Nuclear Regulation: Better Oversight Needed to Ensure Accumulation of Funds to Decommission Nuclear Power Plants
Published: 1999-05-03T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO provided information on the potential cost to decommission nuclear power plants and the implications of competition within the electricity industry, focusing on whether: (1) there is adequate assurance that the Nuclear Regulatory Commission's (NRC) licensees are accumulating sufficient funds for decommissioning; and (2) NRC is adequately addressing the effects of electricity deregulation on the funds that will eventually be needed for decommissioning.
section_title: What GAO Found
paragraphs: GAO noted that: (1) although the estimated cost to decommission a nuclear power plant is on the order of $300 million to $400 million in today's dollars, NRC does not know if licensees are accumulating sufficient funds for this future expense; (2) GAO's analysis showed that, under likely assumptions, 36 of 76 licensees had not accumulated sufficient decommissioning funds through 1997; (3) however, all but 15 of these 36 licensees appeared to be making up their funding shortfalls with recent increases in the rates that they are accumulating decommissioning funds; (4) using more pessimistic and optimistic assumptions would increase or decrease the number of underfunded licensees, respectively; (5) although utility commissions have permitted licensees to continue charging their customers for the costs of decommissioning prematurely-retired plants, this financial safeguard could be affected by states' efforts to deregulate the electricity industry; (6) to address the movement toward deregulating the electricity industry, in November 1998 NRC began requiring its licensees to provide additional financial assurances if the Federal Energy Regulatory Commission or state utility commissions will no longer guarantee, through the regulation of electricity rates, the collection of sufficient funds for decommissioning; (7) however, one additional form of financial assurance--the early payment of decommissioning costs--may not be practicable or affordable; (8) also, NRC considered requiring licensees to accelerate decommissioning funding as a hedge against the premature retirement of plants but rejected the concept because of possible adverse effects on licensees' finances; (9) on the other hand, NRC's alternative methods to the collection of decommissioning funds earlier essentially rely on the continued financial health of the licensee or its parent company; (10) thus, the effectiveness of NRC's 1998 regulatory changes will likely depend on how vigorously NRC monitors the financial health of its licensees; (11) in this regard, licensees must now provide financial reports every 2 years to NRC so it can monitor financial assurances for decommissioning; and (12) however, NRC did not establish thresholds for clearly identifying acceptable levels of financial assurances or establish criteria for identifying and responding to unacceptable levels of assurances.

section_title: Letter
paragraphs: This report responds to your request that we review the adequacy of electric utilities’ efforts to accumulate funds to eventually decommission their nuclear power plants after the plants have been permanently shut down.
subsections: section_title: Introduction
paragraphs: The electricity industry is the largest industry in the United States. According to the Department of Energy’s (DOE) Energy Information Administration (EIA), the industry had total assets worth about $700 billion in 1993 and has revenues of about $200 billion annually.
Nuclear power plants have provided about 20 percent of the nation’s electricity in recent years. Most nuclear power plants are owned and operated by investor-owned utilities. Investor-owned utilities comprise only about 8 percent of the nation’s 3,200 electric utilities but generate and sell over 75 percent of the electricity. One such utility—the Commonwealth Edison Company—received the former Atomic Energy Commission’s first license to operate a civilian nuclear power plant almost 40 years ago. Since then, the Atomic Energy Commission and its successor regulatory agency—the Nuclear Regulatory Commission (NRC)—have issued operating licenses for a total of 125 plants. Twenty-one of the plants licensed to operate have been permanently retired, leaving 104 with operating licenses.
The Atomic Energy Act of 1954, as amended, and the Energy Reorganization Act of 1974, as amended, require NRC to, among other things, protect the radiological health and safety of the public. Under this mandate, NRC licenses nuclear power plants to operate for up to 40 years and continually regulates the utility-licensees’ operation of these plants. In addition, NRC permits utilities to seek license extensions of up to 20 years.
subsections: section_title: Regulatory Challenges to Decommissioning Nuclear Power Plants
paragraphs: Decommissioning a nuclear power plant involves dismantling the structures and equipment at the plant, properly disposing of the resulting radioactive and other wastes, and then ensuring that the plant site complies with applicable environmental standards. Decommissioning involves a combination of technical, financial, and regulatory challenges. For example, the nuclear reactor vessel, other plant components, and concrete surfaces of various rooms in the plant are radioactive or contaminated with radioactive material. Therefore, the processes of maintaining the plant in a safe condition prior to dismantling it and disposing of the resulting radioactive wastes requires constant attention to protecting workers and the public from exposure to radiation.
The interval of time between the initial operation of a plant and its eventual dismantling also presents challenges to licensees and NRC. This interval can be as short as a few years if a plant is retired earlier than expected and dismantled shortly thereafter or as long as 40 to 60 years if a plant operates for an extended license period. In lieu of dismantling a plant immediately after its retirement, a utility may instead elect to decommission a plant by placing the plant in safe storage before dismantling it, as long as the entire decommissioning process is completed within 60 years. This feature of NRC’s regulation allows utilities to defer dismantling a retired plant if they (1) are awaiting the retirement of a colocated plant, (2) need to give DOE time to remove all of the spent (used) fuel from the plant, and (3) need to allow the radioactivity in the plant to decay before dismantling the plant, among other things.
Finally, the financial aspects of decommissioning also present challenges to utility-licensees. For example, although actual decommissioning experience is limited, decommissioning a single plant is expected to cost hundreds of millions of dollars. NRC does not have the authority to regulate the manner in which licensees recover from their customers the costs of constructing, operating, and decommissioning nuclear power plants. Most licensees are investor-owned utilities that traditionally have been provided a monopoly within their service areas. In return, these utilities built generating plants, including nuclear, coal, gas, and hydro power plants, and transmission and distribution facilities to provide electricity for all of the existing and future customers within their service areas. Under this traditional “cost-of-service” regulation, state public utility commissions approved electricity rates that reflected the utilities’ costs of building and operating their electricity systems and approved the financial returns on these investments. Similarly, the interstate aspects of the electric utility industry, including financial transactions, wholesale rates, and interconnection and transmission arrangements, are regulated by the Federal Energy Regulatory Commission (FERC). In this context, utilities’ proposed arrangements to finance the decommissioning of their nuclear plants are a part of their financial operations that are subject to review and approval by their respective state public utility commissions and FERC.
