Nuclear Regulation: NRC Needs More Effective Analysis to Ensure Accumulation of Funds to Decommission Nuclear Power Plants
Published: 2003-10-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Following the shutdown of a nuclear power plant a significant radioactive waste hazard remains until the waste is removed and the plant site decommissioned. In 1999, GAO reported that the combined value of the owners' decommissioning funds was insufficient to ensure enough funds would be available for decommissioning. GAO was asked to update its 1999 report and to evaluate the Nuclear Regulatory Commission's (NRC) analysis of the owners' funds and its process for acting on reports that show insufficient funds.
section_title: What GAO Found
paragraphs: Although the collective status of the owners' decommissioning fund accounts has improved considerably since GAO's last report, some individual owners are not on track to accumulate sufficient funds for decommissioning. Based on our analysis and most likely economic assumptions, the combined value of the nuclear power plant owners' decommissioning fund accounts in 2000--about $26.9 billion--was about 47 percent greater than needed at that point to ensure that sufficient funds will be available to cover the approximately $33 billion in estimated decommissioning costs when the plants are permanently shutdown. This value contrasts with GAO's prior finding that 1997 account balances were collectively 3 percent below what was needed. However, overall industry results can be misleading. Because funds are generally not transferable from funds that have more than sufficient reserves to those with insufficient reserves, each individual owner must ensure that enough funds are available for decommissioning its particular plants. We found that 33 owners with ownership interests in a total of 42 plants had accumulated fewer funds than needed through 2000 to be on track to pay for eventual decommissioning. In addition, 20 owners with ownership interests in a total of 31 plants recently contributed less to their trust funds than we estimate they needed to put them on track to meet their decommissioning obligations. NRC's analysis of the owners' 2001 biennial reports was not effective in identifying owners that might not be accumulating sufficient funds to cover their eventual decommissioning costs. In reviewing the 2001 reports, NRC reported that all owners appeared to be on track to have sufficient funds for decommissioning. In reaching this conclusion, NRC relied on the owners' future plans for fully funding their decommissioning obligations. However, based on the owners' recent actual contributions, and using a different method, GAO found that several owners could be at risk of not meeting their financial obligations for decommissioning when these plants stop operating. In addition, for plants with more than one owner, NRC did not separately assess the status of each co-owner's trust funds against each co-owner's contractual obligation to fund decommissioning. Instead, NRC assessed whether the combined value of the trust funds for the plant as a whole was reasonable. Such an assessment for determining whether owners are accumulating sufficient funds can produce misleading results because owners with more than sufficient funds can appear to balance out owners with less than sufficient funds even, though funds are generally not transferable among owners. Moreover, NRC has not established criteria for taking action if it determines that an owner is not accumulating sufficient funds.

section_title: Letter
paragraphs: Following the retirement of a nuclear power plant and removal of the  plant’s spent or used fuel, a significant radioactive waste hazard remains  until the waste is removed and disposed of, and the plant site  decommissioned. Decommissioning of existing plants is expected to cost  nuclear power plant owners about $33 billion dollars. The Nuclear  Regulatory Commission (NRC), which licenses nuclear power plants,  requires plant owners to submit biennial reports on decommissioning  funding that, among other things, provide financial assurance that enough  funding will be available when the power plants are retired.
In 1999, we reported that the combined value of the owners’  decommissioning trust fund accounts (as of the end of 1997) was 3 percent  less than needed to ensure that enough funds would be available when the  plants are retired. In addition, we found that NRC had not established  criteria for responding to unacceptable levels of financial assurance. In  December 2001, we reported that transfers of plant licenses among  companies stemming from economic deregulation and the restructuring of  the electricity industry had, in many cases, increased assurances that new  plant owners would have sufficient decommissioning funds when their  plants are retired. Nevertheless, in some instances, NRC’s evaluation of the  adequacy of funding arrangements was not rigorous enough to ensure that  decommissioning funds would be adequate.
In this context, you asked us to update our earlier findings on the adequacy  of owners’ decommissioning funds. Specifically, this report (1) assesses the  extent to which nuclear plant owners are accumulating funds at sufficient  rates to pay decommissioning costs when their plants’ licenses expire and  (2) evaluates NRC’s analysis of the owners’ 2001 biennial reports and its  process for acting on reports that show unacceptable levels of financial  assurance.
As part of our review, we collected data from the 2001 biennial reports on  estimated decommissioning costs and actual decommissioning trust fund  balances, generally as of December 31, 2000, for 122 nuclear power plants  licensed by NRC. In addition, we surveyed the owners of the plants to  determine how the trust fund balances were invested in 2000 and to  identify the annual amounts that the owners had contributed to the trust  funds in recent years. Eighty-two percent of the owners responded to our  survey. Using an approach similar to that used for our 1999 report, we  analyzed both the combined efforts of all owners to accumulate funds to  decommission all of the nuclear plants and each individual owner’s efforts  to accumulate funds for decommissioning each of its plants. For our  analysis, we estimated the most likely future values of key assumptions,  such as decommissioning costs, earnings on the decommissioning funds’  assets, and the operating life of each plant. To address the inherent  uncertainty associated with forecasting outcomes many years into the  future, we also analyzed the effect of using pessimistic and optimistic  values for these key assumptions. To evaluate NRC’s analysis of the  biennial reports and its process for acting on reports that have not satisfied  decommissioning funding assurance requirements, we reviewed NRC’s  guidelines and policies for analyzing these reports and interviewed NRC’s  officials about how they conducted their analysis. Appendix I provides  more detail on the scope and methodology of our review.
subsections: section_title: Background
paragraphs: NRC’s primary mission is to protect the public health and safety, and the  environment, from the effects of radiation from nuclear plants, materials,  and waste facilities. Because decommissioning a nuclear power plant is a  safety issue, NRC has authority to ensure that owners are financially  qualified to decommission these plants.
Of the 125 nuclear power plants that have been licensed to operate in the  United States since 1959, 3 have been completely decommissioned. Of the  remaining 122 plants, 104 currently have operating licenses (although 1 has  not operated since 1985), 11 plants are in safe storage (SAFSTOR) awaiting  active decommissioning, and 7 plants are being decommissioned. At the  time of our analysis, 43 plants were co-owned by different owners.
NRC regulations limit commercial nuclear power plant licenses to an initial  40 years of operation but also permit such licenses to be renewed for  additional 20 years if NRC determines that the plant can be operated safely  over the extended period. NRC has approved license renewals for 16 plants  (as of August 20, 2003).
In 1988, NRC began requiring owners to (1) certify that sufficient financial  resources would be available when needed to decommission their nuclear  power plants and (2) require them to make specific financial provisions for  decommissioning. In 1998, NRC revised its rules to require plant owners to  report to the NRC by March 31, 1999, and at least once every 2 years  thereafter on the status of decommissioning funding for each plant or  proportional share of a plant they own. Under NRC requirements, the  owners can choose from one or more methods, including the following, to  provide decommissioning financial assurance:    prepayment of cash or liquid assets into an account segregated from the  owner’s assets and outside the owner’s administrative control;  establishment of an external sinking fund maintained through periodic  deposit of funds into an account segregated from the owner’s assets and  outside the owner’s administrative control;  use of a surety method (i.e., surety bond, letter of credit, or line of credit  payable to a decommissioning trust account), insurance, or other  method that guarantees that decommissioning costs will be paid; and  for federal licensees, a statement of intent that decommissioning funds  will be supplied when necessary.
