Public Policy

Chairman Alexander, Ranking Member Graham, and members of the Subcommittee, my name is Jim Asselstine. I am a Managing Director at Lehman Brothers, where I am the senior fixed income research analyst responsible for covering the electric utility and power sector. In that capacity, I provide fixed income research coverage for more than 100 U.S. electric utility companies, power generators, and power projects. As a research analyst, I also work closely with the large institutional investors who have traditionally been a principal source of debt financing for the power industry. I appreciate your invitation to testify at today’s hearing regarding new nuclear power generation in the United States. In my testimony today, I intend to discuss seven requirements that I believe must be met if the industry is to decide to enter into commitments to build new nuclear power plants in this country, and if analysts and investors are to support that decision.

The first requirement is the continued strong regulatory and economic performance of our existing nuclear plants. By way of background, we currently have 103 operating nuclear units in the United States. These units are located in 31 states and are operated by 27 different companies. Together, these plants represent about 97 gigawatts of generating capacity, or about 12 percent of total U.S. capacity. Because these are baseload plants that operate with high reliability, these units produce more than 20 percent of total U.S. electric output. The plants consist of two reactor types: 69 are pressurized water reactors; and 34 are boiling water reactors. Of our existing fleet, the last unit to enter commercial operation was TVA’s Watts Bar 1 unit in June 1996.

Following the enactment of the Energy Policy Act of 1992, analysts and investors focused considerable attention on the transition arrangements as we moved from regulated to competitive markets, and especially on the ability of the utilities to recover their stranded costs. (Stranded costs represent the difference between the book value of the utility’s assets and their market value in the competitive market.) In many instances, capital investment in the existing nuclear plants represented a substantial portion of the utility’s stranded costs. To date, about half of the states have adopted restructuring plans for the power industry. In essentially all cases, these plans have provided the utilities a fair opportunity over the transition period to competitive markets to recover most or all of their stranded costs. Further, the states have provided for the continued recovery and collection of nuclear plant decommissioning costs from retail ratepayers, recognizing that nuclear plant decommissioning is a health and safety requirement and a financial obligation that was largely incurred during the period of regulated operations. We have also seen considerable consolidation in the ownership and operation of the U.S. nuclear plant fleet. This consolidation has taken place through traditional mergers, purchases of nuclear units by other utilities, corporate restructurings, and new operating arrangements. Taken together, these industry restructuring arrangements have treated the existing nuclear plants in a fairly benign manner.

We have also seen significant improvement in the regulatory, operating, and economic performance of the existing plants over the past decade. The number of significant events reported to the Nuclear Regulatory Commission has declined substantially, as has the average duration of refueling outages. Average capacity factors for the U.S. nuclear fleet have improved significantly, and production costs have declined. As a consequence, a well-run single nuclear unit now has production costs, including fuel, operations and maintenance expenses, ongoing capital requirements, general and administrative expenses, and taxes, of about $20/megawatt-hour, and large, multi-unit plants have production costs of below $20/megawatt-hour. These production costs compare very favorably with other forms of generation, including coal-fired and gas-fired power plants. With the current high natural gas price environment, nuclear units, like coal-fired plants, are viewed by both the industry, and analysts and investors, as attractive assets. One issue affecting analyst and investor perceptions of the performance of the existing nuclear plants is the need for effective inspection and maintenance practices to maintain the material condition of the plants. As a result of the extended shutdown of FirstEnergy’s Davis-Besse plant, the financial community is sensitized to the adverse economic impacts of poor maintenance practices that result in a substantial degradation of the physical condition of important plant equipment. The industry will need to continue to pursue aggressive inspection and maintenance programs to ensure that material condition problems are identified and corrected at an early stage, before they result in serious degradation of important safety equipment.

