Nuclear Regulation: NRC's Oversight of Nuclear Power Reactors' Decommissioning Funds Could Be Further Strengthened
Published: 2012-04-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: About 20 percent of U.S. electricity is generated by 104 nuclear reactors. NRC, which regulates reactors, requires their owners (licensees) to reduce radioactive contamination after reactors permanently shut down. This process, called decommissioning, costs hundreds of millions of dollars per reactor. NRC requires licensees to provide reasonable assurance that they will have adequate funds to decommission, in part, by accumulating funds that are greater than or equal to NRCs decommissioning funding formula. GAO and NRCs OIG have identified concerns about NRCs oversight of decommissioning funds. GAO was asked by Representative Markey in his former capacity as Chairman of the House Subcommittee on Energy and Environment to (1) describe how NRC ensures that licensees provide reasonable assurance of adequate decommissioning funds and (2) identify any improvements or weaknesses in NRCs oversight of this area. GAO analyzed NRCs formula and reviews of licensee information and interviewed NRC officials, licensees, and others.
section_title: What GAO Found
paragraphs: The Nuclear Regulatory Commission (NRC) periodically reviews licensees decommissioning funds and related licensee data to determine if licensees have provided reasonable assurance that they will accumulate adequate funds for decommissioning. For example, licensees must submit estimates to NRC of decommissioning costs throughout the life of the reactor and submit fund status reports at least every 2 years while the reactor is operating. Licensees typically accumulate such funds over time through trust fund investments. The minimum amount of funds considered adequate is established by NRCs decommissioning funding formula, which is based on information collected more than 30 years ago.
NRC has taken actions to strengthen its oversight of licensees decommissioning funds by (1) creating guidance and other documents related to criteria for reviewing licensees 2-year reports and by using its enforcement process when deficiencies are identified, (2) conducting reviews at licensee offices to verify that fund balances licensees reported in their 2-year reports match their year-end bank statements in response to a 2006 NRC Office of the Inspector General (OIG) recommendation, (3) reevaluating the decommissioning funding formula to determine if it should be updated, and (4) improving decommissioning planning. However, several weaknesses may limit NRCs ability to ensure that licensees have provided reasonable assurance. Specifically:
NRCs formula may not reliably estimate adequate decommissioning costs. According to NRC, the formula was intended to estimate the bulk of the decommissioning funds needed, but the term bulk is undefined, making it unclear how NRC can determine if the formula is performing as intended. In addition, GAO compared NRCs formula estimates for 12 reactors with these reactors more detailed site-specific cost estimates calculated for the same period. GAO found that for 5 of the 12 reactors, the NRC formula captured 57 to 76 percent of the costs reflected in each reactors site-specific estimate; the other 7 captured 84 to 103 percent.
The results of more than one-third of the fund balance reviews that NRC staff performed from April 2008 to October 2010 to verify that the amounts in the 2-year reports match year-end bank statements were not always clearly or consistently documented. As an example of inconsistent results, some reviewers provided general information, such as no problem, while others provided more detail about both the balance in the year-end bank statement and the 2-year report. As of October 2011, NRC did not have written procedures describing the steps that staff should take for conducting these reviews, which likely contributed to NRC staff not always documenting the results of the reviews clearly or consistently.
NRC has not reviewed licensees compliance with the investment standards the agency has set for decommissioning trust funds. These standards specify, among other things, that fund investments may not be made in any reactor licensee or in a mutual fund in which 50 percent or more of the fund is invested in the nuclear power industry. As a result, NRC cannot confirm that licensees are avoiding conditions described in the standards that may impair fund growth. Without awareness of the nature of licensees investments, NRC cannot determine whether it needs to take action to enforce the standards.
section_title: What GAO Recommends
paragraphs: GAO recommends, among other things, that NRC define what it means by the bulk of the funds needed for decommissioning and consider reviewing a sample of licensees investments to determine if they comply with standards. NRC agreed to consider reviewing a sample of investments, but disagreed that defining bulk is needed because of the comprehensiveness of NRCs regulatory system. GAO continues to believe that this definition is needed.

section_title: Letter
paragraphs: About 20 percent of the nation’s electricity is generated by 104 nuclear  reactors located at 65 power plants across the country. The Nuclear  Regulatory Commission (NRC), which licenses and regulates reactors,  requires that radioactive contamination be reduced to a level that allows  NRC to terminate the reactor license and release the property for other  use after a reactor shuts down permanently. This cleanup process— known as decommissioning—costs hundreds of millions of dollars per  reactor, and NRC is responsible for ensuring that reactor owners  (licensees) provide reasonable assurance that they will have adequate  funds to decommission their reactors. According to NRC guidance, such  assurance is meant to avoid funding shortfalls that could delay  decommissioning and pose risks to public health and safety and the  environment. NRC’s primary mission is to protect the public health,  safety, and the environment from the effects of radiation from nuclear  power plants and other facilities.