NRC’s authority to require utilities to accumulate funds to decommission their nuclear power plants is derived from its responsibilities under the Atomic Energy Act of 1954, as amended, to regulate the safety of nuclear power. Until 1988, NRC required licensees to certify that sufficient financial resources would be available when needed to decommission their nuclear power plants but did not require these licensees to make specific financial provisions for decommissioning. On July 26, 1988, NRC’s original regulations on the technical and financial aspects of decommissioning became effective. By then, NRC had licensed 114 plants to operate.
NRC’s 1988 regulations provided utilities with the following options for providing decomissioning financial assurance:
The prepayment of cash or liquid assets into an account segregated from the licensee’s assets and outside the licensee’s administrative control. Prepayment may be made in the form of a trust, escrow account, government fund, certificate of deposit, or deposit of government securities.
External sinking funds. These types of funds are established and maintained through the periodic setting aside of funds in an account segregated from the licensee’s assets and outside the licensee’s administrative control. An external sinking fund may be in the same forms permitted for prepayment.
A surety method or insurance. A surety method may be in the form of a surety bond, letter of credit, or line of credit payable to a trust established for decommissioning costs.
For “federal licensees,” such as the Tennessee Valley Authority, a statement of intent that decommissioning funds will be obtained when necessary.
NRC recognized both the uncertainty over decommissioning costs and the authority of public utility commissions and FERC to regulate the economic affairs of utilities. Therefore, NRC approached the regulation of the financial aspects of decommissioning by requiring utilities to provide “reasonable assurance” that sufficient funds would be available to decommission their nuclear power plants when the plants are permanently shut down. Among other things, NRC required, by July 27, 1990, each holder of an operating license to (1) certify that the licensee would provide the required financial assurance for decommissioning; (2) calculate, using a formula contained in NRC’s regulations, the minimum amount (expressed in current-year dollars) that utilities would accumulate for decommissioning their plants by the time they expect to retire them; and (3) provide a copy of the financial instrument(s) executed to provide the required financial assurance. Essentially all utilities have elected the option of establishing external sinking funds to finance future decommissioning costs. A portion of the charge that utilities’ customers pay for their electricity is earmarked for deposit in these funds, and the funds are invested to earn income.
In its regulations, NRC deferred to utilities and their rate regulators the details of collecting the required decommissioning funds. NRC requires only that the amount actually accumulated by the end of a plant’s operating life equals the projected cost to decommission the plant. About 5 years before the projected end of plant operations, NRC requires a utility to submit a preliminary decommissioning cost estimate that includes an up-to-date assessment of the major factors that could affect the cost to decommission its plant. Also, if necessary, the cost estimate shall include plans for adjusting needed funds for decommissioning to demonstrate that a reasonable level of assurance will be provided so that funds will be available when needed to cover the cost of decommissioning. Finally, not later than 2 years after a plant has been permanently shut down, the utility must submit to NRC a decommissioning report that includes, among other things, a site-specific decommissioning cost estimate.
section_title: Deregulation of the Electricity Industry
paragraphs: After about 10 years of experience with NRC’s 1988 decommissioning regulations, the electricity industry has begun to change in ways that have prompted NRC to reassess the adequacy of its regulations governing nuclear power plants, including financial assurances for decommissioning retired plants. Over the next 10 years or so, many states are expected to replace their traditional systems of economic regulation of monopolistic electric utilities with more-competitive, less-regulated environments mainly for the generation of electricity but, to a lesser degree, for the transmission and distribution of electricity as well. Competition, according to NRC, could result in economic pressures that will affect the availability of adequate funds for decommissioning and how utilities address maintenance and safety in nuclear power plant operations.
Currently, the Congress is considering a number of bills to restructure the retail electricity industry to promote a more efficient and market-driven industry. Also, as of September 1997, 49 states had considered reforming their retail electricity markets. As of June 1, 1998, FERC and at least 18 states had either enacted legislation or issued comprehensive regulatory orders implementing plans to restructure the industry. In California, for example, a plan to produce competitive electricity markets and allow consumers to choose their electricity supplier went into effect in March 1998. Also, some of these initiatives would encourage or require the restructuring of the affected electricity industry. Specifically, utilities that have traditionally generated, transmitted, and distributed electricity would be encouraged or required to separate the operation of electricity generation systems from the operation of transmission and distribution systems.
section_title: Objectives, Scope, and Methodology
paragraphs: Concerned about the potential costs to decommission nuclear plants and the implications of a competitive electricity environment on the ability of plant owners to finance decommissioning projects, the congressional requesters of this report asked us to determine if (1) there is adequate assurance that NRC’s licensees are accumulating enough funds to decommission their nuclear power plants when the plants are retired and (2) NRC is adequately addressing the effects of electricity deregulation on the funds that will eventually be needed for decommissioning.
To address both of our objectives we met with, and obtained documentation from, officials of the following organizations:
NRC, Rockville, Maryland.
Nuclear Energy Institute, Washington, D.C. (The Institute represents the nuclear industry, including utilities that operate nuclear power plants.)
National Association of Regulatory Utility Commissioners. (The Association represents public utility commissions and other state-level rate-setting entities.)
National Nuclear Safety Network (a public interest organization). public utility commissions of Oregon (Salem), Maryland (Baltimore), and New Hampshire (Concord).
Portland General Electric (Portland, Oregon); Commonwealth Edison (Chicago, Ill.); Office of Consumer Advocate (Concord, NH.); and Moody’s Investors Service (New York, N.Y.).