In September 1998, NRC amended its regulations to restrict the use of the  external sinking fund method in deregulated electricity markets. Prior to  this time, essentially all nuclear plant owners chose this method for  accumulating decommissioning funds. However, under the amended  regulations, owners may rely on periodic deposits only to the extent that  those deposits are guaranteed through regulated rates charged to  consumers.
In conjunction with its amended regulations, NRC issued internal guidance,  describing the process for reviewing the adequacy of a prospective owner’s  financial qualifications to safely operate and maintain its plant(s) and the  owner’s proposed method(s) for ensuring the availability of funds to  eventually decommission the plant(s). The guidance outlines a method  for evaluating the owner’s financial plans for fully funding  decommissioning costs. In addition, the guidance states that, except under  certain conditions, the NRC reviewer should, when plants have multiple  owners, separately evaluate each co-owner’s funding schedule for meeting  its share of the plant’s decommissioning costs.
section_title: Despite Industry-wide Improvement, Some Owners of Nuclear Power Plants Are Not Accumulating Sufficient Decommissioning Funds
paragraphs: Using our most likely economic assumptions, the combined value of the  nuclear power plant owners’ decommissioning trust funds was about 47  percent higher at the end of 2000 than necessary to ensure accumulation of  sufficient funds by the time the plants’ licenses expire. This situation  contrasts favorably with the findings in our 1999 report, which indicated  that the industry was about 3 percent below where it needed to be at the  end of 1997 to ensure that enough funds would be available. However,  because owners are not allowed to transfer funds from a trust fund with  sufficient reserves to one without sufficient reserves, overall industry  sufficiency can be misleading. When we individually analyzed the owners’  trust funds, we found that 33 owners for several different plants had not  accumulated funds at a rate that would be sufficient for eventual  decommissioning.
subsections: section_title: Collectively the Nuclear Power Industry Is on Pace to Accumulate More Than Sufficient Funds for Decommissioning
paragraphs: Through 2000, the owners of 122 operating and retired nuclear power  plants collectively had accumulated about 47 percent more funds than  would have been sufficient for eventually decommissioning, using our most  likely economic assumptions. Specifically, the owners had accumulated  about $26.9 billion—about $8.6 billion more than we estimate they needed  at that point to ensure sufficient funds. This situation contrasts with the  findings in our 1999 report, which indicated that the industry had  accumulated about 3 percent less than the amount we estimated it should  have accumulated by the end of 1997.
Using alternative economic assumptions changes these results. For  example, under higher decommissioning costs and other more pessimistic  assumptions, the analysis shows that the combined value of the owners’  accounts would be only about 0.2 percent above the amount we estimate  the industry should have collected by the end of 2000. (See app. II for our  results using more optimistic assumptions.)
The collective improvement in the status of the owners’ trust funds (under  most likely assumptions) since our last report is due to three main factors.  First, all or parts of the estimated decommissioning costs were prepaid for  15 plants when they were sold to new owners. For example, the seller  prepaid $396 million when the Pilgrim 1 nuclear plant was sold in 1998 for  the plant’s scheduled decommissioning in 2012.  Second, for 16 other  plants, NRC approved 20-year license renewals, which will provide  additional time for the owners to make contributions and for the earnings  to accumulate on the decommissioning fund balances. Third, owners  earned a higher rate of return on their trust fund accounts than we  projected in our 1999 report. For example, the average return on the trust  funds of owners who responded to our survey was about 8.5 percent  (after-tax nominal return) per year, from 1998 through 2000, instead of the  approximately 6.25 percent per year we had assumed. The higher return  was a result of the stronger than expected performance of financial  markets in the late 1990s. Since that time, however, the economy has  slowed and financial markets—equities in particular—have generally  performed poorly.
section_title: Several Owners Are Not Accumulating Sufficient Funds for Decommissioning Their Plants
paragraphs: In contrast to the encouraging industry-wide results, when we analyzed the  owners’ trust fund accounts individually, we found that several owners  were not accumulating funds at rates that would be sufficient to pay for  decommissioning if continued until their plants are retired. Each owner has  a trust fund for each plant that it owns in whole or in part. For example, the  Exelon Generation Company owns all or part of 20 different plants. For this  analysis, we assessed the status of 222 trust funds for 122 plants owned in  whole or part by 99 owners. As shown in table 1, using our most likely  assumptions, 33 owners of all or parts of 42 different plants (50 trust funds)  had accumulated less funds than needed through 2000 to be on track to pay  for eventual decommissioning (see app. II for details). Thirteen of these  plants were shut down before sufficient funds had been accumulated for  decommissioning. Although the remaining 78 owners of all or parts of 93  plants (172 trust funds) had accumulated more funds than we estimate they  needed to have at the end of 2000, funds are generally not transferable from  owners who have more than sufficient reserves to other owners who have  insufficient reserves. Under our most likely assumptions, the owners whom  we estimate to be behind will have to increase the rates at which they  accumulate funds to meet their eventual decommissioning financial  obligations.
For our analysis, we compared the trust fund balance that individual  owners had accumulated for each plant by the end of 2000 with a  “benchmark” amount of funds that we estimate they should have  accumulated by that date. In setting the benchmark, we assumed that the  owners would contribute increasing (but constant present-value) amounts  annually to cover eventual decommissioning costs. For example, at the  end of 2000, an owner’s decommissioning fund for a plant that had  operated one-half of a 40-year license period (begun in 1980) should  contain one-half of the present value of the estimated cost to  decommission the owner’s share of that plant in 2020. Although this  benchmark is not the only way an owner could accrue enough funds to pay  future decommissioning costs, it provides both a common standard for  comparisons among owners and, from an equity perspective among  ratepayers in different years, a financially reasonable growing current- dollar funding stream over time. Appendix I describes our methodology in  more detail.
The status of each owner’s fund balance at the end of 2000 is not, by itself,  the only indicator of whether an owner will have enough funds for  decommissioning. Whether the owner will accumulate the necessary funds  also depends on the rate at which the owner contributes funds over the  remaining operating life of the plant; by increasing their contribution rates,  owners whose trust fund balances were below the benchmark level could  still accumulate the needed funds. Consequently, for the owners who  provided contributions information to us, we also analyzed whether their  recent contribution rates would put them on track to meet their  decommissioning obligations. For this second analysis, we compared the  average of the amounts contributed in 1999 and 2000 (cost-adjusted to  2000) with a benchmark amount equivalent to the average yearly present  value of the amounts the owners would have to accumulate each year over  the remaining life of their share of the plants to have enough  decommissioning funds.