NRC requires licensees to provide this assurance throughout the life of a  reactor: from licensing, through its period of operations—which is usually  40 years or longer—and through decommissioning, which NRC requires  licensees to complete within 60 years after a reactor permanently shuts  down unless additional time is necessary to protect public health and  safety. Licensees provide such assurance, in part, by accumulating an  amount of funds that is greater than or equal to an amount determined by  a decommissioning funding formula developed by NRC. NRC considers  the formula estimates to be the minimum amount needed by licensees to  decommission their reactors. Licensees are required to demonstrate that  there is reasonable assurance that they will have adequate funds to  decommission their reactors by the time they plan to shut down the  reactors permanently. Licensees demonstrate that they are accumulating  adequate funds by submitting decommissioning funding status (DFS)  reports. The DFS reports, which licensees must submit to NRC at least  every 2 years, include, among other things, the estimated amount of  funds needed for decommissioning and the decommissioning funds  accumulated to date as of the end of the previous calendar year.
Developments since 2000 have called into question the strength of NRC’s  oversight of decommissioning funding assurance and the likelihood that  licensees will have adequate funds for decommissioning. Specifically, the  NRC Office of the Inspector General (OIG) reported in 2000 that the NRC  decommissioning funding formula may be outdated and, in a follow-up  report in 2006, found that as a result there is increased vulnerability to  decommissioning funding shortfalls and potential adverse impacts on the  reliability of NRC’s assessment of licensee financial assurance and the  amount of funds needed for decommissioning. In December 2001, we  reported, among other things, that NRC’s evaluation of licensees’ funding  arrangements was not rigorous enough to ensure that decommissioning  funds would be adequate and that a lack of information about the extent  of radiological contamination at some power plants can increase the risk  that licensees could incur unplanned cleanup expenses. In October  2003, we reported that NRC had not established criteria for taking action  if it determines that a licensee is not accumulating adequate funds. In  addition, in its 2006 follow-up report, the NRC OIG found that NRC relies  on licensees’ reports of decommissioning fund balances without verifying  these balances. Furthermore, in NRC’s 2009 review of licensee DFS  reports, the agency found that licensees for 27 out of 104 operating  reactors had a combined shortfall of more than $2.4 billion in their  decommissioning funds, in part, because of the financial market decline  that began in 2007. In addition, NRC acknowledged in a 2011  decommissioning funding workshop that licensees may face greater costs  during decommissioning than accounted for under the NRC  decommissioning funding formula.
In this context, you asked us to follow up on our previous work on  decommissioning funding assurance in your former capacity as Chairman  of the House Subcommittee on Energy and Environment. Our objectives  were to (1) describe how NRC ensures that licensees provide reasonable  assurance of adequate decommissioning funds and (2) identify any  improvements or weaknesses in NRC’s oversight of this area.
To describe how NRC ensures that licensees provide reasonable  assurance of adequate decommissioning funds, we reviewed  decommissioning regulations and guidance and interviewed relevant  NRC officials. To identify any improvements or weaknesses in NRC’s  oversight of decommissioning funding assurance, we analyzed NRC’s  decommissioning funding formula and the agency’s reviews of licensee  DFS reports. As part of our analysis of NRC’s decommissioning funding  formula, we compared NRC formula-generated cost estimates with  licensee-generated site-specific cost estimates for 12 reactors for which  we were able to obtain both estimates calculated in the same year. We  also compared NRC’s formula and the process the agency used to create  the formula with GAO’s cost-estimating guide, a compilation of cost- estimating best practices drawn from across industry and government. In  addition, we interviewed relevant officials to ensure our understanding of  how the formula was developed and how it is used. As part of our  analysis of NRC’s reviews of licensee DFS reports, we examined data  from licensees’ 2011 DFS reports for operating reactors and currently  decommissioning reactors, relevant NRC regulations and guidance, and  reports by GAO and the NRC OIG on decommissioning funding  assurance. We also visited nuclear power plants; interviewed NRC  officials, licensees, and decommissioning fund stakeholders; and  attended a decommissioning workshop to better understand issues  related to the DFS reports and decommissioning in general. For our site  visits, we selected a nonprobability sample of five nuclear power plants.  We selected these sites to include fully decommissioned, currently  decommissioning, and operating reactors, among other things. We also  interviewed NRC officials from the Office of Nuclear Reactor Regulation  and the NRC OIG to better understand the agency’s oversight of  decommissioning funds. A more detailed description of our scope and  methodology is in appendix I.
We conducted this performance audit from February 2011 to April 2012,  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Decommissioning begins when a licensee has filed documentation with  NRC to permanently shut down a reactor and the fuel has been removed.  NRC requires decommissioning to be completed within 60 years after a  reactor permanently shuts down unless additional time is necessary to  protect public health and safety. Licensees choose from two  decommissioning methods: immediate decontamination and  dismantlement (DECON) or safe storage (SAFSTOR). The DECON  method calls for the licensee to remove the radioactively contaminated  equipment, structures, and parts of the reactor for shipment to a low-level  radioactive waste disposal site or for temporary storage. This process  generally takes 5 or more years. Under the SAFSTOR method, the  reactor is left for up to 60 years in a state that allows the radioactive  components to decay while the reactor is maintained and monitored.  Once radioactivity has decreased, the reactor is then dismantled in a way  similar to the DECON process. After all of the radioactive material has  been removed, and NRC has terminated the reactor’s license, the site  can be used for other purposes. Licensees can begin decommissioning a  reactor while another reactor at the site is operating. Currently, 36 nuclear  power plants have more than one reactor at the site, and six of those  plants have one reactor that is in the process of decommissioning.