To address the adequacy of assurance that NRC’s licensees are accumulating enough decommissioning funds, we also met with, and obtained documentation from, TLG Services, Inc., which prepares decommissioning cost estimates for owners/licensees of nuclear power plants and Dr. Bruce Biewald, a consultant to groups that participate in state public proceedings on setting electricity rates, including charges for decommissioning. We also analyzed whether licensees or their parent companies have (1) accumulated decommissioning funds at a rate consistent with the percentages of their reactors’ operating life already used up (i.e., the fund for each reactor should equal this percentage times the present value of its future decommissioning cost) and are (2) currently (viz., 1997) adding enough money to their decommissioning funds (i.e., assuming that contributions in future years will increase at the funds’ after-tax rate of return) to accumulate sufficient funds to decommission their plants when they are retired. The scope and methodology that we used in these two analyses are discussed in appendix I. To address whether NRC is adequately considering the effects of electricity deregulation on the funds that will eventually be needed for decommissioning, we also obtained and reviewed public comments on NRC’s advance notice of proposed rulemaking for decommissioning financial assurances and on the subsequent proposed rule.
We conducted our review from October 1997 through March 1999 in accordance with generally accepted government auditing standards.
section_title: NRC’s System Did Not Ensure That Licensees Were Accumulating Adequate Decommissioning Funds
paragraphs: We analyzed the status of decommissioning funding as of December 31, 1997, (the year of the most recent data available) for 76 licensees that own all or part of 118 operating and retired nuclear power plants. We performed this analysis because NRC had not, for its own regulatory purposes, systematically collected and analyzed information on its licensees’ decommissioning funds. Our analysis showed that, under likely assumptions about future rates of cost escalation, net earnings on the investments of funds, and other factors, 36 of the licensees had not accumulated funds at a rate that is sufficient for eventual decommissioning. Under these conditions, these licensees will have to increase the rates at which they accumulate funds to meet their future decommissioning financial obligations. Under more pessimistic (unfavorable) and more optimistic (favorable) assumptions, 72 and 8 licensees, respectively, had not accumulated funds at a sufficient rate.
We also analyzed whether licensees had recently increased the amount of funds that they had collected to make up for under-collections in earlier years. For this analysis, we compared the amounts collected in 1997 with the annual average of the present value of the amount of funds needed to meet licensees’ funding obligations when their plants’ licenses expire. We found that, under likely assumptions, 17 companies collected less funds in 1997 than they need to collect each year over their plants’ remaining operating life. The 17 companies included 15 companies that had not collected sufficient funds through 1997. Under more pessimistic and optimistic assumptions, 66 and 4 licensees, respectively, need to increase the amount of funds that they collect in future years.
Our funding analysis generally assumes that nuclear power plants would operate for their current licensed operating period—usually 40 years—and that the licensees will remain financially solvent. No plant, however, has yet operated for the full period of its operating license, and electricity deregulation is expected to cause or contribute to more premature plant retirements. Furthermore, 19 of 26 plants that one Wall Street firm considers at risk for early retirement are owned, in whole or in part, by companies that have been slow to accumulate funds to decommission their plants. So far, however, neither early plant retirements nor licensee bankruptcies have adversely affected decommissioning. Economic regulators have allowed utilities to charge their customers rates that included amounts for decommissioning plants that were retired early, and courts have permitted the continued accumulation of decommissioning funds during bankruptcy proceedings.
From 1990 through 1997, most licensees’ estimates of the costs to decommission their plants have increased rapidly. Likewise, the utilities’ periodic calculations, using a formula contained in NRC’s regulations, of the minimum amount that they must accumulate in their decommissioning funds generally have been escalating more rapidly (particularly in recent years) than the site-specific cost estimates. Also, there are uncertainties over what the actual decommissioning costs might be. For example, the eventual resolution of a protracted dispute between NRC and the Environmental Protection Agency (EPA) over appropriate radiation standards for decommissioned sites could affect final decommissioning costs.
subsections: section_title: Rates at Which Decommissioning Funds Are Being Accumulated
paragraphs: NRC requires licensees using external sinking funds for decommissioning financial assurance to deposit funds collected for decommissioning into their funds each year. For two reasons, however, NRC does not know if licensees are accumulating decommissioning funds at rates that will provide enough funds to decommission their plants when the plants have been retired. First, NRC leaves the amounts to be put aside up to licensees and their public utility commissions. Second, until recently, NRC has not required that licensees report on the status of their decommissioning funds.
We analyzed the status of decommissioning funds, as of the end of 1997, for 118 operating and retired nuclear plants owned by 76 licensees (or the parent companies of subsidiaries that are the legal owners of the plants). In our first analysis, we compared the total amount of each licensee’s decommissioning funds with the expected amount of funds that should have been accumulated by that date. To determine the expected amount, we assumed that licensees would accumulate increasing (but constant present-value) amounts annually. Once in the fund, each yearly contribution would continue to grow at the fund’s after-tax rate of return. The sum of these annual amounts, plus the income earned on the investments of the funds, would equal the total estimated decommissioning costs when the licensees’ plants’ operating license expires. For example, at the end of 1997, a licensee’s decommissioning fund for a plant that had operated half of a 40-year license period (begun in 1977) should equal one-half of the present value of the estimated cost to decommission the plant beginning after 2017. This expected level of funding is not the only funding stream that could accrue to equal future decommissioning costs but provides us with both a common standard for comparisons among licensees 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, assumptions, and results for each of the 76 licensees.
Performing this analysis required that we make assumptions about future economic and plant-operating conditions. Key assumptions included initial decommissioning cost estimates, rates of cost escalation, net earnings on the investments of funds (discount rate), plant-operating periods, and the use of decommissioning funds for both radiation- and non-radiation-related decommissioning activities. Because of the inherent uncertainty associated with assuming future conditions over many years, we used assumptions of the most likely future conditions to develop a baseline scenario. And, to bound the results of the baseline scenario, we developed pessimistic and optimistic scenarios using unfavorable and favorable economic and plant-operating conditions, respectively.
For our baseline scenario, 36 of the 76 licensees (47 percent) had not accumulated funds at a rate that is sufficient for eventual decommissioning. Under these conditions, these licensees will have to increase the rates at which they accumulate funds to meet their future decommissioning financial obligations. Changing assumptions to reflect the pessimistic and optimistic scenarios, greatly affects the adequacy of the licensees’ funding. Under pessimistic and optimistic assumptions, 72 (95 percent) and 8 (11 percent) licensees, respectively, had not accumulated funds at a sufficient rate for eventual decommissioning.
