Opinion ID: 1918402
Heading Depth: 1
Heading Rank: 3

Heading: Decommissioning Costs/Rate of Inflation

Text: The Company's third assignment of error alleges that the Commission erred by using the Consumer Price Index Urban (CPIU) inflation rate of 3.5% to escalate nuclear decommissioning costs, rather than a 5.5% rate of inflation. In the year 2025, River Bend's operating license will expire, requiring the Company to decommission the plant by dismantling it and disposing of all radioactive materials. Decommissioning is scheduled to commence in the year 2023 and conclude in the year 2031. Pursuant to the Commission's approval of the Deregulated Asset Plan, [10] the cost of decommissioning River Bend is allocated between the regulated and deregulated portions. Gulf States Utils., 676 So.2d at 580-81. The funds necessary to pay for the decommissioning of the regulated portion of River Bend are collected through base rates each year and then placed in external trust funds in which earnings also accumulate. In 1990, Entergy submitted a revised decommissioning report which estimates the cost of decommissioning in 1990 dollars at $382 million, including a contingency factor of 20% to 25%. In the instant base rate proceeding, the Commission used a 3.5% rate of inflation to escalate the 1990 cost estimate to the future cost of decommissioning. To arrive at the 3.5%, the Commission relied upon Wharton Econometrics Forecasting Associates (WEFA), which projected that the CPIU inflation rate will be 3.5% per year out into the future. Factoring in the CPIU inflation rate to estimate the decommissioning cost of the regulated portion of River Bend, the Commission increased the amount the Company could recover through base rates from $1.124 million to $1.477 million. The Company had requested recovery of $9.02 million, factoring in a 5.5% rate of inflation. In declining the Company's request, the Commission reasoned that: The Joint Regulatory Proposal Term Sheet establishes that for each year subsequent to the test year, the operation and maintenance expense level will be increased by an inflation factor reflecting the Consumer Price Index (Order No. U-19904, Appendix I). Decommissioning expense was filed as part of operation and maintenance expenses. [The Company's] own experts, as well as staff, recommend that a decommissioning cost study be performed every three to five years.... A new study should therefore be due in 1995. At that time, new calculations can be made on the best information available as to the current cost of decommissioning the facility. Periodic studies should correct for any imbalances in the decommissioning fund. The costs related to nuclear decommissioning are somewhat speculative in that no decommissioning has actually taken place.... [The 1990 decommissioning cost estimate] includes a contingency amount of twenty to twenty-five percent. While [the Company] argues that this contingency amount is not intended to deal with inflation, it is nonetheless an additional safeguard.... . . . Current customers should contribute only what would be their portion of the cost if the decommissioning took place today. L.P.S.C. Order No. U-21485 at 13-14. Additionally, the Commission noted that although the Company is entitled to recover the cost of decommissioning the regulated portion of River Bend, the timing of the recovery is a question of regulatory judgment because the decommissioning will not occur for some time. Id. The Company asserts that the Commission's reliance on the CPIU is misplaced because, the Company contends, decommissioning costs, such as the cost of disposing of radioactive waste, rise at a higher rate than the price of consumer goods, such as groceries, automobiles, appliances and similar items. The Company presented filed testimony by Mr. Michael Volpi that the estimated cost to decommission River Bend escalated at a rate of 13.7% from $204.1 million in 1985 dollars to $382.5 million in 1990 dollars. According to Mr. Volpi, the general inflation rate measured by the CPIU increased by only about 4.1% annually during the same period. Rebuttal Test. Mr. Volpi at 5, L.P.S.C. (11/13/95). The Company further contends that the Commission approved Louisiana Power & Light 's proposal to calculate the Waterford 3 decommissioning cost using an unpublished 5.5% escalation rate in its June 1995 order. See L.P.S.C. Order No. U-20925 at 22. Moreover, the Company contends that the Commission erred by relying on the merger savings tracker, which uses the CPIU to escalate base year O & M expenses to determine savings, because decommissioning costs are not mentioned in the tracker or included in any calculation pursuant to the