In addition to decommissioning, licensees are also responsible for other  postshutdown activities. These activities include the management of  spent nuclear fuel—a type of high-level radioactive waste—until it can be  transferred to the Department of Energy, which is responsible for  providing permanent disposal. Site restoration is another such activity,  which includes the cleanup of nonradiological contaminants, such as  acids and heavy metals, to restore the power plant site to a condition that  is safe for public use. However, these activities do not fall within the  scope of NRC’s definition of decommissioning or under NRC’s  decommissioning oversight authority, and licensees must pay for these  costs with funds that are separate from their decommissioning funds.
section_title: NRC Methods to Ensure That Licensees Provide Reasonable Assurance of Adequate Decommissioning Funds
paragraphs: NRC periodically reviews licensees’ decommissioning funds and related  licensee data to determine if licensees have provided reasonable  assurance that they will accumulate adequate funds for decommissioning.  According to NRC guidance, the amount of funds that is considered  adequate is established by NRC’s decommissioning formula, which  represents the bulk of the funds needed to decommission a specific  reactor and is not an estimate of the actual cost. The formula estimates  decommissioning costs by reactor type—pressurized water reactor or  boiling water reactor—and the reactor’s capacity to generate electricity.  The formula is based on two studies, published in 1978 and 1980, that  provided information on the technology available at the time, safety  considerations, and the probable costs for decommissioning the two  types of reactors. NRC codified its decommissioning funding formula in  1988. According to this regulation, the three cost factors identified in the  formula—labor, energy, and low-level radioactive waste disposal—are  adjusted annually to reflect the effects of inflation. To estimate costs in  current year dollars, the labor and energy cost factors are adjusted from  the prior year using data from the U.S. Department of Labor’s Bureau of  Labor Statistics, while the waste disposal cost factor is adjusted based on  actual disposal cost data published by NRC.
As part of NRC’s oversight of decommissioning funds, the agency  requires licensees to provide decommissioning cost estimates and other  information to NRC throughout the life cycle of a nuclear reactor:  Initial decommissioning estimate and financial method. Beginning in  July 1990, NRC has required licensees to report that they had (1)  estimated the amount needed for decommissioning, typically using  NRC’s decommissioning funding formula, and (2) developed a plan  for accumulating these funds by the projected time of permanent  shutdown. Since that date, license applicants have been required to  submit this information as part of their license application. NRC  regulations allow licensees to use one or more methods as part of  their plan to accumulate funds, such as prepayment of the entire  estimated decommissioning amount, a trust fund that is separate from  other licensee assets and accrues earnings based on investments,  parent company guarantees, or letters of credit. The most common  financial method is a trust fund that is allowed to grow over the life of  the reactor and during the decommissioning process. Once licensees  contribute funds to a decommissioning trust fund, funds generally  cannot be withdrawn for other purposes.    DFS reports. NRC requires licensees to submit DFS reports at least  every 2 years while a reactor is operating, and every year once a  reactor is within 5 years of permanent shutdown through license  termination. Licensees may report the amount of funds estimated to  be needed for decommissioning using the decommissioning funding  formula or a licensee-generated site-specific cost estimate if it is  greater than the formula amount. According to NRC guidance, NRC  staff compare two things in reviewing these reports: (1) the licensee’s  accumulated funds plus amounts provided by any other methods in  the licensee’s plans to accumulate funds as described above and (2)  the amount estimated to be needed for decommissioning, which is the  greater of an NRC-generated formula estimate or the licensee- generated site specific cost estimate. If the licensee’s balance is  greater than or equal to the estimated amount needed for  decommissioning, an NRC reviewer makes a determination of  reasonable assurance. If the balance is less than the estimated  amount needed for decommissioning, the reviewer projects the  licensee’s accumulated funds through the decommissioning period to  account for any anticipated growth. If the projected amount plus  amounts provided by other methods is less than the estimated  amount needed for decommissioning and a second reviewer verifies  this finding, then NRC may request additional information from the  licensee and repeat the process. According to agency guidance,  licensees are expected to make adjustments to correct shortfalls in 2  or 5 years, depending on the type of licensee, from when the DFS  report in question is submitted. An NRC official told us that the  agency determines on a case-by-case basis if additional actions  should be taken to assure the agency that the licensee will have  adequate decommissioning funds when needed.    Preliminary decommissioning cost estimate. About 5 years prior to a  reactor’s projected permanent shutdown, NRC requires licensees to  submit a preliminary decommissioning cost estimate that is more  detailed than NRC’s decommissioning funding formula. This cost  estimate provides NRC with an up-to-date estimate of expected  decommissioning costs and an assessment of the major factors that  could affect such costs, as well as the licensee’s plans for adjusting  decommissioning funding levels if necessary. Major factors include,  but are not limited to, the potential for contamination of the site and  the decommissioning method the licensee plans to use. NRC  guidance calls for staff to compare the preliminary cost estimate with  the decommissioning cost estimate generated by the NRC formula.  The licensee’s preliminary cost estimate is deemed acceptable if it is  equal to or greater than the formula amount. If it is less than the  formula amount, NRC informs the licensee that additional information  is needed to assure the agency that the licensee will accumulate  adequate funds for decommissioning.    Site-specific cost estimate. NRC requires licensees to submit a site- specific cost estimate prior to or within 2 years following permanent  shutdown; licensees may also develop such estimates earlier at  their discretion. The intent of this cost estimate is to provide NRC with  a more detailed assessment that incorporates the cost impacts of site- specific factors. Site-specific factors include, but are not limited to, an  estimate of the volume of radioactive waste and a summary of costs  estimated for each major decommissioning activity. According to NRC  guidance, the site-specific estimate may be significantly greater than  the minimum amount based on the NRC formula. If the site-specific  estimate and formula amount differ, NRC requires licensees to  provide information on the basis for the difference. If NRC determines  that the information provided is insufficient, an agency official told us  that the agency decides, on a case-by-case basis, how many  information requests it will make and whether it will consider taking  additional actions to assure the agency that the licensee will have  adequate decommissioning funds when needed.    License termination plan with updated site-specific cost estimate.