As table 2 shows, 28 owners with ownership shares in 44 different plants  (50 trust funds) contributed less than the amounts we estimate they will  need to meet their decommissioning obligations, under our most likely  assumptions.
We compared the owners in table 1 with those in table 2 to see whether  owners who are behind in balances were making up their shortfalls with  recent increases in contributions. Of the 33 owners who we estimate had  less than the benchmark balances through 2000, 26 owners of all or parts of  38 plants provided contributions information. Of these owners, only 8  owners of all or parts of 9 plants appeared to be making up their shortfalls  with recent increases in contributions. By contrast, 20 owners with  ownership interests in 31 plants recently contributed less to their trust  funds than we estimate they needed to put them on track to meet their  decommissioning obligations.
These results would change under alternative economic assumptions. For  example, if economic conditions improve to those assumed in our  optimistic scenario, of the 20 owners who were below the benchmark  under most likely assumptions on both balances and contributions, 12  owners would still be below the benchmark in both categories, even under  optimistic assumptions.
However, if economic conditions worsen to those in our pessimistic  scenario, 34 owners who were above the benchmark under most likely  assumptions on either balances or contributions would be below either of  these benchmarks under pessimistic assumptions. (See app. II for detailed  results.)
section_title: NRC’s Analysis Did Not Effectively Determine Whether Each Owner Was Accumulating Sufficient Decommissioning Funds
paragraphs: NRC’s analysis of the 2001 biennial decommissioning status reports was  not effective in identifying owners that might not be accumulating funds at  sufficient rates to pay for decommissioning costs when their plants are  permanently shut down. Although the NRC reported in 2001 that all owners  appeared to be on track to have sufficient funds for decommissioning, our  analysis indicated that several owners might not be able to meet financial  obligations for decommissioning. NRC’s analysis was not effective for two  reasons. First, NRC overly relied on the owners’ future funding plans, or on  rate-setting authority decisions, in concluding that the owners were on  track to fully fund decommissioning. However, as discussed earlier, based  on actual contributions the owners had recently made to their trust funds,  several owners are at risk of not accumulating enough funds to pay for  decommissioning. Second, for the plants with more than one owner, NRC  did not separately assess the status of each co-owner’s trust funds relative  to the co-owner’s contractual obligation to fund a certain portion of  decommissioning. Instead, NRC combined funds on a plant-wide basis and  assessed whether the combined trust funds would be sufficient for  decommissioning. Such an assessment method can produce misleading  results because the owners with more than sufficient trust funds can  appear to balance out those with insufficient trust funds. Furthermore, if  NRC had identified an owner with unacceptable levels of financial  assurance, it would not have had an explicit basis for acting to remedy  potential funding deficiencies because it has not established criteria for  responding to unacceptable levels of financial assurances.
NRC officials said that their oversight of the owners’ decommissioning  funds is an evolving process and that they intend to learn from their review  of prior biennial reports and make changes to improve their evaluation of  the 2003 biennial reports. However, they also said that any specific changes  they are considering are predecisional, and final decisions have not yet  been made.
subsections: section_title: NRC’s Review Relied on Owners’ Future Plans for Making Contributions
paragraphs: According to NRC officials, in reviewing the 2001 biennial reports, they  used a “straight-line” method to establish a screening criterion for  assessing whether owners were accumulating decommissioning funds at  sufficient rates. Specifically, NRC compared the amount of funds  accumulated through 2000 (expressed as a percentage of the total  estimated cost as of 2000 to decommission the plant) to the expended plant  life (expressed as a percentage of the total number of years the plant will  operate). Under this method, the owner of a plant that has operated for  one-half of its operating life would be expected to have accumulated at  least one-half of the plant’s estimated decommissioning costs (that is, it  would be collecting at or above the straight-line rate). NRC found that the  owners of 64 out of 104 plants currently licensed to operate were collecting  at the above a straight-line rate, and that the owners of the remaining 40  plants were collecting at the less than a straight-line rate.
On a plant-wide basis, NRC then reviewed the owners’ “amortization”  schedules for making future payments to fully fund decommissioning. The  schedules, required as part of the biennial reports, consist of the remaining  funds that the owners expect to collect each year over the remaining  operating life of the plants. In estimating the funds to be collected, the  owners may factor in the earnings expected from their trust fund  investments. To account for such earnings, NRC regulations allow an  owner to increase its trust fund balance by up to 2 percent per year (net of  estimated cost escalation), or higher, if approved by its regulatory rate- setting authority, such as a state public utility commission. Because these  owners’ amortization schedules identified sufficient future funds to enable  them to reach the target funding levels, NRC concluded that all licensees  appear to be on track to fund decommissioning when their plants are  retired.
However, relying on amortization schedules is problematic, in part because  the actual amounts the owners contribute to their funds in the future could  differ (that is, worsen) from their planned amounts if economic conditions  or other factors change. NRC officials said that owners are not required by  regulation to report their recent actual contributions to the trust funds, and  NRC does not directly monitor whether the owners’ actual contributions  match their planned contributions. Consequently, NRC relies on the  owners’ amortization schedules as reported in the biennial reports.
Such reliance is also problematic because in developing their amortization  schedules, the owners could use widely varying rates of return to project  the earnings on their trust fund investments. For example, each of the three  co-owners of the Duane Arnold Energy Center nuclear plant assumed a  different rate, ranging from 2 to 7 percent (net of estimated cost  escalation). Other factors being equal, the owners using the higher rates  would need to collect fewer funds than the owner using the lower rate of  return. While the return that each owner actually earns on its investments  may be higher or lower than these rates, by relying on the owners’  amortization schedules, NRC effectively used a different set of  assumptions to evaluate the reasonableness of the trust funds accumulated  by each owner. Consequently, NRC did not use a consistent “benchmark” in  assessing the owners’ trust funds. By contrast, we used historical trends  and economic forecasts to develop assumptions about rates of earnings  and other economic variables, applied the same assumptions in evaluating  the adequacy of each owner’s trust fund, and based expected future  contributions on actual amounts contributed in recent years.
section_title: NRC’s Analysis Focused on the Adequacy of Trust Funds on a Plant-by-Plant Basis
paragraphs: NRC’s internal guidance for evaluating the biennial reports states that for  plants having more than one owner, except in certain circumstances, each  owner’s amortization schedule should be separately assessed for its share  of the plant’s decommissioning costs. For those plants that have co- owners, NRC used the total amount of funds accumulated for the plant as a  whole in its analysis. However, as we demonstrated with our industry-wide  analysis, such an assessment for determining whether owners are  accumulating sufficient funds can produce misleading results because  owners with more than sufficient funds can appear to balance out owners  with less than sufficient funds, even though funds are generally not  transferable among owners.