The fact that a licensee might have collected funds for decommissioning at a lesser rate than the expected rate does not, by itself, mean that the licensee will not meet its financial obligations by the time it retires its plants. By increasing their rates of collection, these licensees can still accumulate the funds that are necessary. Therefore, to obtain insights on whether licensees are now collecting funds at adequate rates, we undertook a second analysis. We compared the available amounts that each licensee collected in 1997 with the average yearly present value of the amounts that the licensees would have to accumulate each year over the remaining life of their plants to have enough decommissioning funds upon the retirement of the plants. This analysis assumes that the licensees will increase their yearly future funding at the after-tax rate of return on the investments of their funds. And, once in the fund, these yearly contributions will grow at this same rate. Our analysis shows these results for the baseline (most likely), pessimistic, and optimistic scenarios.
For the baseline, the results show that only 17 of 76 licensees (22 percent) were not yet collecting the amounts that they will need to meet their decommissioning obligations. Thus, while 47 percent of the licensees had less than expected levels of funds at the end of 1997, only 22 percent did not appear to be currently on track, as represented by the funds that they collected in 1997, to eventually meet their decommissioning financial obligations. In other words, while licensees might not have funded sufficiently in the early years of their plants’ operating life, our results suggest that most licensees have recently increased funding to make up the funding shortfalls from earlier years. But if conditions deteriorate from those assumed in our baseline scenario, as represented by the pessimistic scenario, 66 licensees (87 percent) under-collected funds in 1997. Conversely, under the optimistic scenario, only 4 licensees (5 percent) are currently accumulating funds too slowly.
section_title: Plant Operating Life’s Effect on Decommissioning Funding
paragraphs: If a nuclear power plant is retired prematurely, sufficient funds may not have been collected by the retirement date to pay all decommissioning costs. To date, 21 plants have been retired before their licenses expired. So far, however, public utility commissions have permitted licensees to continue collecting the funds for decommissioning from the licensees’ electricity customers after these plants were retired.
subsections: section_title: Twenty-One Plants Were Retired Early
paragraphs: To date, no plant has operated for its full licensed operating life, and 21 plants have been retired before their operating license would have expired. (See table 2.1.) Two of the 20 plants operated for as long as 25 years. Fifty-two of the 104 plants that are currently licensed to operate have operated from 20 to 30 years.
Nine commercial nuclear power plants were permanently shut down before NRC issued its original decommissioning regulations. Eight of these retired plants are in safe storage. The ninth plant (Pathfinder), which was a small demonstration plant, has been decommissioned. Twelve commercial nuclear power plants have been retired since NRC issued its decommissioning financial assurance regulations. Four of these plants are in safe storage. Two plants—Fort St. Vrain and Shoreham—have been decommissioned. Five plants are currently being dismantled, and the owner of one plant has not yet decided whether to dismantle the plant soon or put it in safe storage.
The five plants that are now being dismantled—Big Rock Point, Haddam Neck, Maine Yankee, Trojan, and Yankee Rowe—were retired before their owners had accumulated sufficient funds to decommission them. For example, the Trojan plant was retired in 1992 after 17 years of operation. At that time, the plant’s licensees estimated that decommissioning the plant would cost $198 million (in 1993 dollars). However, the licensees had accumulated only $43 million, or 22 percent, of that amount. The Maine Yankee plant was permanently shut down in 1997 after 24 years of operation. When the plant was retired, the licensee had accumulated $188 million for decommissioning. That amount was only 53 percent of the $357 million (in 1997 dollars) that the licensee estimated would be needed to decommission the plant. In both of these cases, as well as in other states where retired nuclear plants are located, public utility commissions are permitting the licensees to continue collecting decommissioning funds from their customers even if their plants were retired early.
section_title: Experts Expect More Early Plant Retirements
paragraphs: Industry experts, such as major financial institutions, and DOE’s Energy Information Administration anticipate that the deregulation and restructuring of the electricity industry could result in the early retirement of from 9 to 40 percent of the nation’s nuclear power plants because these plants may not be competitive with other sources of electricity. In April 1998, Standard & Poor’s predicted that poor economics would cause the early retirements of six plants by 2001. (See table 2.2.) The company also concluded that another 20 units are “at risk” through 2020 for early retirement on the basis of expected poor operating and economic performance over the remainder of the plants’ license. According to the company, in a competitive market, plant owners will attempt to improve profitability; however, the vulnerability of these plants to unscheduled outages may squeeze operating margins and cause the plants to lose their long-term value.
In commenting on our report, NRC pointed out that one plant that Standard & Poor’s listed as “at risk” for premature retirement—Pilgrim—is in the process of being sold. The prospective buyer, NRC added, intends to operate the plant for its full license term and will consider seeking a license extension for the plant. This example, NRC said, serves to illustrate both the speculative and controversial nature of projecting the premature retirements of nuclear power plants.
Other experts, however, have reached conclusions that are similar to Standard & Poor’s. For example, in January 1999, Synapse Energy Consultants, Inc., a firm that often testifies in electricity rate proceedings conducted by state public utility commissions, concluded in a report that, depending upon the assumptions used, from 20 to 90 nuclear power plants may be retired early. The most likely case, according to the authors of the report, is that 34 plants will be retired early. Nineteen of the 26 plants that Standard & Poor’s predicts may be retired early are also included in Synapse’s list of 34 plants that it believes may be retired early.
Compounding the risk that more nuclear power plants may be retired prematurely is the possibility that the licensees that own these plants may have, so far, under-accumulated funds to decommission these plants. For example, 19 of the 26 plants that may be retired early, according to Standard and Poor’s predictions, are owned, in whole or in part, by 14 licensees that have not accumulated sufficient decommissioning funds, according to our analysis. Additional predictions of more early plant retirements have also been made. For example, in December 1997, EIA projected that 24 nuclear plants would retire as early as 10 years before their license expires. In 1995, Moody’s concluded that at least 10 nuclear plants may be closed for economic reasons if the generation of electric power is completely deregulated. One year later, Moody’s downgraded the bond ratings of 24 electric utilities that operate nuclear plants. Again, in 1997, Moody’s said that the frequency that certain nuclear plants tend to require expensive capital additions to comply with their operating license increases the likelihood of even more early plant retirements.