Toward the end of decommissioning and at least 2 years before  termination of the reactor’s license, NRC requires licensees to submit  a license termination plan. In this plan, licensees must estimate the  remaining costs of decommissioning. NRC guidance calls for agency  staff to review this report to independently verify that a reactor can be  decommissioned safely and the license terminated. As part of this  review, staff are to compare the estimated remaining costs of  decommissioning with the licensee’s funds available for  decommissioning. If the available decommissioning funds are less  than the estimated remaining costs, the plan must indicate the means  the licensee will use for ensuring adequate funds to complete  decommissioning.
Licensees who choose to invest their decommissioning trust funds are  generally required to do so in accordance with standards set by NRC.  NRC defers to the Federal Energy Regulatory Commission (FERC) for  investment standards for reactors that are owned by public utilities, which  constitute about half of the 104 operating reactors. FERC requires the  utilities it regulates to invest their decommissioning funds in accordance  with several standards. These standards state, among other things, that  the fund must be independent of the public utility, its subsidiaries,  affiliates, or associates; the public utility may not serve as its own  investment fund manager; and the investment manager must exercise the  standard of care that a prudent investor would use in the same  circumstances. Public utilities are required to submit annual  decommissioning fund statements to FERC that summarize the public  utility decommissioning fund balances and investments, among other  things.
For reactors that are not owned by public utilities, NRC regulations set  investment standards specifying, for example, that the funds must be held  by an independent trustee who adheres to a standard of care required by  state or federal law or, in the absence of any such standard, to a prudent  investor standard as defined by FERC; investments may not be made in  any reactor licensee or in a mutual fund in which 50 percent or more of  the fund is invested in the nuclear power industry; and no more than 10  percent of the funds can be indirectly invested in securities of any entity  owning or operating a reactor.
section_title: NRC Has Strengthened Its Oversight of Decommissioning Funds, but Several Weaknesses Remain
paragraphs: In response, in part, to GAO’s and the NRC OIG’s recommendations,  NRC has taken actions to strengthen its oversight of licensees’  decommissioning funds, including creating guidance for reviewing DFS  reports, reevaluating the decommissioning funding formula, and requiring  licensees currently decommissioning their reactors to report to NRC the  actual costs of decommissioning. However, remaining weaknesses in  NRC’s oversight may limit the agency’s ability to ensure that licensees  have provided reasonable assurance that they will have adequate funds  to decommission their reactors.
subsections: section_title: NRC Has Taken Actions to Strengthen Its Oversight
paragraphs: NRC has taken steps to identify and resolve decommissioning funding  shortfalls by creating guidance and other documentation related to criteria  for reviewing DFS reports and by using its enforcement process when  deficiencies are identified. In 2003, we recommended that NRC  establish criteria for taking action when it determines that a licensee is not  accumulating sufficient funds. Since then, NRC has developed guidance  for reviewing DFS reports that includes criteria for when staff should  request additional information from licensees to address shortfalls. NRC  has updated this guidance several times based on lessons learned from  its DFS report reviews. NRC also documented the approach staff are to  use to request additional information from licensees when the agency  identified decommissioning shortfalls in 2009 through its DFS reviews. In  addition, NRC has used its enforcement process in three cases to  address DFS reporting deficiencies since 2009. Agency officials said that  such actions were effective in getting the licensees to resolve the issues  identified, in part because NRC’s enforcement process provides publicly  available information in the event that an apparent violation is identified.
In addition, in response to an NRC OIG recommendation, NRC has  conducted reviews at licensee offices to verify that the amounts licensees  reported to NRC in DFS reports as fund balances match the amounts  stated in licensees’ year-end bank statements. The NRC OIG  recommended in 2006 that the agency require verification of  decommissioning fund balances in order to better ensure that licensees  are providing reasonable assurance that they will have the necessary  funds. NRC documents indicate that from April 2008 through October  2010, NRC officials performed 136 reviews at 35 locations. NRC officials  told us that during these reviews they verified that the decommissioning  fund balances reported in the bank statements matched the balances  reported in the DFS reports, with one exception, and that they did not  find any cases where a licensee overreported its fund balance.
Furthermore, in response to an NRC OIG recommendation, NRC began  reevaluating its decommissioning funding formula in 2009 to determine if it  should be updated because of changes in decommissioning technology  and the cost of management and disposal of low-level radioactive waste.
