NEWS

Nuclear power project financing option sticks ratepayers with tab

By John Russell
john.russell@indystar.com

Who pays the bill when the cost of a nuclear power project goes wildly over budget?

Thirty years ago — the last time this question came up in Indiana — the answer was clear: The utility would swallow the cost. And it did. Public Service Indiana nearly went bankrupt in 1984 when construction costs soared to $2.5 billion at its Marble Hill Nuclear Power Station in southern Indiana. The distressed company pulled the plug. The half-built plant was later dismantled and sold for parts.

But that could change.

Around the country, including in Indiana, a move is growing to shift up-front costs of potential nuclear power projects from utilities to ratepayers.

In states from Florida to South Carolina, utilities can bill customers billions of dollars for engineering and construction costs — usually years before a single kilowatt hour of electricity is generated, and sometimes even if the plant is never built.

So when construction costs soar, as they often do, it's not the utility, but homeowners, shops and steel mills that keep paying the tab.

The idea was floated here earlier this month by state Sen. James Merritt, powerful chairman of the Senate Utilities Committee.

Merritt introduced a bill that would allow utilities to build a nuclear power plant, or a new, smaller generation of nuclear generators called small modular reactors, and pass along the engineering and construction costs to customers years before the plant goes into operation.

The bill was assigned to Merritt's committee three weeks ago. But in a surprise move, Merritt said on Jan. 21 he would not move the bill forward, saying that no utilities or big industrial customers in Indiana had expressed any interest in nuclear power. He did not rule out reintroducing the bill next year.

A longtime supporter of nuclear energy, Merritt said the topic "needs to be kept fresh in the minds of Hoosiers." He said nuclear energy is safe and reliable and will be increasingly needed as federal regulations on coal plants push up the price of electricity in Indiana.

Indiana relies primarily on coal for electricity. It is one of the few Midwestern states with no nuclear plants. Nuclear advocates tout nuclear power as a "clean energy," meaning it produces energy by splitting uranium atoms, but does not emit carbon dioxide, sulfur dioxide or nitrogen oxides, as traditional coal-fired power plants do.

But nuclear plants use large amounts of water for steam production and for cooling. They also generates spent uranium fuel which is stored in pools or steel-lined, concrete vaults for decades.

In the past few years, Indiana lawmakers and regulators have expressed growing interest in small modular reactors — a new generation of nuclear power a fraction of the size of traditional power plants.

It's a technology that's still on the drawing board. No small modular reactors have been licensed or built. Some say it could be another decade or so before the technology is ready for prime time.

The modular reactors are designed to be built in factories and assembled on-site on about 40 to 100 acres, a fraction of the space needed for a traditional nuclear power plant, which can sprawl over 1,000 acres.

"I am interested in nuclear power as a whole — both small and large power packs," Merritt wrote in a statement.

But giving construction incentives to utilities to build nuclear plants can sometimes backfire, with ratepayers picking up the bill for billions of dollars — sometimes even when a plant is canceled.

Leaning on ratepayers

With the cost of nuclear plants often running into the tens of billions of dollars, utilities are increasingly turning to a controversial financing procedure called Construction Work in Progress, or CWIP.

That allows the utilities to pass the front-end costs to ratepayers years in advance of the plant going on line.

Electric and nuclear trade associations defend CWIP as a way to save millions of dollars in construction borrowing costs — savings they say they pass onto consumers.

But a review of CWIP financing shows that nuclear projects and large coal-generated power plants that use them often run into huge cost overruns.

Consider the experience in Florida. In 2006, the Florida legislature passed a CWIP bill, allowing utilities to charge ratepayers up front for construction costs of nuclear power plants. Supporters said it was a way to get nuclear plants built faster and cheaper. Opponents called the bill "crony capitalism," saying it would shift the risk of start-up costs onto ratepayers in the form of higher utility bills, while utility investors would reap the profits.

Two years later, the new Florida law got a taker. Progress Energy filed an application to build a nuclear plant in central Florida, estimating it would cost $5 billion. But over the next few years, the price tag climbed to more than $20 billion, due to delays and larger-than-expected costs.

Then things got complicated. In 2010, Florida utility regulators rejected Progress's request for $368 million in rate increases around the state. In response, Progress said it would stop spending on nuclear power plants, delaying the new plant. In response, lawmakers revised the law that guaranteed Progress could shift all construction costs onto ratepayers.

In 2012, Progress was bought by Duke Energy. A year later, Duke said it was shelving the new Florida nuclear plant, citing delays and "regulatory uncertainties."