In explaining their approach, NRC officials said that the section of the  guidance that calls for a separate evaluation of each owner’s amortization  schedule for its share of the plant is not compulsory. In addition, they said  that they consider each owner’s schedule to determine the total funds for  the plant as a whole, but they believe that the same level of effort is not  required for each individual trust fund balance unless there is a manifest  reason to do so. They also stated that NRC’s regulations do not prohibit  each co-owner from being held responsible for decommissioning costs,  even if these costs are more than the co-owner’s individual ownership  share. However, assessing the adequacy of decommissioning costs on a  plant-wide basis is not consistent with the industry view, held by most plant  owners, that each co-owner’s responsibility should be limited to its pro rata  share of decommissioning expenses and that NRC should not look to one  owner to “bail out” another owner by imposing joint and several liability on  all co-owners. NRC has implicitly accepted this view and has  incorporated it into policy to continue it. In a policy statement on  deregulation, NRC stated that it will not impose decommissioning costs  on co-owners in a manner inconsistent with their agreed-upon shares,  except in highly unusual circumstances when required by public health and  safety considerations and that it would not seek more than the pro rata  shares from co-owners with de minimis ownership. Nevertheless, unless  NRC separately evaluates each co-owner’s trust fund, NRC might  eventually need to look to require some owners to pay more than their  share.
section_title: NRC Has Not Established Criteria for Responding to Unacceptable Levels of Financial Assurance
paragraphs: While the NRC has conducted two reviews of the owners’ biennial reports  to date, it has not established specific criteria for responding to any  unacceptable levels of financial assurances that it finds in its reviews of the  owners’ biennial reports. As we noted in our 1999 report, without such  criteria, NRC will not have a logical, coherent, and predictable plan of  action if and when it encounters owners whose plants have inadequate  financial assurance. NRC officials said that their oversight of the owners’  decommissioning funds is an evolving process, and they are learning from  their prior reviews. However, they also said that any specific changes they  are considering are predecisional and final decisions have not yet been  made.
The absence of any specific criteria for acting on owners’ decommissioning  financial reports contrasts with the agency’s practices for overseeing safety  activities at nuclear power plants. According to NRC, its safety assessment  process allows it to integrate information relevant to licensee safety  performance, make objective conclusions regarding the information, take  actions based on these conclusions in a predictable manner, and effectively  communicate these actions to the licensees and to the public. Its oversight  approach uses criteria for identifying and responding to levels of concern  for nuclear plant performance. In determining its regulatory response, NRC  uses an “Action Matrix” that provides for a range of actions commensurate  with the significance of inspection findings and performance indicators. If  the findings indicate that a plant is operating in a way that has little or no  impact on safety, then NRC implements only its baseline inspection  program. However, if the findings indicate that a plant is operating in a way  that implies a greater degree of safety significance, NRC performs  additional inspections and initiates other actions commensurate with the  significance of the safety issues. A similar approach in the area of financial  assurance for decommissioning would appear to offer the same benefits of  objectivity and predictability that NRC has established in its safety  oversight.
section_title: Conclusions
paragraphs: Ensuring that nuclear power plant owners will have sufficient funds to  clean up the radioactive waste hazard left behind when these plants are  retired is essential for public health and safety. As our analysis identified,  some owners may be at risk of not accumulating sufficient trust funds to  pay for their share of decommissioning. NRC’s analysis was not effective in  identifying such owners because it relied too heavily on the owners’ future  funding plans without confirming that the plans were consistent with  recent contributions. Moreover, it aggregated the owners’ trust funds plant- wide instead of assessing whether each individual owner was on track to  accumulate sufficient funds to pay for its share of decommissioning costs.  In addition, NRC has not explained to the owners and the public what it  intends to do if and when it determines an owner is not accumulating  sufficient trust funds. Without a more effective method for evaluating  owners’ decommissioning trust funds, and without criteria for responding  to any unacceptable levels of financial assurance, NRC will not be able to  effectively ensure that sufficient funds will be available when needed.
section_title: Recommendations for Executive Action
paragraphs: To ensure that owners are accumulating sufficient funds to decommission  their nuclear power plants, we recommend that the Chairman, NRC,  develop an effective method for determining whether owners are  accumulating funds at sufficient rates to pay for decommissioning. For  plants having more than one owner, this method should include separately  evaluating whether each owner is accumulating funds at sufficient rates to  pay for its share of decommissioning. We further recommend that the  Chairman, NRC, establish criteria for taking action when NRC determines  that an owner or co-owner is not accumulating decommissioning funds at a  sufficient rate to pay for its share of the cost of decommissioning.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to NRC for its review and comment.  NRC’s written comments, which are reproduced in appendix III, expressed  three main concerns regarding our report. First, NRC disagreed with our  observation that its analyses of funding levels of the co-owners of a nuclear  plant are inconsistent with its internal guidance. We revised the report to  remove any inferences that NRC was not complying with its own guidance.  While clarifying this point, we remained convinced that NRC needs to do  more to develop an effective method for assessing the adequacy of nuclear  power plant owner’s trust funds for decommissioning. NRC’s current  practice is to combine the trust funds for all co-owners of a nuclear plant,  then assess whether the combined value of the trust funds is sufficient.  However, as our analysis indicates, NRC’s practice of combining the trust  funds of several owners for its assessment can produce misleading results  because co-owners with more than sufficient funds can appear to balance  out those with less than sufficient funds. As a practical matter, owners  have a contractual agreement to pay their share of decommissioning costs,  and owners generally cannot transfer funds from a trust fund with  sufficient reserves to one without sufficient reserves. While NRC  recognizes that private contractual arrangements among co-owners exist,  the agency stated that it reserves the right, in highly unusual situations  where adequate protection of public health and safety would be  compromised if such action were not taken, to consider imposing joint and  several liability on co-owners for decommissioning funding when one or  more co-owners have defaulted. Nonetheless, we believe that NRC should  take a proactive approach, rather than simply wait until one or more co- owners default on their decommissioning payment expenses, to ensure  that sufficient funds will be available for decommissioning and that the  adequate protection of public health and safety is not compromised. Such  an approach, we believe, would involve developing an effective method  that, among other things, separately evaluates the adequacy of each co- owner’s trust fund.
Second, NRC disagreed with our view that some owners are not on track to  accumulate sufficient funds for decommissioning. NRC’s position is that it  has a method for assessing the reasonableness of the owners’ trust funds  and that our method has not been reviewed and accepted by NRC. While  we recognize that NRC has neither reviewed nor accepted our method, our  report identifies several limitations in NRC’s method that raise doubts  about whether the agency’s method can effectively identify owners who  might be at risk of not having sufficient funds for decommissioning. A  particularly problematic aspect of this method is NRC’s reliance on the  owners’ future funding plans to make up any shortfalls without verifying  whether those plans are consistent with the owners’ recent contributions.  We found some owners’ actual contributions in 2001 were much less than  what they stated in their 2001 biennial reports to NRC that they planned to  contribute. For example, one owner contributed about $1.5 million (or 39  percent) less than the amount they told NRC that they planned to  contribute.  In addition, based on our analysis using actual contributions  the owners had recently made to their trust funds, we found that 28 owners  with ownership shares in 44 different plants contributed less than the  amounts we estimate they will need to make over the remaining operating  life of their plants to meet their decommissioning obligations. Therefore,  we continue to believe that some owners are not on track to accumulate  sufficient funds to pay for decommissioning.