The NRC OIG recommended in 2000 that the agency consider reassessing  the reasonableness of the formula, in part because it was outdated, and  reiterated this recommendation in 2006. NRC has not updated its  decommissioning funding formula since it was codified in 1988. NRC  officials told us that they plan to make a recommendation to agency  management in late 2012 about whether an update is warranted based on  its evaluation. In commenting on a draft of this report, NRC officials told us  that, as part of evaluating the formula, they expect to estimate the lower  and upper bounds of the cost of decommissioning based on licensee- generated cost estimates and historical decommissioning costs—thereby  creating a range of expected decommissioning costs—and then see how  an updated formula fits into this range.
Moreover, NRC amended its decommissioning funding regulations in  June 2011 to improve decommissioning planning and reduce the  likelihood that any currently operating power plant will become a legacy  site—a facility with a licensee that cannot complete complex  decommissioning work for technical or financial reasons. The regulatory  changes as a result of the amendments will, among other things, require  licensees of the reactors currently undergoing decommissioning to report  to NRC the actual costs being incurred during decommissioning,  specifically, to report annual decommissioning expenditures. NRC wants  these data to assess the adequacy of decommissioning funding after  permanent shutdown. These data could be used to determine if the  agency’s decommissioning formula estimates the bulk of the funds that  licensees will likely need to decommission their reactors. The  amendments become effective in December 2012, and licensee reporting  of these data is required by March 31, 2013.
section_title: Several Weaknesses May Limit the Adequacy of NRC’s Oversight of Decommissioning Funds
paragraphs: Even with the actions NRC took to strengthen its oversight, the agency’s  ability to ensure that licensees provide reasonable assurance that they will  have adequate funds at the time of decommissioning may be limited by  several remaining weaknesses in its oversight. Specifically, NRC has not (1)  clearly defined what the agency means by the “bulk” of the funds licensees  will likely need to decommission and the decommissioning funding formula  may not reliably estimate adequate decommissioning costs, (2) always  clearly or consistently documented its fund balance review results and may  discontinue these reviews, and (3) reviewed licensees’ compliance with  investment standards.
NRC has not defined what it means by the bulk of the funds licensees will  likely need to decommission a reactor. When we compared  decommissioning funding formula estimates provided by NRC for 12  reactors with licensees’ site-specific cost estimates calculated for the  same reactors, we found that the NRC formula captured from 57 to 103  percent of the costs reflected in each reactor’s site-specific estimate, with  5 of the 12 capturing 76 percent or less (see table 1). Even though the  formula estimates captured more than 50 percent of the licensee’s site- specific cost estimates for each of the 12 reactors, the wide range of  differences between formula and site-specific cost estimates raises a  question about whether or not the formula can reasonably be said to have  captured the bulk of decommissioning costs.
In addition, for 8 of the 12 reactors, the licensees calculated their site- specific cost estimates less than 7 years before the license was originally  due to expire, and their estimates were as much as $362 million more  than the formula estimates at that time. It is true that NRC expects that  its formula estimate may be less than licensees’ site-specific cost  estimates. However, licensees whose formula estimate is significantly  less than the site-specific estimate when calculated near the end of their  reactors’ operating lives would have fewer years to accumulate a  significant amount of decommissioning funds. Overall, 9 of the 12  reactors have had their licenses renewed, which gives these licensees  more time to accumulate the decommissioning funds they will likely need.  However, without changes to the NRC formula, it is possible that the NRC  formula estimates could be significantly less than the licensees’ site- specific cost estimates several years from their new shutdown date.
Furthermore, NRC’s decommissioning funding formula may not provide a  reliable estimate of adequate decommissioning costs for several reasons.  We compared NRC’s formula and the process the agency used to create  the formula with GAO’s cost-estimating guide, which compiles cost- estimating best practices drawn from across industry and government  and, in doing so, identified several issues that raise additional questions  about the quality of the formula. For example, NRC’s decommissioning  funding formula substantially met two characteristics of a high-quality  formula, but only partially met the other two. Specifically, NRC’s  supporting documentation for the formula was not thorough enough for us  to understand and replicate its derivation. According to our cost- estimating guide, without thorough documentation, NRC cannot reliably  explain its rationale for the cost elements that support the formula and  formula-generated cost estimates. In addition, NRC did not perform a risk  analysis on the formula, which would convey a level of confidence in the  likelihood of the formula’s ability to estimate the most likely minimum cost  of decommissioning. Without performing a risk analysis on the formula,  NRC cannot be assured of the accuracy of the formula because  management may not be able to determine a defensible level of  contingency reserves that is necessary to cover increased costs such as  underestimated labor and waste disposal costs. See appendix II for our  detailed assessment of the formula in comparison with the four  characteristics identified in our cost-estimating guide.
The results of more than one-third of the 136 fund balance reviews that  NRC staff performed from April 2008 to October 2010 to verify the  amounts in DFS reports were not always clearly or consistently  documented. Specifically, the results of 49 reviews were not clear  because the reviewer either did not check “yes” or “no” or checked both  boxes on the one-page form NRC staff used to collect information when  indicating whether the original licensee documents were verified to show  that the amounts in year-end bank statements matched the amounts in  DFS reports (see fig. 1). In other cases, the results were not consistently  documented, with some reviewers providing general information on their  forms, such as writing “no problem,” while others provided more detailed  information, such as providing both the balance in the year-end bank  statement and in the DFS report.