The premature retirement of the Zion-1 and Zion-2 nuclear power plants in January 1998 illustrates the effect of deregulation on power plant economics. The Commonwealth Edison Company determined that the plants could not generate electricity at competitive prices in the deregulated environment. Therefore, the utility decided to retire both plants after about 24 years, or 60 percent, of their licensed operating life. When the plants were permanently shut down, the utility had put aside $362 million, or less than 43 percent of the $834 million estimated to be needed to decommission the two units. According to officials of Commonwealth Edison, however, under Illinois law the utility is authorized and directed to include in the rates that it charges its electricity customers amounts for the necessary and prudent decommissioning costs for these plants.
section_title: A Few Licensees Have Declared Bankruptcy
paragraphs: In addition to early plant retirements, licensees of nuclear power plants have declared bankruptcy in a few cases. So far, the continuing availability of decommissioning funding has been protected in these cases. For example, the Cajun Electric Cooperative owned 30 percent of the River Bend, Louisiana, plant. The Cooperative went bankrupt in 1994, and a bankruptcy settlement was approved on August 26, 1996. The settlement provided for the transfer of $125 million to an external trust to satisfy Cajun’s share of River Bend’s estimated decommissioning cost of $419 million (in 1996 dollars). But the settlement left the successor to Cajun’s share of the plant open. The court order provided that the bankruptcy trustee and parties to the settlement were to take all necessary and appropriate actions to consummate the settlement by June 1, 1997, including finding a buyer for Cajun’s share of River Bend. On November 28, 1997, NRC’s staff approved the transfer of Cajun’s portion of River Bend’s license to Entergy Gulf States, Inc., which is now the sole owner of this plant. NRC’s staff concluded that Entergy Gulf States was financially qualified to contribute appropriately to the plant’s decommissioning.
Another bankruptcy case involved the El Paso Electric Company, which owns 16 percent of the three-unit Palo Verde Nuclear Generating Station in Arizona. The company filed for bankruptcy protection in 1992, primarily because of excess generating capacity and insufficient rates to cover the costs of power. The settlement of the bankruptcy filing became effective in 1996, at which time, the company emerged with reduced debt and a stronger financial position. During the bankruptcy proceeding, according to an NRC official, the company continued to make its required decommissioning payments.
section_title: Effects of Cost Uncertainties on Rate of Fund’s Accumulation
paragraphs: For our funding analyses, we assumed, among other things, that current estimates of decommissioning costs are accurate. Because actual decommissioning experience is limited, however, actual costs could be lower or higher. From 1990 through 1997, cost estimates increased rapidly for both site-specific studies by licensees and calculations using NRC’s cost-estimating formula. Moreover, uncertainties about the actual scope of decommissioning affects costs. Utilities, for example, sometimes consider the cost to empty a spent fuel storage pool (to permit dismantling a retired plant) as a decommissioning cost. NRC, however, excludes the cost of emptying the storage pool from the scope of its formula for estimating decommissioning costs. The storage of spent fuel in facilities outside of the plant’s storage pool, and the cost of such storage, are addressed in parts of NRC’s regulations that are not directly related to decommissioning. In addition, the eventual resolution of a protracted dispute between NRC and EPA over appropriate radiation standards for decommissioned sites could affect the scope of decommissioning and, therefore, total decommissioning costs.
subsections: section_title: Decommissioning Cost Estimates Are Increasing
paragraphs: Cost estimates since 1990, developed through both NRC’s formula and licensees’ site-specific cost estimates, show that both estimates have increased. Although NRC has not routinely monitored the amounts of decommissioning funds that its licensees have been accumulating, its 1988 regulations required licensees to annually calculate the minimum amount of funds that must be accumulated to pay future decommissioning costs. For each plant using NRC’s mathematical formula, the utility must make an initial calculation in 1986 dollars that is based on the size and type of plant. Then, the utility must escalate the initial calculated value to that of the current year on the basis of prescribed escalation factors. Also, to support proposed charges to electricity customers, plant owners periodically develop detailed estimates of the cost to decommission their specific plants and submit the estimates to their public utility commission regulators. In the absence of significant actual experience, site-specific estimates of decommissioning costs provide the best check on the reasonableness of NRC’s formula for calculating potential decommissioning costs.
Since 1990, decommissioning cost estimates prepared on a site-specific basis and calculated using through NRC’s formula have increased substantially. For example, site-specific cost estimates (excluding costs that licensees may incur during decommissioning, such as spent fuel storage costs, that NRC does not consider to be decommissioning costs) have increased, on average, at a rate of about 6.6 percent per year. One reason for this increase is the expansion of the scope of decommissioning. The estimates made through NRC’s formula are now, on the average, about one-third higher than the site-specific estimates for the same plants. The main reason for this condition is that the waste disposal part of NRC’s formula was not designed to reflect licensees’ efforts to reduce the volume of waste from decommissioning in response to increasing prices for disposal that have traditionally been based on waste volume. In December 1998, NRC corrected this weakness, which brought calculations through its formula more in line with licensees’ site-specific cost estimates.
section_title: Uncertainty Related to Spent Fuel Management Costs
paragraphs: Largely because DOE is not taking spent fuel from licensees’ nuclear power plants, licensees that intend to immediately dismantle their retired plants must store their spent fuel outside of their plants. For the purpose of estimating and accounting for decommissioning costs, some licensees treat storage costs related to the retirement of their plants as decommissioning costs. The inclusion by licensees of these storage costs in their decommissioning costs is a major reason why licensees’ cost estimates have increased in recent years. A second reason is that licensees may include the cost to dismantle nonradioactive structures, such as administrative buildings, in their estimates of decommissioning costs.