My second requirement for future commitments to new nuclear plants is that those units must be cost competitive with other generation alternatives, most notably gas-fired and coal-fired generation. As we move to more competitive power markets, industry decisions on new generation, and how the financial community perceives those decisions, will be driven by the relative cost, and the risks and uncertainties associated with the available alternatives. As discussed above, the strong operating performance of the existing plants demonstrates that production costs for a new nuclear plant should be very competitive with other alternatives, especially if the new plant design represents an evolutionary step beyond the existing plant designs. The other variable is the capital cost of building the plant. Here, new nuclear units, and for that matter, new coal plants, face some challenges when compared with gas-fired generation. Nuclear and coal plants have a more complex construction process, and take considerably longer to build, than gas-fired plants. This results in higher capital costs and higher interest costs during the construction period. Also, a longer time period is required to recover the investment after the plant has entered commercial operation. Taking into account these factors, I agree with the industry representatives that a new nuclear plant will need to have a capital cost in the range of $1,000-$1,200/kilowatt in order to be cost-competitive with the other available alternatives.

My third requirement is the need for a high degree of assurance that a new nuclear unit will be built at a predictable cost and on a dependable schedule. The industry and the financial community remember that a number of the existing plants that received their operating licenses in the 1980s and 1990s experienced delays due to regulatory or licensing issues that arose after most or all of the capital investment in the plant had been made. These delays were caused by a number of factors, including construction issues, quality assurance weaknesses, coordination issues between plant design and construction work, changing requirements, and the mechanics of the two-stage licensing process, which resulted in litigation at the pre-operation stage. The Energy Policy Act of 1992 and subsequent actions by the NRC have put in place a new regulatory process that should result in the resolution of licensing issues at an early stage in the process before large capital commitments to build the plant have been made. This new regulatory process provides for the pre-approval of new, standardized plant designs, allowing for the resolution of regulatory issues and the completion of substantial design work before construction work begins. The process also provides for the pre-approval of nuclear plant sites. As is the case with the design approval process, the use of early site permits should allow major siting questions to be resolved before a decision is made to proceed with a new plant. Finally, and perhaps most importantly, the new process provides for the issuance of a combined construction and operating license. The objective of the combined license, together with an agreement on the regulatory standards to be applied by the NRC in monitoring the construction process, is to resolve all key safety and regulatory issues before the start of plant construction, and to minimize the risk of delays in plant operation after the capital investment has been made. The NRC and the industry are now implementing and validating the standard design approval and early site permit features. This will provide some assurance that the new regulatory process will work as intended. Unfortunately, however, some uncertainty will remain until the first few plants have successfully completed the entire process of receiving a combined license, completing construction, and entering commercial operation. Until we gain this experience for the initial plants, both the industry and the financial community are likely to require some added measures to mitigate this construction completion and initial plant performance risk.

My fourth requirement is the need for appropriate financing arrangements to cover the construction costs of a new nuclear plant. Historically, our existing nuclear units were financed by electric utilities as part of their regulated utility operations. Typically, the utility would demonstrate that the new nuclear unit was needed and represented the best available alternative. Following state regulatory approval and receipt of a construction permit from the NRC, the utility would proceed with construction. Most construction costs were met by the utility with a combination of cash from its other utility operations, and the proceeds of new debt and equity issuance by the utility or its parent company. Recovery of most of the investment in the plant would not take place until after the plant had received an operating license from the NRC, the plant had entered commercial operation, and the state regulators had determined that the investment in the plant was prudent and recoverable from ratepayers. Although there were some unpleasant surprises in terms of state regulatory disallowances of some investments in the current generation of nuclear units, this system worked fairly effectively as a means to finance new plant construction in the 1980s and 1990s. Going forward, a utility that elected to build a new nuclear unit could finance that plant as part of its regulated utility operations.

