Making White Elephants Fly

In the summer of 1998, after about a year of peddling its Oyster Creek nuclear plant and finding no takers, GPU Inc. appeared resigned to shutting the unit down. Aging, inefficient, and economically uncompetitive, Oyster Creek was a prime example of how nuclear power--the ultimate energy boondoggle--wouldn't survive in the new world of deregulated energy markets. But this past fall, GPU announced it had actually found a buyer. At $10 million, one-sixtieth of the plant's $600-million valuation, AmerGen Energy Company got a real bargain. In fact, the company, a joint venture between Philadelphia-based PECO Energy Company and British Energy, was formed explicitly to scavenge the nation's unwanted nuclear units. It has made similar offers on six other plants and plans to buy many more. PECO, which is merging with the Midwest's utility behemoth Unicom, is fast becoming the country's nuclear powerhouse. Another company, Entergy Corporation, is also eyeing the nuclear market and has already completed a deal to buy a plant in Massachusetts.



Given the industry's history, expanding into nuclear power might seem ridiculous. But as Oyster Creek's $10-million price tag demonstrates, nuclear reactors are going for clearance prices--subsidized, of course, by consumers. Thanks to these subsidies, white-elephant nuclear power plants are enjoying a second childhood. Ironically, these bailouts are part of energy "deregulation," which supposedly subjects electric utilities to the discipline of market forces.



In the words of antinuclear activist Paul Gunter, "These plants are selling for the cost of fuel, with the reactors tossed in as a freebie." The utilities, eager to shed their nuclear holdings, can afford to part with the plants for cheap because under state deregulation laws, the consumer pays off the remaining construction debt--the enormous capital costs that made nuclear power so expensive and, therefore, uncompetitive.





The Great Bailout



So far, 24 states have begun opening their energy markets to competition. These are states with higher-than-average energy prices, usually because of utilities' unwise investments. In the past, nuclear power plants sometimes ate up billions of dollars before producing a single kilowatt. The escalating costs of building nukes have been ascribed both to tougher regulations implemented after the Three Mile Island accident in 1979 and to utility incompetence. These plants have generated some of the most expensive power in the country.



During the past few years, as states moved to restructure their energy markets, legislators debated how to deal with nuclear plants and other bad investments, which the utilities euphemistically termed "stranded costs" or "stranded assets." The utilities contended that they would not be able to compete in an open market against firms with no previous baggage unless consumers paid off the remaining capital costs.



In the era of regulation, customers typically paid for bad decisions that had been sanctioned by regulators. In the jousting over the terms of deregulation, some consumer and environmental groups argued that utilities often invested in these ventures over local objections, so utility shareholders should bear some, if not all, of the costs as the companies move to a competitive market. However, in every state deregulation scheme, utilities and their shareholders won huge bailouts by ratepayers, amounting to billions of dollars that will be tacked onto millions of customers' electricity bills over the course of several years.





Footloose and Debt Free



Sloughing off the debt makes nuclear power plants artificially competitive, even against the cheapest power sources. Because most plants have two or three decades left on their licenses, this could amount to a very shrewd investment for AmerGen or Entergy. Evaluating only production costs, the Nuclear Energy Institute (NEI) predicts plants' generating prices will be roughly on par with coal: nuclear power at 1.9 cents per kilowatt, coal at 1.8 cents per kilowatt. For example, the Limerick plant in Pennsylvania, which is owned by PECO, generates power at 1.43 cents a kilowatt-hour after deregulation, when most of the capital costs have been written off. But if capital costs are figured in, the company estimates the plant's power would cost eight cents a kilowatt-hour.



During atomic energy's half-century of commercial existence, the industry has survived on the public dole, clinging to life supported by subsidy after subsidy. Nuclear has become the most heavily subsidized energy source, from the industry's federally backed insurance limiting utilities' liability to ratepayers who absorbed the enormous construction costs through years of high energy prices, to billions of dollars in federal research and development funding. Now, even their recycling to new owners is being subsidized.



