclear facilities; the costs of decommissioning nuclear facilities; and disposition of low level nuclear waste which continues to be produced by operating facilities.

The nuclear aspects of the existing electric power industry strategy with respect to deregulation clearly now is coming into focus. The landscape is as follows:

• A handful of buyers, notably Entergy and AmerGen (PECO and British Energy).

• An increasing number of nuclear plant sellers, whether under State deregulation divestiture orders, e.g. Northeast Utilities, or under the pressure of state deregulation legislation necessitating the strategic disencumbrance of high capital cost assets.

• The possibility that if the nuclear plants are sold cheap, can have their decommissioning costs covered, and can sell energy, they can be profitable competitors for the rest of their lives.

• The even more colorful possibility that existing decommissioning funds (in place, or sustained at current levels) will be more than is required: an added asset bonus to purchasers.

The realization of this strategy by utility buyers and sellers is now coming under scrutiny on Capitol Hill, both in the electric deregulation context and outside of it.

Special legislation (H.R. 2038) was introduced to allow nuclear plant owners to continue to deduct contributions to nuclear plant decommissioning funds and to increase the amount eligible for that tax break. In the current regulated cost-of-service environment, the tax exempt status of such funds has been clear. As that regulatory environment now gives way to a market-based environment, and as utilities have begun selling nuclear plants, IRS officials have questioned the eligibility of decommissioning funds for tax deductions. At immediate issue is whether nuclear plant operators will be allowed to deduct full decommissioning costs allowed by the IRS, without reference to whether a state has deregulated. A related key question at stake is how much tax must an acquiring utility pay when it assumes a nuclear decommissioning fund as part of its purchase of a plant?

The bill – which is not part of the proposed federal deregulation act - would increase the deductible amount of fund contributions if state regulators allowed higher decommissioning charges or required accelerated payment because of ownership changes. It would limit such tax deductible contributions to a taxpayer’s current or former interest in the nuclear plant to which the funds relate.

In evaluating the legislation, Congress will have to take into account several competing policy considerations. Unfunded decommissioning liability, estimated at $25 – 30 billion, is a significant portion of nuclear utilities stranded costs. If a utility doesn’t sell a unit, but closes it prematurely, it must negotiate a deal with state regulators to assure adequate decommissioning funding.

Conversely, however, an article in Nucleonics Week raises the real possibility that at the purchase pattern set to date, profitable early shutdown may be possible. The decommissioning trust fund included in the purchase package could be sufficient, by itself, to decommission the plant when the time comes. In the deals to date, state regulators have been willing to let new owners keep any money left over in decommissioning trust, as long as the owner agrees to shoulder any cost overrun. And, low level waste ("LLW") disposal costs (roughly 30% of decommissioning costs) are now potentially coming down through the use of outsourcing to LLW waste vendors. In effect, some nuclear plant buyers (and the cognizant state ratemaking regulators) may view the purchase/decommissioning package as a "reverse turnkey" in which the buyer takes the risk and keeps the profit.

The larger energy/environment policy backdrop for the debate over who the nuclear plant winners and losers will be as a result of the transition from a regulated to a deregulated environment focuses on the extent to which provision will be made for decommissioning and/or nuclear waste disposal. Several very troubling facts have surfaced in that regard:

• A recent GAO study (May 1999) found that 36 of 76 nuclear plant licensees had not accumulated enough funds as of 1997 to cover future decommissioning expenses under the current regulatory system. It suggested that future competition in the paper industry could affect future availability of funds for that purpose. It criticized the NRC for not establishing acceptable levels of financial assurance to be maintained by utilities.

• Meanwhile, the debate continues as to a long run solution for utility off site disposal for spent fuel nuclear waste storage. Several utilities are suing the Federal Government over the unavailability of the Yucca Mountain above ground interim storage facility. At issue in proposed legislation, among other matters, is whether the U.S. Government will take title "on site" to the waste; the future source of funding of the future waste repository; and the extent of U.S. Government liability to utility suits?

The environmental movement has become increasingly cognizant of the implications of the crossing vectors of deregulation, decommissioning and the failure of waste disposal issues to be resolved. For example, in the context of the decision of Southern California Edison to speed up plans to dismantle the mothballed reactor at the San Onofre nuclear complex, a spokesman of the Union of Concerned Scientists pointed out: "If they wait to decommission their plants, there’s a concern they won’t have anyplace to send the radioactive materials."

Overall then, the nuclear decommissioning issue is taking a more central place in the deregulation debate than one would gather looking at the legislation designed to establish it. For its own reasons, the American Public Power Association is now throwing the issue on the fire, seeking to sweep in more favorable consideration of its "private use" tax issues at the same time as investor-owned utility tax issues are in the fire.

There is a nuclear glow around the edges of the electric deregulation issue now. Don’t bet against its half life – there’s too much financially and environmentally at stake. A nuclear flush can hold up a deregulation straight.
 

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.