In contrast, NRC excludes both spent fuel management costs and non-radioactive-related cleanup costs from its formula for calculating the funds that licensees must accumulate to decommission their nuclear power plants. NRC’s reasons for excluding these types of costs are that it (1) regulates independent spent fuel storage facilities (facilities that are separate from the spent fuel pool, which is an integral part of a nuclear power plant) under regulations that are separate from those applicable to the construction, operation, and decommissioning of nuclear power plants and (2) only regulates the possession, use, and disposal of radioactive materials. Nevertheless, spent fuel management costs have been and will continue to be a real cost for utilities that choose to immediately dismantle their retired plants. For example, in 1995 the licensee for the retired Trojan plant in Oregon estimated that spent fuel management costs to construct, operate, and maintain a dry storage facility at that plant would cost about $102 million (in 1993 dollars).
section_title: Uncertainty Related to Standards for Residual Radiation
paragraphs: Uncertainty over the standards for residual radiation that utilities will have to meet in cleaning up the sites of their retired nuclear power plants affects the accuracy of the current estimates of future decommissioning costs.
EPA is responsible for setting acceptable radiation limits outside of the boundaries of nuclear facilities and for developing residual radiation standards to protect the health and safety of the public and to protect the environment. EPA has been responsible since 1970 for establishing radiation standards for all aspects of decommissioning, including acceptable levels of residual contamination. To date, however, EPA has not issued such standards. “A site will be considered acceptable for unrestricted use if the residual radioactivity that is distinguishable from background radiation does not exceed 25 [millirem ] per year, including that from groundwater sources of drinking water, and that the residual radioactivity has been reduced to levels that are as low as reasonably achievable.”
EPA does not agree with NRC’s standard. In fact, the disagreement between the two agencies has been characterized by both its length and its acrimony. EPA started to develop residual radiation standards in 1984 but has not yet finalized these standards. Nevertheless, EPA’s position is that NRC’s licensees should be required to decontaminate nuclear plant sites to a residual radioactivity level of 15 millirems per year and to limit the exposure to an individual from his/her consumption of groundwater to 4 millirems per year. Most recently, EPA’s administrator stated that the agency would apply the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 to sites that are being decommissioned if NRC and EPA do not reach an agreement on applicable standards. Also, in April 1998, one of NRC’s commissioners publicly commented that the impasse between EPA and NRC over appropriate radiation protection standards may have to be resolved by the Congress. In fact, to resolve this disagreement, NRC has sought legislation that would eliminate the overlap in the standard-setting authority of NRC and EPA.
Currently, NRC’s licensees are using NRC’s regulations and related guidance on decommissioning the sites of retired nuclear facilities to plan and/or implement the decommissioning of their nuclear power plants and related nuclear fuel facilities. If, however, EPA’s residual radiation standards are ultimately used in lieu of NRC’s standards, licensees may have to perform additional cleanup when decommissioning their nuclear plant sites. If this occurred, it would increase decommissioning costs, but by how much is uncertain. According to both NRC and EPA officials, retroactively applying more stringent EPA standards to nuclear plant sites that have already been decommissioned according to NRC’s standards could be very costly.
section_title: Effectiveness of Amendments to Financial Assurance System Will Depend Upon Financial Reviews by NRC
paragraphs: Late in 1998, NRC amended its decommissioning regulations in anticipation of the deregulation and restructuring of the electricity industry. The amended regulations do not allow licensees to rely exclusively on their external sinking funds to ensure that funds are available for decommissioning if its regulators no longer guarantee that moneys can be collected from the licensees’ customers through electricity rates. In such a case, NRC now requires a licensee to provide additional financial assurance for the portion of the licensee’s estimated decommissioning cost that would not be guaranteed. There is, however, uncertainty over the availability and affordability of some of these additional options for providing financial assurance. NRC will also now require licensees to periodically report financial information on decommissioning; however, NRC did not specify how it would use this information.
subsections: section_title: NRC Amends Decommissioning Financial Assurance Regulations
paragraphs: Effective November 23, 1998, NRC amended its decommissioning financial assurance regulations out of concern that the deregulation and restructuring of the electricity industry could reduce confidence that the owners of nuclear power plants will be able to accumulate sufficient funds to decommission their plants. The new regulations provide that, to the extent that the collection of estimated decommissioning costs from customers is no longer guaranteed, a licensee may not exclusively rely on external sinking funds to provide adequate financial assurance of decommissioning. For any portions of decommissioning costs for which the collection of funds is not guaranteed, licensees will have to provide one or more additional types of financial assurance.
subsections: section_title: Additional Methods of Financial Assurance
paragraphs: Electric utilities have almost exclusively relied on the collection of fees from their electricity customers, deposited into externally managed sinking funds, to provide decommissioning financial assurance. In anticipation of electricity deregulation initiatives, NRC, in September 1998, amended its regulations (effective in Nov. 1998) to address situations in which a licensee’s continued collection of decommissioning fees from its electricity customers may no longer be guaranteed by the economic regulation of electricity rates. To the extent that the collection of decommissioning funds is no longer guaranteed, a licensee may provide up-front financial assurance. The options available to licensees include the prepayment of the estimated decommissioning cost or purchase of surety bonds or insurance to cover decommissioning costs. The assurances may also be in the form of guarantees of payments by the licensees or, as appropriate, their parent company, provided that such guarantees are accompanied by the passing of specified financial tests. Both NRC and the nuclear industry have expressed concern about whether these up-front payment methods would be affordable for licensees. However, in commenting on our draft report, NRC stated that the terms for the recent sales of the Three Mile Island Unit 1, Pilgrim, and Seabrook (partial sale) nuclear power plants have included the prepayment of all estimated decommissioning costs. NRC added that it believes that the prepayment option will likely be the preferred means of assuring decommissioning funds in future sales transactions.
When NRC published its proposed amended regulations for public comment in September 1997, it expressed concern that surety instruments and insurance may not be available to some nuclear power plant licensees; therefore, NRC specifically asked for comments on this issue. In response, some commenters said they were concerned about the feasibility of the up-front methods (prepayment, surety instruments, and insurance) for assuring decommissioning funding. For example, the Edison Electric Institute, which represents electric utilities, stated that it could be difficult, if not impossible, for licensees to provide such assurances. Also, seven licensees jointly stated that these funding methods would bar prospective new owners from purchasing interests in nuclear power plants. The seven utilities added that the (then) proposed regulations could impose a financial burden that would likely prevent the sale of a nuclear plant. Finally, the utilities stated that (1) it is uncertain if an insurance product or a surety bond could be procured to secure a nonelectric utility’s share of decommissioning costs, and (2) the cost of procuring such a bond could potentially exceed the cost of prepaying decommissioning expenses.