But this latest ratepayer bailout changes the very economics of the nuclear business. This is particularly galling because one of the initial promises of energy deregulation was that the most efficient technologies would win out in a free market, dooming economic and environmental dinosaurs like nuclear. Instead, the mechanics of "deregulation" have produced a sheltered market in which uneconomical facilities are shielded from the rigors of competition and ratepayers are no longer protected by regulation. Plus, the new nuclear owners will most likely find a heightened demand for their product in a market characterized by increasingly tight capacity, where the strong economy and consumer needs are eating away at surpluses that have typified U.S. energy markets in recent years.



This is not to say that the new owners of a nuclear plant aren't making a financial bet. Major repairs on nuclear plants can be very expensive. More importantly, the sale of used plants does not herald a full-scale nuclear revival. Nuclear has been on the wane since the Three Mile Island accident and the vigorous protests that followed, when plans for nearly 100 plants were scrapped. Even if the Nuclear Regulatory Commission approves 40-year extensions of some plants' licenses, nobody thinks it makes economic sense to build a new plant.





Nuking Consumers



Strangely, these transactions are often presented as a good deal for consumers. In news reports about the $10-million sale of Oyster Creek, GPU spokesmen have highlighted the $200 million ratepayers will supposedly save. But those savings are a calculation of the amount consumers would have paid into the decommissioning fund if the plant were shut down early, leaving out the roughly $590 million ratepayers will cough up to relieve GPU of the debt associated with the plant.



Or take the example of the Pilgrim plant in Massachusetts. Entergy, a New Orleans-based company that is also the public utility in Louisiana, paid Boston Edison Company $81 million for a plant with a book value of $700 million. Under the agreement, approved last summer, Entergy also received a decommissioning fund worth $466 million--a dowry that will pay to dismantle the plant once the license expires and the reactor is shut down for good. Consumers have already paid around $200 million into the fund, and Boston Edison will raise the rest from charges on electricity bills.



For Boston Edison, this sale means the company is absolved of future responsibility for the plant, including the hassle of the eventual shutdown while consumers pay the debts from past construction and repairs. Of the $1 billion the company's customers are paying for all of Boston Edison's "stranded costs," over $500 million is from the Pilgrim plant alone. Consumers will cover this debt through "transition" charges on their electricity bills.



Like Oyster Creek, the Pilgrim plant wasn't supposed to be a prime candidate for acquisition; it was just too expensive to operate. Deregulation was expected to reveal that reality, not camouflage it. In fact, one of the more centrist environmental groups, the Conservation Law Foundation (CLF), helped successfully fight a referendum last year that would have overturned Massachusetts's deregulation law because the group believed the law would be good for the environment. CLF's campaign literature maintained that competition would "hasten the retirement of the region's old, dirty, and inefficient coal- and oil-fired power plants and its nuclear units." Under this theory, the polluters would then have been replaced with cleaner, combined-cycle gas turbine plants.



Of course, that hasn't played out. Once its capital costs are written off and charged to ratepayers, an already constructed plant has an obvious advantage--you don't have to pay to build it. In the early 1980s, the story was quite different; utilities built lots of power plants in anticipation of high demand that never materialized, explained David Penn, the deputy executive director of the American Public Power Association. Since then, no companies or utilities have built new base-load generating plants, focusing instead on smaller ones that can be operated during times of peak need. So deregulation won't drive environmentally questionable facilities out of business. Rather, many energy analysts and environmentalists predict older plants will continue to operate while more plants are simply added to the mix.





Nuclear Antiques



For AmerGen, the economies of scale achieved by owning a large collection of plants is critical to the company's strategy. In practical terms it will mean, for example, running a number of plants in the same geographical area with management and outage teams traveling from unit to unit, said Bill Jones, a spokesman for the company. Deb Katz, the executive director of the Citizen Awareness Network in western Massachusetts, pointed out that after the nuclear industry in Britain was privatized under British Energy's care, the work force maintaining the country's 11 plants was severely pared down. The British nuclear regulatory body criticized the staff reductions as potentially dangerous in a draft report leaked to the media this summer, although those concerns were reportedly toned down in later drafts.