As of October 2011, NRC did not have written procedures describing the  steps that staff should take in analyzing licensee documentation and  documenting review results on the one-page form, which likely contributed  to NRC staff not always documenting the results of the reviews clearly or  consistently. We have previously reported that written procedures help  ensure consistency within an organization. Under Standards for Internal  Control in the Federal Government, federal agencies are to clearly  document internal control—the policies, procedures, techniques, and  mechanisms that enforce management’s directives—and the  documentation is to be readily available for examination.
In addition, NRC officials told us that management was considering  recommending that the agency discontinue the reviews. If NRC  discontinues these reviews, the agency will no longer have a mechanism  for verifying the accuracy of licensee fund balances in their DFS reports  and will no longer address the 2006 NRC OIG recommendation to verify  licensee balances to better ensure that licensees are providing  reasonable assurance that they will have the necessary funds for  decommissioning. NRC officials told us that the reasons they may  discontinue the reviews are a lack of findings and budget constraints.  However, according to our analysis of the results of the 136 reviews, it is  unclear whether NRC’s conclusion of a lack of findings is accurate. In  addition, an NRC official told us that these reviews could be incorporated  into the DFS review process, thereby eliminating the cost of travel to a  licensee’s office, potentially mitigating budget constraint concerns.
NRC has not reviewed licensees’ compliance with the investment  standards the agency has set for decommissioning funds. NRC does not  require licensees to file statements showing how their decommissioning  funds are invested, and NRC’s DFS review process does not include an  evaluation to ensure that licensees comply with these investment  standards. As a result, NRC cannot confirm that licensees are avoiding  conditions described in the standards, such as investing in other  licensees. According to two stakeholders involved in decommissioning  fund management and investment consulting, a small but growing  number of licensees are considering investing in hedge funds as a way of  improving returns on their investments and managing market volatility. As  we have stated in the past, hedge funds pose a number of risks and  challenges beyond those posed by traditional investments. NRC officials  told us that their staff resources are limited and that they lack the financial  expertise to evaluate compliance with investment restrictions. For public  utility licensees, NRC officials stated that they coordinate informally with  FERC in cases where potential funding shortfalls or problems arise.  FERC officials told us that they review licensee compliance with the  standards only if a problem with a licensee’s decommissioning trust fund  is brought to the agency’s attention, which would mean that most  licensees’ compliance with the standards would not be reviewed. Without  awareness of the nature of licensees’ investments, NRC cannot  determine whether it needs to take action to enforce the standards.
section_title: Conclusions
paragraphs: NRC ensures that licensees have provided reasonable assurance that  they will have adequate funds to decommission their reactors by  periodically reviewing licensees’ decommissioning funds and related  licensee data. Consistent with its mission to protect the public and  environment from the effects of radiation, NRC has taken steps to  strengthen its oversight of licensees’ decommissioning trust funds. NRC,  for example, amended its decommissioning funding regulations to  improve decommissioning planning and reduce the likelihood that any  currently operating power plant will become a legacy site. In addition,  NRC began reevaluating its decommissioning funding formula in 2009 to  determine if it should be updated because of changes in  decommissioning technology and the cost and management of low-level  radioactive waste. NRC officials plan to make a recommendation to  management in late 2012 about whether an update is warranted based  on this evaluation.
However, weaknesses remain in NRC’s oversight of decommissioning  funds that could leave the public and environment vulnerable. For  example, NRC has not defined what it means by the bulk of funds that the  decommissioning funding formula is supposed to estimate, and we found  a wide-range of differences between NRC’s decommissioning funding  formula estimates and some licensees’ site-specific cost estimates. This  raises questions about the reliability of the formula as an estimate of the  minimum amount needed for decommissioning. In addition, the agency  did not have thorough documentation that would enable us to understand  and replicate the derivation of its formula and did not perform a risk  analysis on the formula, raising questions about the quality of the cost  estimates used to create the decommissioning formula. Without a  definition of what NRC means by the bulk of decommissioning costs and  without high-quality estimates of these costs, it is unclear how NRC can  determine if the formula is performing as intended or that licensees will  have adequate decommissioning funds when necessary. In addition,  NRC does not have written procedures describing the steps that staff  should take in their reviews analyzing licensee documentation and  verifying that the amounts licensees report to NRC in their DFS reports  match the amounts reported on their year-end bank statements, a fact  that likely contributed to the results of the reviews not always being  clearly or consistently documented. However, NRC may discontinue  these reviews, which the agency undertook in response to a 2006 NRC  OIG recommendation. Without conducting these reviews, NRC will not  have an accountability mechanism for ensuring that the amounts reported  in DFS reports match the amounts shown in licensees’ year-end bank  statements. Finally, NRC has not reviewed licensees’ compliance with the  investment standards it has set for decommissioning funds. Therefore,  the agency cannot confirm that licensees are avoiding conditions  described in the standards that could put decommissioning funds at risk.  Without awareness of the nature of licensees’ investments, NRC cannot  determine whether it needs to take action to enforce decommissioning  investment standards.