Finally, NRC disagreed with our view that it should establish criteria for  responding to owners with unacceptable levels of financial assurance. NRC  stated that its practice is to review the owners’ plans on a case-by-case  basis, engage in discussions with state regulators, and issue orders as  necessary and appropriate. Since NRC has never identified an owner with  unacceptable levels of financial assurance, it has never implemented this  practice. We believe that NRC should take a more proactive approach to  providing owners and the public with a more complete understanding of  NRC’s expectations of how it will hold owners who are not accumulating  sufficient funds accountable. As stated in our draft report, this lack of  criteria is in contrast to NRC’s practices in overseeing safety issues at  nuclear plants, where the NRC uses an “Action Matrix” that provides for a  range of actions commensurate with the significance of safety inspection  findings and performance indicators. In the area of financial assurance, a  similar approach could involve monitoring the trust fund deposits of those  owners who NRC determines are accumulating insufficient funds to verify  that the deposits are consistent with the owners’ funding plans.
We conducted our review from June 2001 to September 2003 in accordance  with generally accepted government auditing standards. Unless you  publicly announce the contents of this report earlier, we plan no further  distribution until 30 days from the report date. At that time, we will send  copies of this report to the appropriate congressional committees; the  Chairman, NRC; Director, Office of Management and Budget; and other  interested parties. We will also make copies available to others upon  request. In addition, this report will be available at no charge on the GAO  Web site at http://www.gao.gov. If you or your staff have any questions,  please call me at (202) 512-6877. Key contributors to this report are listed in  appendix IV.
section_title: Scope and Methodology of Our Analysis of the Decommissioning Trust Funds
paragraphs: This appendix describes the scope and methodology of our review for our  first objective: the extent to which nuclear power plant owners are  accumulating funds at sufficient rates to pay decommissioning costs when  their plants’ licenses expire.
In addressing this objective, we analyzed the status of the  decommissioning trust funds from two perspectives. First, we analyzed  whether the industry as a whole is accumulating funds at rates that would  be sufficient for decommissioning. For this analysis, we combined the trust  funds of the owners of 122 nuclear plants. We then compared our results  with those of our 1999 report to see whether the industry’s status had  changed.
Second, because owners generally cannot transfer funds from a trust fund  with sufficient reserves to one without sufficient reserves, we also  analyzed the status of each owner’s trust fund for each plant in which the  owner had an ownership share. For this analysis, we analyzed the status of  222 individual trust funds, representing 99 owners of all or parts of 122  plants.
For both the combined industry-wide trust funds and the individual  owners’ trust funds, we conducted two separate analyses (hereafter  described in terms of our analysis of the individual owners’ trust funds).  This method is the same as that used in our earlier report on the adequacy  of decommissioning funding. First, we looked backward from a base  year—2000—and assessed whether, when taking into account key  economic factors such as decommissioning cost-escalation rates and after- tax rates of return on the funds (the discount rate), each owner’s  decommissioning fund balance for its ownership share of each of its plants  was consistent with the expended portion of the licensed operating life of  that plant. In other words, we assessed whether the monies the owner had  contributed to its fund as of the end of 2000, together with the past earnings  on these monies, equaled a benchmark or expected balance the owner  should have accumulated by that time.
To determine the benchmark balance for 2000 for each plant (owner’s  share), we multiplied the present value of the plant’s estimated future  decommissioning costs (owner’s share) by the fraction of the plant’s  operating life used up by 2000. For example, a plant that began operating in  1980 would have used up one-half of its 40-year operating life by the end of  2000. Therefore, by the end of 2000, the owner for this plant should be  expected to have accumulated in its trust fund one-half of the present value  (in constant 2000 dollars) of the estimated decommissioning costs. Over  the life of a plant, our benchmark measure presumes that an owner would  contribute an annual amount that increases (but constant in present-value  terms) at the trust fund’s after-tax rate of return. The sum of these annual  amounts plus the income earned on the investment of the funds would  equal the total estimated (present value of) the decommissioning costs  when the plant’s operating license expires.
Although recent deregulation and restructuring of the electricity industry  have led some owners to prepay decommissioning costs, many owners  continue to fund the trust funds by collecting fees from electricity users.  Thus, under our benchmark measure, by paying decommissioning “fees”  that are deposited into the trust funds, electricity users pay for the present  value of each year’s accrued decommissioning costs. As a result, the  benchmark embodies the principle of economic efficiency in that the price  of a product (i.e., electricity) should, if possible, equal all of its costs— current and accrued. In addition, by assuming that current and future users  pay the same decommissioning fees, in constant present-value terms, our  benchmark ensures that decommissioning costs are accrued transparently  over time.
In addition to the looking-backward analysis, we conducted a second  analysis, a “looking forward” from a base year—end of 2000—and assessed  whether each owner’s recent contributions to its decommissioning funds  for respective shares of each of its nuclear power plants were at a level  consistent with the remaining portions of the licensed operating lives of  each plant. In other words, we assessed whether the owner recently added  monies to its decommissioning trust fund for each plant at the benchmark  contribution necessary to have enough funds to decommission the plant  when its operating license expires. For example, an owner who is behind in  terms of trust fund balance through the end of 2000 could have recently  contributed to its fund at much higher rates than it had in the past to make  up for its shortfall over the remaining operating life of the plant.
To determine an owner’s benchmark annual contribution, for each of its  plants, we computed the annual-average present value of the required  future contributions that are summed over the remaining life of the plant.  The total present value contribution must  equal the present value of the  total future decommissioning costs minus the value of the current trust  fund balance. We then compared this annual amount with the average  contribution to the trust fund that the owner made in 1999 and 2000 (cost  adjusted to 2000). We assume that an owner will annually increase its most  recent contribution (2-year average, cost adjusted to 2000) over the  remaining life of its plant by the assumed after-tax rate of return on its  decommissioning fund. Owners whose recent average contributions  exceeded the benchmark amount would be adding funds at a rate that  would be more than sufficient, while owners whose recent average  contributions were below the benchmark rate would be adding funds at an  insufficient rate to pay for future decommissioning costs (under our  specific economic assumptions).
For our assessment of the status of the industry as a whole (and for both  the looking-backward and looking-forward analyses), we developed three  different scenarios: baseline (i.e., most likely), pessimistic, and optimistic.  For the baseline analysis, we used our most likely economic assumptions.  For the pessimistic and optimistic scenarios, we used different values for  several key assumptions, as described later in this appendix.
For our assessment of the status of each individual owner’s trust funds, we  looked at the status of each owner’s trust funds under baseline (most  likely) assumptions (for both the looking-backward and looking-forward  analyses). In addition, for owners who were below the benchmark on both  balances and contributions under the baseline assumptions, we reviewed  the 2003 and 2001 biennial reports to ascertain whether the owner has  and/or had an additional method (e.g., parent company guarantee) to  support financial assurance obligations. We indicate in our detailed results  when an owner reported having an additional method (see app. II, table 4).  However, we did not evaluate the adequacy of these methods.