More immediate than the somewhat distant possibility of a serious accident, this decision to extend nuclear power's life-span is also a decision to continue producing radioactive waste that, as of yet, has no final destination. Under a 1982 law, the ultimate responsibility rests with the federal government, which was supposed to build a repository for commercial waste by 1998. That hasn't happened, leaving around 40,000 tons of waste sitting at 72 reactor sites around the country. The waste--uranium pellets stored in 12-foot-long rods--is kept in pools of water and boron, a chemical that prevents nuclear chain reactions. Some older plants are running out of space in these spent fuel storage pools and are forced to store the excess in aboveground dry casks.



Meanwhile, the radioactive material's ultimate resting place--where it will lie buried for 10,000 years--is nowhere near receiving final approval. The Department of Energy is conducting extensive evaluations of only one site, a desert ridge in Nevada called Yucca Mountain. If approved, the site won't be ready to begin receiving shipments for at least a decade.



Despite this problem of nuclear waste with no place to go, the industry is already selling itself as an environmentally friendly alternative to fossil fuels. "If anything is going to be done with regard to achieving limits [to meet proposed international air standards], nuclear energy is going to have to play a huge role," said Steve Kerekes, a spokesman for the NEI. This is a shopworn argument with nuclear proponents, who have always aggressively sold this spin to policy makers, partially to explain the hefty subsidies the industry has received over the years. During the oil crises in the 1970s, nuclear power was supposed to shelter the United States from dependence on foreign fossil fuel. Now, the industry has jumped aboard international efforts to decrease air pollution.



The NEI has already run two different magazine and newspaper ad campaigns about nuclear power's purported environmental advantages in the past two years, although the group maintained they were directed at lawmakers, not consumers. Nevertheless, the Natural Resources Defense Council and other organizations challenged the first round of ads at the Better Business Bureau of New York, questioning the depiction of nuclear energy as "environmentally clean." The bureau agreed and forwarded the matter to the Federal Trade Commission, which has yet to take action.





While environmentalists are up in arms, Wall Street likes what it sees. Many analysts expect a consolidation of which companies own the remaining nukes, a trend that mirrors the intense consolidation currently taking place in the energy industry at large, exemplified by PECO's recent decision to merge with Unicom. There are 103 operating nuclear plants in the country; between them, Unicom and PECO own 14 (with AmerGen's six potential acquisitions, the new company's total will be 20 nuclear plants).



In its proposed purchase of six nuclear units, AmerGen will spend from $10 million to $100 million. The company has made offers on the Oyster Creek plant and has bought the unmelted unit at Three Mile Island, which was also owned by GPU. Plus, AmerGen plans to purchase Vermont Yankee and two reactors at Nine Mile Point in New York, and has completed a deal on the Clinton plant in Illinois. All of these deals, which need approval from various regulators, will probably be completed by the end of this spring. Overall, AmerGen's stated business plan is to acquire up to 20 plants. Of the possible contenders, the Northeast Utilities plants in Connecticut and New Hampshire are slated to go on the auction block soon. Entergy has so far only bought the Pilgrim plant in Massachusetts but has intentions to buy four more units by 2003. All of these units come with substantial decommissioning trust funds to pay for the extensive cleanup of the sites after the reactors are closed down for good.



Substantial indeed. Compared to the $316.5 million AmerGen is spending to acquire six nuclear plants, the company will receive $1.7 billion in accompanying trust funds, which will ultimately be paid by consumers. One of the gambles here is that AmerGen will be able to decommission these plants--a process that entails entirely decontaminating the site of all traces of radioactive material--for cheaper than the collected stash. The company's argument is that AmerGen is assuming the risk of having to pay out more for the cleanup if the estimates are overly optimistic, so they should also be able to reap the rewards. But the decommissioning funds are supplied with ratepayer dollars, and many environmental groups are alarmed that a profit motive could influence the cleanup process.



Furthermore, it is not clear whether this windfall will be tax free. Basically, either the IRS or Congress must decide what the tax status of these funds will be as they move from a state regulated utility to a for-profit company. If AmerGen and Entergy get out of paying any tax on the transfers, environmentalists agree they should be forced to share any excess bounty with ratepayers. If not, a couple of decades down the road, consumers and taxpayers will find that they are being ripped off yet again for the same plants. ยค

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