The difficulty in obtaining a surety bond or insurance product is illustrated by the experience of one of NRC’s licensees. Great Bay Power Corporation, which owned 12 percent of the Seabrook nuclear power plant in New Hampshire, was formed out of bankruptcy proceedings involving four former part-owners of the Seabrook plant. NRC concluded that Great Bay, as a part owner of the plant, did not appear to meet the definition of an “electric utility” because its ability to collect funds for decommissioning from its electricity customers was not guaranteed by the traditional regulation of electricity prices. Therefore, according to NRC’s regulation, Great Bay could not rely exclusively on external sinking funds to provide decommissioning financial assurance. Although NRC gave Great Bay until July 1998 to obtain a surety bond or other financial guarantee to fulfill its decommissioning obligations, the company was unable to obtain such a guarantee. Out of concern for the possible bankruptcy of Great Bay if NRC were to mandate that the company prepay its decommissioning obligation, the state of New Hampshire, in June 1998, passed legislation that would make the co-owners of Seabrook proportionately responsible for making Great Bay’s decommissioning payments if the company defaults on this obligation. According to NRC, this approach qualifies as an acceptable “other method” of providing decommissioning financial assurance.
In addition to the traditional financial assurance methods discussed above, NRC adopted other methods that licensees may use to provide decommissioning financial assurance.
Other guarantee methods, including parent company guarantees and self-guarantees coupled with financial tests. For parent company guarantees, a licensee’s parent company must, among other things, have net working capital, tangible net worth, and assets located in the United States worth at least six times the amount of decommissioning funds being assured by the parent company for all of its nuclear power plants. Tangible net worth must exclude the net book value of the nuclear unit(s). For self-guarantees, tangible net worth and assets located in the United States must be 10 times the amount of the decommissioning funds being assured.
Contractual obligations of a licensee’s customers to purchase enough electricity to provide the licensee’s total share of uncollected funds for decommissioning.
Any other method, or combination of methods, that provides, as determined by NRC upon its evaluation of the specific circumstances, assurance of decommissioning funding equivalent to that provided by the other acceptable methods.
These methods are similar to financial assurance methods that NRC permitted in its 1988 decommissioning regulations for other types of licensees, such as operators of nuclear fuel facilities.
section_title: NRC Adopts Financial Reporting Requirements
paragraphs: Prior to November 1998, NRC had reserved the right to inspect licensees’ decommissioning fund arrangements and status. Under the 1998 amendments, NRC also explicitly reserved the right to take additional action, either independently or in cooperation with economic regulators. These actions could include modifying a licensee’s schedule for accumulating additional funds. In addition, NRC’s 1998 decommissioning regulations required licensees, beginning by the end of March 1999, to report to NRC, every 2 years, certain financial information that would ensure that licensees are collecting their required decommissioning funds.
Information that must be provided in licensees’ financial reports includes (1) the amount of decommissioning funds estimated to be required according to NRC’s formula; (2) the funds accumulated as of the end of the year prior to the report date; (3) the annual amounts remaining to be collected; (4) the assumptions used to escalate decommissioning costs, project rates of earnings on investments of external sinking funds, and discount funding projections; and (5) modifications to external sinking fund agreements. Utility representatives have not opposed financial reporting. For example, the Edison Electric Institute told NRC that periodic reporting on the status of external sinking funds for decommissioning is appropriate. In addition, in commenting on the proposed regulations, a group of seven utilities stated that a comprehensive reporting requirement is long overdue and is particularly appropriate, given that economic regulators have not been actively monitoring the status of licensees’ external sinking funds on an ongoing basis.
When NRC published its final regulations, it stated that, after licensees have submitted their initial reports by the end of March 1999, it would review the reports and consider whether to issue additional guidance on the format and content for subsequent licensee reports. Also, in June 1997, when NRC’s commissioners approved the proposed regulations for public comment, the commissioners stated that after NRC’s staff has reviewed licensees’ initial reports, the staff should advise the commissioners on the need for further rulemaking. When NRC issued the 1998 amendments to its decommissioning regulations, however, it did not explain when and how it intends to act on the financial information reported by individual licensees if that information does not clearly demonstrate that an individual licensee is accumulating decommissioning funds at a satisfactory rate.
The lack of any criteria for acting on licensees’ decommissioning financial reports contrasts with the agency’s ongoing efforts to establish a more objective, understandable, and predictable approach to safety oversight of nuclear power plants. According to NRC, an independent regulatory oversight process is based on unbiased assessments of licensees’ performances; logical, coherent, and predictable actions by NRC; clear ties to NRC’s regulations and goals; and opportunities for public awareness of process results. The new safety oversight process should, according to NRC, allow for the integration of various information sources relevant to a licensee’s safety performance, make objective conclusions regarding the significance of the integrated performance information, take actions based on these conclusions in a predictable manner, and effectively communicate these results to the licensees and to the public.
Therefore, NRC is in the process of establishing a new oversight approach in which it will, among other things, use indicators of nuclear power plants’ performance to establish thresholds for clearly identifying acceptable levels of performance. In conjunction with this, NRC plans to establish criteria for identifying and responding to unacceptable licensee performance.