In addition, for selected owners depending upon our baseline results, we  analyzed how these results might change under alternative conditions— optimistic or pessimistic assumptions. For example, for owners who were  below the benchmark on both balances and contributions under the  baseline (see app. II, table 5), we assessed the status of their trust funds  under optimistic conditions to determine which of these owner’s funds  would still remain below benchmark on both our looking-backward and  looking-forward measures. In addition, for owners who were from zero to  100 percent above the benchmark, under baseline assumptions for either  balances or contributions, we assessed the status of their funds under  pessimistic assumptions to determine whether their funds would fall below  benchmarks for both balances and contributions (see app. II, table 6).
subsections: section_title: Key Data Used in Analysis
paragraphs: To conduct our analysis we used a spreadsheet simulation model that uses  a base year of 2000. In addition, for the key data in our analysis, we used  the owner’s 2001 biennial reports and responses from a mail survey that we  administered to nuclear power plant owners.
More specifically, the key data used in the model are the following: (1) Owner’s name, percentage of each plant in which the owner has a share,  year the plant was licensed to operate (or commenced operation, if earlier),  and year the plant’s license will expire. We obtained these data using the  owners’ 2001 biennial reports to Nuclear Regulatory Commission (NRC)  and other NRC publications. (2) A decommissioning cost estimate for each plant (that is, a current  dollar amount for the year that the estimate was made). When available, we  used a site-specific estimate of NRC-related costs (that is, radiation-related  costs). If a site-specific estimate was not available, we used cost estimates  derived from NRC’s generic formula for these NRC-related costs. We  obtained these data using the owners’ 2001 biennial reports to NRC. (3) Decommissioning fund balances as of December 31, 2000 for each  owner and its plant share. When indicated, we used that portion of the fund  balance that the owner designated for NRC-type costs (that is, excluding  the costs relating to nonradiation or spent-fuel activities). Otherwise we  used the entire fund balance. We obtained these data from the owners’  responses to our survey or from their 2001 biennial reports.   (4) Decommissioning fund contributions for 1999 and 2000 for each owner  and its plant share. We assumed these contributions were for NRC-related  costs only. We obtained these data from the responses to our survey, and  for owners who did not respond to our survey, we do not report on the  adequacy of their contributions.
In some cases, the ownership shares of plants have changed hands since  our survey and the 2001 biennial reports. In these cases, to make our  analysis as current as possible, we assess the adequacy of the funds that  were accumulated by the previous owner but report the results under the  name of the new owner of the trust fund (see app. II, table 4). Nonetheless,  the new owner might accumulate trust funds at a different rate than the  former owner.
section_title: Key Assumptions Used in the Analysis
paragraphs: The analysis of the industry-wide trust funds and the individual owners’  trust funds depends on the following six key assumptions. The values for  these six assumptions vary based upon the scenario: baseline (most likely),  pessimistic, or optimistic. For each scenario, we used the same assumption  values for each owner and each plant in order to apply an “even-handed”  standard.  (1) Future after-tax rate of return on decommissioning fund assets  (discount rate): An after-tax rate of return was used to discount future trust  fund contributions and plant decommissioning costs. In our survey, we  asked owners for information on the financial assets contained in their  respective decommissioning funds. We grouped these assets into five basic  financial categories and calculated estimated, industry-wide, average  weights for each type, these asset weights themselves reflecting the  weights of the varying fund sizes. These categories, and calculated  weighted-averages were:  equities (e.g., common stocks), 47.1 percent; U.S.  securities (e.g., federal government bonds), 26.7 percent; corporate bonds,  9.8 percent; municipal bonds, 10.4 percent; and cash and short-term  instruments, 6.0 percent. Therefore, on average, these decommissioning  funds contained roughly a 50-50 split between equities and bonds. We used  these results for all of the decommissioning funds, for all three scenarios,  but recognize three qualifications: (1) the variation in these asset weights  among individual funds for 2000 was quite large, (2) our asset composition  data represent only a time “snapshot” of such allocation—for year 2000  only, and (3) these same (baseline) asset weights are also assumed for our  other two scenarios, because appropriate data were lacking to do  otherwise.
Using a long-term forecast from Global Insight (an economic forecasting  company), we developed a forecast for each asset category under a  baseline, pessimistic, and optimistic forecast scenario. For the baseline  scenario, we used Global Insight’s trend forecast; for the pessimistic  scenario, we used their pessimistic forecast (representing slower real gross  domestic product (GDP) growth); and for the optimistic scenario, we used  their optimistic forecast (representing faster real GDP growth).
For the baseline scenario, we calculated a forecast (current-dollar) growth  rate of 6.26 percent for equities, 6.83 percent for U.S. securities, 7.83  percent for corporate bonds, 6.27 percent for municipal bonds, and 5.02  percent for cash and short-term instruments. Multiplying these forecast  rates with their respective asset weights in the owners’ portfolios yielded a  baseline “portfolio average” forecast pretax annual-average rate of return  of 6.49 percent. Similarly, we calculated pretax rates of return for the  pessimistic and optimistic forecasts of 7.27 percent and 6.45 percent,  respectively. The rate under  the pessimistic forecast is higher than the rate  under the baseline or optimistic forecasts because of higher inflation in the  Global Insight pessimistic forecast and because of the owners’ relatively  high average allocation of trust fund investments in bonds. (In Global  Insight’s pessimistic forecast, the nominal-rate return on bonds is greater  than on equities.)
To convert the “portfolio average” forecast pretax rate of return to an after- tax rate of return, we used the pre- and post-tax rates of return data that  owners provided in our survey. Based on these data we determined that the  pretax rate should be reduced by 0.87 percentage points to derive a  baseline after-tax rate of return of 5.62 (6.49 – 0.87) percent.  Similarly, we  calculated an after-tax rate of return of 6.40 (7.27 – 0.87) percent for the  pessimistic scenario and an after-tax rate of return of 5.58 (6.45 – 0.87)  percent for the optimistic scenario.  (2) Future decommissioning cost escalation rate:  For our baseline  scenario, we assumed that decommissioning costs would increase annually  at a nominal rate of 4.60 percent. Combining the after-tax rate of return  and the cost escalation rate gave us an implied real (cost-adjusted) after-tax  rate of return of 1.02 (5.62 - 4.60) percent for the baseline scenario.
To calculate real after-tax rates of return for the pessimistic and optimistic  scenarios, we first adjusted the nominal after-tax rates of return using  Global Insight’s inflation forecasts. Its annual-average inflation forecast  was about 2.47 percent for trend, or baseline, 3.04 percent for pessimistic,  and 2.15 percent for optimistic. Using these forecasts, the real forecast  rates of return are 3.15 (5.62 - 2.47) percent for baseline, 3.36 (6.40 – 3.04)  percent for pessimistic, and 3.43 (5.58 – 2.15) percent for optimistic. We  then used proportionality ratios to obtain real cost adjusted after-tax rates  of return of 1.09 percent for the pessimistic scenario and 1.11 percent for  the optimistic scenario. From these real after-tax rates of return, we computed implied cost-escalation rates of 5.31 percent and 4.47 percent for  the pessimistic and optimistic scenarios, respectively.