section_title: Recommendations for Executive Action
paragraphs: To further strengthen NRC’s oversight of decommissioning funding  assurance, we recommend that the NRC Commissioners take the  following five actions:    Ensure reliability as part of the agency’s process of reevaluating its  decommissioning funding formula, by    defining what the agency means by the “bulk” of the funds that  licensees will likely need to decommission their reactors and    using the cost-estimating characteristics as a guide for a high- quality cost-estimating formula in the event that NRC chooses to  update the formula.    Better ensure that licensees are providing reasonable assurance that  they will have the necessary funds and improve the consistency of  information the agency collects by    documenting procedures describing the steps that staff should  take in their reviews analyzing licensee documentation and  verifying that the amounts licensees report to NRC in their DFS  reports match the balances on their year-end bank statements  and  continuing these reviews of fund balances in a way that is most  efficient and effective for the agency.    Consider reviewing a sample of licensees’ investments to determine if  licensees are complying with decommissioning investment standards  and determine whether action should be taken to enforce these  standards.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to NRC for review and comment. NRC  provided written comments, which are presented in appendix III, and  technical comments, which we incorporated in the report as appropriate.  NRC agreed with three of our recommendations, disagreed with one  recommendation, and partially agreed with another recommendation.  Specifically, NRC agreed with our recommendations that the agency (1)  document procedures describing the steps that staff should take in their  reviews analyzing licensee documentation and verifying that the amounts  licensees report to NRC in their DFS reports match the balances on their  year-end bank statements; (2) continue these reviews of fund balances in  a way that is most efficient and effective for the agency; and (3) consider  reviewing a sample of licensees’ investments to determine if licensees  are complying with decommissioning investment standards and  determine whether action should be taken to enforce these standards.
However, NRC disagreed with our recommendation that, when the  agency reevaluates its decommissioning funding formula, it define what it  means by the “bulk” of the funds that licensees will likely need to  decommission their reactors. In its comments, NRC stated that, in view of  the comprehensiveness of the agency’s regulatory system, a precise  definition of the meaning of “bulk” is not necessary to ensure that  licensees adequately plan for decommissioning costs. We did not  recommend that NRC provide a precise definition but we continue to  believe that a definition is necessary. As we noted in our draft report,  without a definition of what the agency means by bulk it is unclear how  NRC can determine if the formula is performing as intended or if  licensees will have adequate decommissioning funds when necessary,  especially given the wide range of differences we identified when we  compared formula-based and site-specific cost estimates. NRC  suggested that we revise our recommendation to state that NRC’s  reevaluation of the formula consider the relationship between the formula  amount and the range of expected decommissioning costs. This  approach could be appropriate, as long as NRC states what the  relationship between the formula and the range should be. According to  NRC officials, the agency has not yet developed this range of expected  decommissioning costs. Officials explained that, as part of its process of  reevaluating the formula, the agency expects to estimate the lower and  upper bounds of the range of expected decommissioning costs based on  licensee-generated cost estimates and historical decommissioning costs  and will determine how an updated decommissioning funding formula fits  into this range. We believe such an analysis could help the agency better  define the bulk of funds licensees should accumulate to ensure adequate  funds for decommissioning.  In response to this comment, we modified  the report to include information about the range of expected  decommissioning costs NRC plans to develop, but did not revise the  recommendation.
Finally, NRC partially agreed with our recommendation that the agency use  the cost-estimating characteristics as a guide for a high-quality cost- estimating formula in the event that NRC chooses to update the formula as  part of ensuring reliability during the process of evaluating its  decommissioning funding formula. NRC agreed that the decommissioning  funding formula should provide a credible and well-documented basis for  establishing the minimum amount of funding needed to plan for the costs of  decommissioning a reactor, but disagreed that the formula is the  appropriate tool for achieving the characteristics of comprehensiveness  and accuracy in estimating decommissioning costs. NRC commented that  the formula was not intended to provide a cost estimate but rather provide  a reference level for licensees as a planning tool early in a reactor’s life.  We disagree that the formula is not a cost estimate. As we noted in our  draft report, NRC considers the formula to be the minimum amount needed  by licensees to decommission their reactors; we believe that this meets the  definition of a cost estimate. NRC further commented that the agency  believes that it achieves the characteristics of comprehensiveness and  accuracy by requiring a licensee to provide an updated, plant-specific cost  estimate late in a plant’s life. We recognize that the plant-specific cost  estimate that NRC requires can draw on additional information to help  achieve characteristics of a high-quality cost estimating formula. However,  this requirement does not address the quality of the formula. The formula  needs to be appropriately accurate and comprehensive for its intended  purpose. As we noted in our draft report, licensees typically use the formula  to meet NRC’s requirement to report an initial decommissioning cost  estimate in their license application, and NRC uses the formula to  determine if there is reasonable assurance that licensees will have  adequate decommissioning funds as part of the DFS report review  process. We recognize that NRC is in the process of reevaluating its more  than 30-year old formula to determine if the formula should be updated to  reflect changes in decommissioning technology and costs. We believe that  an updated formula that reflects these changes and has the characteristics  of a high-quality cost-estimating formula could help to ensure that NRC’s  decommissioning funding formula is appropriately accurate and  comprehensive.