But Florida ratepayers are still on the hook. Over the years, Progress and Duke have collected about $1.5 billion from ratepayers — and do not have to pay it back.

"Thank, you, Tallahassee, for making us pay so much for nothing," read a headline in the Tampa Bay Times last summer, in a sentiment aimed at state lawmakers.

Critics says CWIP is hard to stop once it gets started, regardless of the cost.

"Once you pass these things, and once these guys start spending billions of dollars, they become freight trains you just can't stop," said Mark Cooper, a longtime critic of nuclear power and senior fellow at the University of Vermont.

Florida isn't alone. Around the county, other major nuclear or coal plants are being built under CWIP laws.

In Georgia, a project to build two additional reactors at Southern Co.'s Plant Vogtle was originally estimated to cost $14 billion. It is now almost two years behind schedule and nearly $1 billion over budget.

The Nuclear Energy Institute, a trade association based in Washington, said that despite the overruns, the projects will reap benefits for decades in the form of low-cost energy.

"Add to that the long-term value of diversifying the electricity mix with a low-carbon technology," institute spokesman Steven Kerekes wrote in an email.

In Mississippi, the construction cost of a new coal-gasification plant has jumped from $2.8 billion to more than $5 billion. The state legislature had allowed the owner, Southern Co., to charge customers for the up-front construction costs, a move that pushed monthly bills up 15 percent this year alone.

In Indiana, the only power plant to be built under CWIP financing is Duke Energy's coal-gasification plant in Edwardsport. The cost of the plant, originally approved at $1.9 billion, has soared to more than $3.3 billion, with ratepayers picking up much of the increase.

Analyzing the track record

Some critics point to the track record and say CWIP is an open checkbook for big energy companies who can't get funding for expensive new plants from banks or Wall Street.

"It's simply an ATM card for utilities," said Grant Smith, a longtime utility-consumer advocate and senior energy policy adviser at the Civil Society Institute. "It is a power plant tax."

Yet CWIP has its advocates, including the Edison Electric Institute, a trade association and lobbying group in Washington that represents the investor-owned electric utilities. The institute has supported its members who have sought CWIP in some cases, saying it would lower the cost of borrowing, ultimately benefiting ratepayers.

Jon Corley, a spokesman for Edison Electric, said CWIP isn't the reason the Mississippi plant went over cost. He said that plant is a first of its kind, using unique and expensive carbon-capture technology that will make the plant cleaner.

"But obviously, the public doesn't like it, because they're on the hook for part of the cost," Corley acknowledged. "But I wouldn't necessarily say CWIP is the reason these projects do go over cost."

Supporters also say CWIP is necessary because building a nuclear plant, even a small modular reactor, is so expensive that banks and Wall Street have shied away. They say they need ratepayers to help with the up-front costs that will generate benefits down the road.

But critics say the reason Wall Street won't finance nuclear power is not because it is too expensive, but because it's a losing economic proposition. Other forms of energy, including natural gas, are much cheaper today.

Wall Street, after all, invests heavily in other billion-dollar industries, from computer-chip factories to energy pipelines.

"The test that nuclear can't pass isn't how big it is, but whether energy can be generated at much lower cost in other ways," said Peter Bradford, a former member of the U.S. Nuclear Regulatory Commission and former chair of the New York and Maine utility regulatory commissions. "The answer is clearly yes."

A looming issue is how much a new nuclear project will cost — even at the small modular reactors, which are still years away from going from the drawing board to production. It's difficult to give a price for one, since a utility has yet to buy or build one.

Several energy contractors, including Babcock & Wilcox and NuScale, did not return calls from The Indianapolis Star to discuss prices or market interest in their small reactors.

Even with so many unknowns, the federal government is pushing small reactors. The Department of Energy is offering $452 million in matching grants to subsidize design and licensing costs. It predicts a small reactor could come online by 2020.

Some taxpayer groups are pushing back, saying the technology is too uncertain and the price too high. Taxpayers for Common Sense, a tax-watchdog group based in Washington, D.C., gave a "Golden Fleece Award" to the Department of Energy for the grant program.

"The nuclear industry has a tradition of rushing forth to proclaim that a new technology, just around the corner, will take care of whatever problem exists," the group said in a statement. "Unfortunately, these technologies have an equally long tradition of expensive failure."

But the conversation over nuclear power in Indiana — and who will pay for it — is sure to continue for years to come.

"I'm often asked about it," Senator Merritt said, "and I believe we need to educate the public."

Call Star reporter John Russell at (317) 444-6283 and follow him on Twitter @johnrussell99.