Given the move to deregulated power markets, however, it is perhaps more likely that a future nuclear unit would be built and operated by a competitive generation company. Investors have been willing to invest in generation companies that have a substantial component of operating nuclear plants in their generation mix, especially if those plants have a solid track record of operating performance, are cost-competitive in their regional markets, and the generation company has stable revenues tied ultimately to retail customers or load-serving entities. Although it would be challenging, it is conceivable that a large competitive generating company with a diverse portfolio of operating assets, could finance the construction of a new nuclear unit with appropriate mitigation of construction completion and initial operation risk. Another alternative would be to finance a new nuclear unit through a consortium of a number of experienced nuclear companies, including utilities or generation companies, and manufacturers and suppliers. The consortium approach has the advantage of limiting the financial risk to any single party, but has other potential operational disadvantages. The most challenging alternative would be to attempt to finance a future nuclear plant on a stand-alone basis without recourse to another company or companies with other assets and revenues. Given the uncertainties associated with an untested licensing process, the length of the construction process, and the cost of the project, this non-recourse financing approach does not appear to be feasible without substantial financial risk mitigation features.

My fifth requirement is the need for a continued low cost supply of fuel and enrichment services given that low and stable fuel costs are an important component of the cost-competitiveness of nuclear units. With ample supplies of uranium, multiple sources of enrichment services, and new proposals for enrichment providers, this requirement appears to pose limited risk.

My sixth requirement is public acceptance. Public acceptance of new nuclear plant commitments will likely turn on two issues: public perceptions of the safety of nuclear plants; and confidence that we will achieve a workable solution for spent fuel disposal. Public perceptions on the safety issue will likely be determined by the ongoing performance record of our existing plants. Continued progress in developing, licensing, building, and ultimately, operating a waste repository will likely be the determining factor on the spent fuel disposal issue.

Finally, extension of the Price-Anderson Act will be needed to extend the nuclear liability indemnification system to new nuclear plants. It is doubtful that the industry or the financial community would proceed with a new plant commitment without this system in place.

Mr. Chairman, your staff also raised several questions regarding TVA’s ongoing program to return Browns Ferry Unit 1 to service, and its implications for future nuclear plant development in this country. The Browns Ferry Unit 1 refurbishment and restart effort is a significant undertaking, with a program that is expected to take up to five years and result in up to 2,400 temporary jobs, and with a cost estimate of $1.7-$1.8 billion. It appears that the Browns Ferry Unit 1 refurbishment effort will be the most extensive effort involving a nuclear plant since the completion of the last round of new plant construction in the mid-1990s. As such, I believe that TVA’s experience can be very valuable in building confidence within the industry and within the financial community that the scope of construction work on a new plant can be managed effectively. If TVA and the NRC can work effectively on this project, and if TVA can complete the refurbishment process and return Browns Ferry Unit 1 to service within the projected budget and time schedule, this would represent a positive contribution. But because Browns Ferry Unit 1 has an operating license, this refurbishment process will probably not reduce the uncertainties around the as-yet untested combined construction and operating license process. Conversely, cost overruns and delays could have negative implications depending upon the causes.

The experience that engineering, procurement, and construction contractors have obtained on certain international nuclear power projects is also relevant in terms of building confidence within the U.S. industry and the financial community about a future nuclear plant here. Several of the international projects now underway are likely to be similar to the new standardized designs that would form the basis for a new plant order in the United States. Continued success in completing those international projects on budget and on schedule should provide added confidence in the schedules and cost estimates for new U.S. plants. Again, unfortunately, until we gain actual experience with the new NRC regulatory process, that major area of uncertainty will remain.    
 
In terms of potential financial community investment in the restart of Browns Ferry Unit 1, TVA has stated that it expects to be able to fund the cost of the refurbishment program and still achieve its debt reduction objectives. TVA enjoys strong and exceptionally broad-based investor support for its Power Bonds due to its very high credit quality, its status as a wholly-owned corporation of the U.S. government, its successful and low cost generation and transmission operations, and its rate-setting authority. It appears that TVA will be able to execute and finance its Browns Ferry Unit 1 restart effort as currently contemplated. It is possible that the restart program for that unit or another nuclear unit with an operating license could attract other sources of financing if needed, but the more extensive the effort, and the more it resembles the scope and scale of new plant development, the more the financing constraints and conditions for a new plant, discussed above, will apply. Thank you.