A similar approach in the area of providing adequate financial assurances for decommissioning would appear to offer the same benefits of objectivity and predictability that NRC seeks in its safety oversight of nuclear power plants.
section_title: NRC Did Not Address Early Plant Retirements or Bankruptcy in Its Amended Regulations
paragraphs: NRC’s new financial assurance regulations do not address the option of accelerating the rate at which licensees must accumulate decommissioning funds on the basis of the actual longevity of plants. NRC rejected this option because it believes that some plants will probably continue operating for their licensed operating period of up to 40 years and, with license extensions, beyond 40 years. Therefore, NRC said, requiring all licensees to accelerate their accumulation of decommissioning funds because of some premature plant retirements would be arbitrary and lead to widely varying effects on licensees. Thus, NRC intends to continue its practice of addressing early plant retirements on a case-by-case basis. NRC’s position, as expressed in the supplementary information accompanying the publication of its amended decommissioning regulations, is that accelerated funding is inequitable. NRC believes that accelerated funding places too much of the financial burden on current utility ratepayers and a lesser burden on ratepayers in the later years of a nuclear power plant’s operation. However, when licensees have retired plants before the plants’ operating license expired, the licensees’ electricity customers have had to pay decommissioning costs for plants from which they no longer receive electricity. The Trojan, Maine Yankee, and Zion cases, discussed earlier, demonstrate this fact. During the years that the Trojan and Zion plants operated, the respective licensees’ customers paid for less than half of the costs to decommission the plants. The customers of the Maine Yankee plant paid for 53 percent of the decommissioning cost. Now, although these retired plants no longer generate electricity, the current and future customers of the licensees will pay the remaining decommissioning costs without receiving comparable benefits from the plants.
NRC elaborated on its reasons for opposing accelerated decommissioning funding in its comments on our draft report. NRC said that requiring accelerated funding for decommissioning would cause substantial cost increases to be incurred by either licensees’ stockholders or their ratepayers. Also, there would be a myriad of difficulties in determining the appropriate rate of acceleration; for example, at what rate should the collection of funds be accelerated? These issues, NRC added, were considered in its evaluation of accelerated funding as part of its process of amending its decommissioning regulations. NRC concluded that accelerated funding does not provide sufficiently increased decommissioning funding assurance commensurate with its potential cost impacts.
State legislatures, state public utility commissions, and FERC appear to be addressing assurances for decommissioning funding in their electricity deregulation initiatives. Utility officials in Illinois, New Hampshire, and Oregon, for example, pointed out that laws in those states provide for the collection of necessary and prudent funds for decommissioning nuclear power plants regardless of whether the plants operate until their current licenses expire or are retired prematurely. Thus, licensees have continued collecting from electricity customers the fees earmarked for decommissioning three prematurely retired plants in Illinois and one in Oregon. Similar examples are occurring in California and Massachusetts.
With respect to the bankruptcy of licensees, New York’s Public Service Commission, in commenting on NRC’s proposed amendments to its decommissioning regulations, urged NRC and states to consider proposing legislation that would make decommissioning liabilities a first priority in the event of the bankruptcy of a private nuclear facility owner. Current bankruptcy law does not make the subject of nuclear decommissioning costs a priority, but NRC has said it does enter bankruptcy proceedings to protect the integrity of decommissioning funding. Moreover, at NRC’s request, the Administration included a provision in its 1999 electricity deregulation bill that would give priority to funding decommissioning of nuclear power plants in bankruptcy proceedings involving licensees.
section_title: Conclusions
paragraphs: Several factors have come together at this time that make it imperative for NRC to ensure that its licensees accumulate sufficient funds to decommission their plants regardless of when they are permanently shut down. Specifically, some licensees have not set aside sufficient amounts of funds for decommissioning, and there is uncertainty over the availability and affordability of the up-front payment methods of providing financial assurance. With electricity deregulation emerging, the possibility exists that a licensee may, in the future, prematurely retire a plant and be faced with paying the remaining decommissioning funds from its own resources. The ability of the licensee to do so might then depend upon its overall financial condition. Thus, self-guarantees that decommissioning funds will be available are only as good as the financial condition of the licensee. (We recognize that to date, early plant retirements have not resulted in a shortfall in decommissioning funds because regulators have allowed licensees to continue collecting funds after plants have been retired.)
To NRC’s credit, it recognized its need to increase its oversight of decommissioning financial assurance when it modified its decommissioning regulations by requiring licensees to provide financial reports every 2 years. NRC did not, however, explain what it intends to do with these reports. For example, NRC did not establish the thresholds for clearly identifying acceptable levels of financial assurances or establish criteria for identifying and responding to unacceptable levels of assurances. In the absence of such explanations, there is no logical, coherent, and predictable oversight of licensees’ financial assurance for decommissioning their nuclear power plants.
section_title: Recommendation
paragraphs: After NRC reviews licensees’ initial reports on decommissioning financial assurances, we recommend that the Chairman, NRC, provide licensees and the interested public with information on the (1) objectives, scope, and methodologies of NRC’s reviews of the reports; (2) thresholds for identifying, on the basis of these reviews, acceptable, questionable, and unacceptable indications of financial assurances; and (3) criteria for the actions to be taken on the results of these reviews.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided NRC with a draft of our report for review and comment. NRC said that our recommendation merits serious consideration with respect to its future uses of licensees’ biennial reports on decommissioning funds. NRC added, however, that it is premature to expend significant staff resources on establishing thresholds for identifying problems with licensees’ financial assurances for decommissioning until NRC knows, on the basis of its reviews of the initial status reports from licensees, that such problems exist. Thus, NRC differs with us not on the substance of our recommendation but on the timing of its implementation. NRC’s position is that it does not need to establish performance thresholds unless actual performance problems exist. In our opinion, a proactive, rather than reactive, approach would more appropriately provide licensees and the public with a more complete understanding of NRC’s expectations in the area of financial assurance for decommissioning.
NRC also stated that our report does not adequately represent the complex changes that are occurring in the electric utility industry and the interactions among NRC, state public utility commissions and FERC, and the nuclear power industry. According to NRC, a host of complex, interrelated variables must be analyzed before any threshold for determining funding shortfalls can be established. These variables include, NRC added, (1) the actual rates that licensees are accumulating for decommissioning funds, (2) the stated intents of rate regulators (such as state public utility commissions) on allowing the ultimate collection of decommissioning funds, (3) the provisions for decommissioning funding in state deregulation initiatives, and (4) for licensees no longer subject to the traditional regulation of their electricity rates, the extent to which the future collection of decommissioning funds may be based on non-bypassable wire charges. Where appropriate, we have either added NRC’s comments to, or revised the text of, our report. The full text of NRC’s written comments and our response appear in appendix II.