Note that the real (cost-adjusted) after-tax rates of return are quite similar  in value among our scenarios; therefore, any differing effect on model  results caused by the combination of the fund rate of return and  decommissioning cost-escalation assumptions will be fairly minimal.  Nonetheless, all other things being equal, for these two assumptions only,  the balance and contribution adequacy results for the pessimistic scenario  will be slightly above those of the baseline scenario, and only slightly below  those of the optimistic scenario.  (3) Alternative initial decommissioning cost estimates:  In our baseline  scenario, for the “initial” decommissioning (NRC-related) costs, we used  the site-specific estimates when available. Otherwise, we used the cost  estimates derived from NRC’s generic formula. For the pessimistic and  optimistic scenarios, we used professional judgment to adjust the estimate  used in the baseline. For example, to reflect a general concern among  industry observers that future decommissioning costs could be much  higher than expected, we increased the initial cost estimate by 40 percent  for the pessimistic scenario, and reduced the initial decommissioning cost  estimate by only 5 percent for the optimistic scenario. (4) Alternative start of decommissioning--years after shutdown:  For the  baseline scenario, we assumed that decommissioning would occur within  the immediate 5 years after license termination;  for simplification, we  assumed “instantaneous” decommissioning at 2.5 years after shutdown.   For the pessimistic assumption, decommissioning is assumed to occur  within the first 4 years—at 2 years after shutdown. For the optimistic  assumption, we assumed a 5-year delayed start of decommissioning—  within 5-10 years after license termination—at 7.5 years after shutdown.  Under certain circumstances (e.g., co-located plants), NRC may permit a  decommissioning delay. As long as the assumed after-tax rate of return  exceeds the assumed cost-escalation rate (i.e., a positive, real, cost- adjusted rate of return), a delay in decommissioning will improve the  outlook for an owner’s trust fund in both the looking-backward (trust fund  balance) and looking-forward (trust fund contributions) analysis, all else  the same.  (5) Alternative operating license expiration year:  The year of plant  operating-license expiration is assumed to vary among our three scenarios  to reflect that NRC has approved license renewals for some plants, and it  may approve 20-year license renewals for other plants in the future. For the  baseline and pessimistic scenarios, we include the renewals that have been  approved for 16 plants, as of August 20, 2003. In addition, because NRC  has received renewal applications from owners of 14 plants, and it  anticipates applications from owners of another 8 plants by the end of 2003  (as of August 20, 2003), we assume in the optimistic scenario that license  renewals will be approved for an additional 22 plants. In general, these  plant license renewals suggest that the electricity market today is robust  and owners expect higher electricity prices in the future.   (6) Alternative market values for decommissioning funds:  For the baseline  and optimistic scenarios, we use the actual market value of the trust fund  balances as of the end of 2000. In contrast, for the pessimistic scenario, we  reduced the actual market value of the funds by 5 percent for 2000 to  simulate the effect of a slowing economy on investment returns from 2000  through 2002. The simulated decline is modest, and over the period, the  overall increase in bond prices would have offset to some degree the  overall decline in the value of common stocks.
section_title: Detailed Results of Our Analysis of the Decommissioning Trust Funds
paragraphs: This appendix presents the detailed results of our analysis of the  decommissioning trust funds. Specifically, table 3 shows industry-wide,  weighted-average results under three scenarios—baseline (most likely)  assumptions, pessimistic assumptions, and optimistic assumptions. Table 4  presents the results for individual owners under baseline, or most likely  assumptions. Table 5 shows the results of our analysis under optimistic  assumptions for individual owners whose trust funds were below the  benchmarks for both balances and recent contributions under the baseline  scenario. Table 6 presents the results under pessimistic assumptions for  individual owners whose trust funds were zero to 100 percent above the  benchmark balances and/or contributions under the baseline scenario. See  appendix I for a description of our methodology.
section_title: Comments from the Nuclear Regulatory Commission
paragraphs: The following are GAO’s comments on NRC’s letter dated October 3, 2003.
subsections: section_title: GAO Comments
paragraphs: 1. Rather than concluding that NRC does not have a method, we stated  that the agency’s analysis was not effective in identifying owners who  might be at risk of accumulating insufficient funds to pay for  decommissioning. For example, NRC relied on the owners’ future  funding plans to make up any shortfalls without verifying whether the  plans are consistent with the owners’ recent contributions. See also our  response in the Agency Comments and Our Evaluation section on page  16.   2. We agree that NRC should be primarily concerned with ensuring that  owners of nuclear power plants will have sufficient funds for  decommissioning. However, we believe that NRC should take a  proactive, rather than reactive, approach to providing owners and the  public with a more complete understanding of NRC’s expectations as to  how they will hold owners who are not accumulating sufficient funds  accountable. As discussed in the report, the lack of any specific criteria  for acting on owners’ decommissioning financial reports contrasts with  NRC’s practices in overseeing safety issues at nuclear plants, where the  agency uses an “Action Matrix” that provides for a range of actions  commensurate with the significance of safety inspection findings and  performance indicators. Without similar criteria in its oversight of  decommissioning funding assurance, NRC will not have a logical,  coherent, consistent, and predictable plan of action if and when it  encounters owners whose plants have inadequate financial assurance.  See also our response in the Agency Comments and Our Evaluation  section on page 16. 3. See our responses to comments 5, 6, and 9 in this appendix.  4. See our responses to comment 9. 5. We agree that current NRC regulations do not establish intermediate  benchmarking levels, but rather establish the minimum balance that  must be obtained when plants are retired. We also agree that the state  regulatory authorities and Federal Energy Regulatory Commission play  a role. However, we believe that NRC should take a more proactive  approach in developing an effective method for ensuring that sufficient  funds will be available for decommissioning. For example, a common  expected rate of return could be used to project the earnings of each  owner’s trust fund. NRC’s current method allows the owners to use up  to 2 percent (real) or another rate if approved by its state regulator. As  we stated in our report, one state regulator approved owners of the  same plant to use widely varying rates of return to project earnings on  their trust fund investments. Other factors being equal, the owner using  the higher rate would need to collect fewer funds than the owner using  a lower rate of return. While the actual rate the owners will earn on  their funds could be higher or lower, NRC accepted the state regulator- approved rates without assessing whether they were consistent with  market expectations.