As agreed with your office, 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 to the Chairman of NRC,  appropriate congressional committees, and other interested parties. The  report also will be available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff that made major contributions to  this report are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To describe how the Nuclear Regulatory Commission (NRC) ensures that  reactor owners (licensees) provide reasonable assurance of adequate  decommissioning funds, we reviewed relevant regulations, including  Reporting and Record Keeping for Decommissioning Planning, and  guidance documents, such as Procedures for NRC’s Independent  Analysis of Decommissioning Funding Assurance for Operating Nuclear  Power Reactors. We also reviewed GAO and NRC Office of the  Inspector General (OIG) reports on decommissioning funding assurance  and interviewed NRC officials from the Office of Nuclear Reactor  Regulation and OIG to better understand the agency’s oversight of  decommissioning funds.
To identify any improvements or weaknesses in NRC’s oversight of  decommissioning funding assurance, we analyzed NRC’s decommissioning  funding formula and the agency’s reviews of licensee decommissioning  funding status (DFS) reports. To analyze NRC’s decommissioning funding  formula, we compared NRC formula-generated cost estimates with licensee- generated site-specific cost estimates for 12 nuclear reactors for which we  were able to obtain both types of estimates that were calculated in the same  year. We also compared NRC’s formula and the process the agency used to  develop the formula with GAO-identified best practices for cost estimating,  and reviewed documents used to create the formula. To ensure our  understanding of how the formula was developed and how it is used, we  interviewed NRC officials and staff of the Pacific Northwest National  Laboratory (the contractor NRC used to create the formula). To analyze  NRC’s reviews of licensee DFS reports, we analyzed data from reactor  licensees’ 2011 DFS reports for each of the operating reactors and for  currently decommissioning reactors. These reports reflect estimated  decommissioning costs and actual decommissioning fund balances as of  December 31, 2010, among other things. We assessed the reliability of the  data we used by interviewing NRC officials to identify steps the agency uses  to verify the data, and several licensees to identify steps they take to ensure  that the data they provide are reliable. In our assessment of the data, we  determined these data were sufficiently reliable for our purpose of identifying  the number of licensees who had not reported specific data in the 2011 DFS  reports. We also reviewed the results of NRC’s in-licensee-office  comparisons of licensees’ DFS reports and year-end bank statements from  April 2008 through October 2010.
We also analyzed relevant Federal Energy Regulatory Commission  (FERC) regulations governing decommissioning trust funds, because  FERC oversees public utility financial reporting and about half of the 104  operating reactors are owned by public utilities.
To better understand issues related to decommissioning nuclear power  reactors in general, we interviewed officials from other federal agencies  (such as from FERC and the Department of Energy), a decommissioning  cost estimator, nongovernmental organizations, nuclear power industry  groups, licensees of nuclear power reactors, and decommissioning fund  stakeholders—a fund trustee and two investment advisors—who have  knowledge of nuclear reactor decommissioning or are involved with it. We  identified the trustee through licensee interviews and one investment  advisor through a March 2011 NRC public decommissioning workshop  that we attended. We also attended the 23rd annual NRC Regulatory  Information Conference held in March 2011. In addition, we visited five  nuclear power plants—Haddam Neck (Connecticut Yankee) in  Connecticut, Indian Point in New York, Peach Bottom Atomic Power  Station and Three Mile Island Nuclear Station in Pennsylvania, and  Enrico Fermi Atomic Power Plant in Michigan—interviewed licensee  officials there, and toured the facilities. The five sites we visited were a  nonprobability sample that we selected to include a mix of fully  decommissioned, currently decommissioning, and operating reactors.  Because we used a nonprobability sample, the information obtained from  these site visits is not generalizable to other reactors. To select these  sites, we considered sites that were a mixture of types of reactors, types  of ownership, and types of decommissioning methods used, as well as  reactors that are operating, currently decommissioning, or fully  decommissioned. In addition to these criteria, we considered sites that  were close to GAO headquarters in Washington, D.C., for cost-saving  purposes. The exception was the Enrico Fermi Atomic Power Plant in  Michigan. We visited this site because it has the closest currently  decommissioning reactor using the immediate decontamination and  dismantlement (DECON) method. We also interviewed relevant state  agency officials (e.g., the Pennsylvania Public Utility Commission and  Michigan Department of Environmental Quality) in the states where we  conducted our site visits to better understand their roles in the  decommissioning process.
We conducted this performance audit from February 2011 to April 2012,  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: GAO Assessment of NRC’s Decommissioning Funding Formula
paragraphs: Table 2 shows our comparison of NRC’s decommissioning funding  formula compared with our cost-estimating guide’s four characteristics of  a high-quality cost-estimating formula.
section_title: Appendix III: Comments from the Nuclear Regulatory Commission
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Karen Jones, Assistant  Director; Karen Richey, Assistant Director; Josey Ballenger; Bernice  Dawson; Jennifer Echard; Jonathan Kucskar; Robin Marion; Katya  Melkote; Cynthia Norris; Michelle K. Treistman; and Vanessa V. Welker  made significant contributions to this report. Mehrzad Nadji and Anne  Rhodes-Kline also made important contributions to this report.