In another example, in its 2001 biennial report, one owner using NRC’s  2 percent rate of return estimated that the amount of funds needed for  decommissioning under NRC’s regulations would be insufficient at five  of its nuclear power plants. Therefore, the owner provided additional  assurance in the form of a parent guarantee. However, the owner  sought and subsequently received approval from its state regulator to  use a higher real rate of return. After receiving the approval, the owner  withdrew its parent guarantee since under the higher rate, the  projected trust funds were sufficient to cover estimated  decommissioning costs. We believe that by being more proactive, and  not simply deferring to others, the NRC can develop a more effective  and consistent method and better achieve its primary concern of  ensuring that owners are accumulating funds at sufficient rates. 6. We found no evidence during our review that NRC has ever determined  that an owner is not accumulating sufficient funds. Therefore, without  any experience that its “practice” has been applied, we believe that  without clear criteria, NRC will not have a logical, coherent, consistent,  and predictable plan of action if and when it encounters owners whose  plants have inadequate financial assurance. Accordingly, we are  recommending that NRC establish criteria for responding to  unacceptable levels of financial assurance.  7. We agree that our method is different from that used by NRC. Our draft  discussed and reviewed NRC’s analysis. Based on our review, we  concluded that NRC’s analysis was not effective in identifying owners  who might be at risk of accumulating insufficient funds to pay for  eventual decommissioning. For example, NRC relied on the owners’  future funding plans, or on rate-setting authority decisions, in  concluding that the owners were on track to fully fund  decommissioning. However, we found some owners’ actual  contributions in 2001 were much less than what they stated in their  2001 biennial reports to NRC that they planned to contribute. For  example, one owner contributed about $1.5 million (or 39 percent) less  than the amount it told NRC that it planned to contribute.  Moreover,  using actual contributions the owners had recently made to their trust  funds, we identified several owners that are at risk of accumulating  insufficient funds to pay for eventual decommissioning. 8. We do not believe any changes are needed. 9. We agree, and the our draft report stated, that NRC does not separately  assess the status of each co-owner’s decommissioning funding against  the co-owner’s private contractual obligation to fund decommissioning.  The NRC guidance states: “Some licensees are part owners of power  reactors. In such cases, the  reviewer should evaluate separately  each licensee’s  amortization schedule [i.e.,  decommissioning funding] for its share of the facility, unless the lead  licensee has agreed to coordinate funding documentation and reporting  for all co-owners.” Nonetheless, we revised the report to remove any  inferences that NRC’s practice is inconsistent with its internal  guidance. Notwithstanding NRC’s characterization of its practice, we  believe that both the guidance and NRC’s actions do not go far enough.  For example, the guidance allows for an exception when the lead  licensee agrees to coordinate documentation and reporting. More  importantly, the critical issue is that NRC should do more to develop an  effective method for assessing the adequacy of nuclear power plant  owner’s trust funds for decommissioning. Under NRC’s current method,  it combines the trust funds for all co-owners of a nuclear plant and then  assesses the adequacy of decommissioning funds on a plant-wide basis.  However, as our analysis indicates, combining the trust funds of several  owners can produce misleading results because those co-owners with  more than sufficient funds can appear to balance out those with less  than sufficient funds. In addition, as a practical matter, owners have  contractual agreements to pay for their share of decommissioning, and  the trust funds are generally not transferable among owners. Unless  NRC separately evaluates the adequacy of each co-owners’  decommissioning trust fund, the agency’s existing process would  appear to require some co-owners to pay more than their fair share of  decommissioning costs. We believe this would be inconsistent with  NRC’s stated policy of generally not looking to one co-owner to bail out  another. 10. Rather than state that NRC has not developed and used a method, we  found that the agency’s method was not effective in identifying owners  who might be at risk of accumulating insufficient funds to pay for  decommissioning. For example, we identified several limitations in  NRC’s method, including the agency’s practice of combining the trust  funds for all the co-owners of a nuclear plant and then assessing  whether the combined value of the trust funds is sufficient. We believe  that this practice can produce misleading results because those co- owners with more than sufficient funds can appear to balance out those  with less than sufficient funds.
In addition, we agree that NRC has not established criteria for taking  action when it finds cases of unacceptable levels of financial assurance.  According to NRC officials we spoke to, NRC has never identified an  owner with unacceptable levels of financial assurance. Moreover, the  general activities that NRC stated above are not included in its internal  guidance for reviewing the owners’ biennial reports. We believe that  NRC should take a more proactive approach to providing owners and  the public with a more complete understanding of NRC’s expectations  as to how they will hold owners who are not accumulating sufficient  funds accountable. We believe having established criteria for taking  action when it is determined that unacceptable levels of financial  assurance exist will better prepare NRC to make this determination.  Furthermore, having such criteria would not only increase public  confidence that NRC has a plan to take action to ensure sufficient funds  will be available for decommissioning but also would make its  determination of inadequacy more transparent to owners. 11. As indicated in our draft report, we reviewed NRC’s analysis of the  owners’ 2001 biennial reports. Our review clearly points out that the  agency’s method has limitations that reduce its effectiveness. For  example, NRC relied on the owners’ future funding plans to make up  any shortfalls without verifying whether those plans are consistent with  the owners’ recent contributions. We found that some owners’ actual  contributions in 2001 were much less than what they stated in their  2001 biennial reports to NRC that they planned to contribute. For  example, one owner contributed about $1.5 million (or 39 percent) less  than the amount they told NRC that they planned to contribute. In  addition, based on our analysis using the actual contributions the  owners recently made to their trust funds, we found that 28 owners  with ownership shares in 44 plants contributed less than the amounts  we estimate they will need to contribute over the remaining life of their  plants to meet their decommissioning obligations. Accordingly, we  believe that our recommendation to NRC to develop an effective  method is clearly warranted to ensure that all owners are accumulating  funds at sufficient rates. See also our response to comment 12. 12. As stated in our draft, our conclusions are based on a method that uses  a benchmark to assess the adequacy of each nuclear plant owner’s  decommissioning trust fund. In addition, our draft stated that this  benchmark is not the only way an owner could accrue enough funds to  pay future decommissioning costs. Still, we believe that our benchmark  is useful for assessing the status of the owners’ decommissioning trust  funds because it (1) provides a common standard for comparisons  among owners, (2) embodies the principle of economic efficiency in  that the price of a product (i.e., electricity) should, if possible, equal all  of its costs—current and accrued, and (3) provides for transparency in  that it assumes that current and future users pay the same  decommissioning fees, in constant present-value terms. 13. As we stated in our draft, NRC stated that it will not impose  decommissioning costs on co-owners in a manner inconsistent with  their agreed-upon shares, except in highly unusual circumstances when  required by public health and safety considerations and that it would  not seek more than the pro rata shares from co-owners with  de minimis ownership. Nevertheless, unless NRC separately evaluates  the adequacy of each co-owners’ decommissioning trust fund, the  agency’s existing process would appear to require some co-owners to  pay more than their fair share of decommissioning costs. We believe  this would be inconsistent with NRC’s stated policy of generally not  looking to one co-owner to bail out another one.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition, Ronald La Due Lake, Carolyn McGowan, Cynthia Norris,  Michael Sagalow, Barbara Timmerman, Daniel G. Williams, and Dwayne  Weigel made key contributions to this report.
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