tracker. Additionally, the Company argues that the contingency factor included in the cost estimate is intended to address potential inaccuracies in the estimates of current dollar dismantling and disposal costs not errors in the rate of inflation. Finally, the Company asserts that it is unreasonable to rely upon future decommissioning cost estimates to correct any underrecovery resulting from applying a 3.5% rate of inflation. The Company reasons that, by minimizing costs paid by today's ratepayers, the Commission is circumventing the fundamental goal of accruing decommissioning costs over the life of the plant. In response, the Commission relies upon the testimony of Mr. Stephen J. Baron, who testified that there is no reason to anticipate that historical trends in decommissioning cost estimates will bear any relationship to the future. Dir. Test. Mr. Baron at 13, L.P.S.C. (10/95). According to Mr. Baron's filed testimony, the use of a 5.5% escalation factor would unjustifiably double the real cost of the 1990 study: Q. Do you believe that there is any basis for assuming a 5.5% escalation factor in the 1990 decommissioning cost estimates for [the Company]? A. No. For the purposes of the revenue requirement analysis, I believe that it is appropriate to utilize a general inflation factor to transform the 1990 constant dollar decommissioning cost estimate to a future period. The Company's use of a 5.5% factor significantly alters the concept of employing a detailed site-specific decommissioning cost analysis to compute decommissioning costs. Effectively, by assuming a 5.5% factor, the Company has increased the real cost of its 1990 decommissioning study by about 100% by the time the decommissioning actually takes place. There is simply no evidence that the 1990 dollar, site specific decommissioning cost estimate will be two times as great by the time decommissioning actually takes place, not counting inflation. The proper approach would be to apply a general inflation factor.... Id. at 14 (footnote omitted). Mr. Baron further testified that the 5.5% escalation factor proposed by the Company essentially represents an additional contingency, on top of the 20% to 25% contingency already in the cost estimate, in the event that the decommissioning cost escalates at a rate greater than general inflation. Mr. Baron testified that an additional contingency is unnecessary, in part because if actual cost increases above general inflation occur in the future, they may be captured in future decommissioning studies that will be performed periodically. Id. The Commission further relies upon a recent decision by a Federal Energy Regulatory Commission administrative law judge who rejected the Company's proposal to use a 5.5% escalation factor in estimating decommissioning costs for the Company's Grand Gulf nuclear unit. That ALJ adopted a 4% escalation rate based on the historic general inflation rate. System Energy Resources, Inc., 76 FERC ¶ 63,001 (1996) (noting that SERI's 5.5 percent escalation factor is not supported by substantial evidence, and is not supported by Commission precedent). Moreover, pursuant to a stipulation, Arkansas Power & Light, a subsidiary of Entergy, has been escalating decommissioning costs since 1988 using the CPIU as forecast by WEFA. Cross Exam. Mr. Volpi at 1025, L.P.S.C. (1/17/96). When questioned about the reasonableness of using the CPIU in Arkansas proceedings, Mr. Volpi responded as follows: Q. Do you think use of CPIU is still reasonable, even though you believe it ought to be something higher? A. I don't believe it's reasonable.... Q. But, to your knowledge, the company has no plans to seek a change of this stipulation at this time in Arkansas? A. To my knowledge, I'm not aware of any current plans to seek a change to the stipulation.... Id. at 1028. Similar to the Arkansas stipulation, the Commission reasons that the Proposal requires that O & M savings, which include decommissioning cost reductions, be calculated by factoring in the CPIU. The Commission also refutes the Company's claim that in a 1995 rate order, Order No. U-20925, the Commission applied a 5.5% escalation rate. In that order, the Commission stated: Currently, the company estimates inflation and decommissioning cost increases of approximately 5.5%. Mr. Catlin suggest that rather than have the contributions grow at 5.5%, they should grow at the rate of inflation as measured by the CPIU which is approximately 3.6%. Utilizing this inflation gauge would cause current contributions to be somewhat higher and later contributions to be somewhat lower than they were when the Commission first adopted this proposal in 1990. L.P.S.C. Order. No. U-20925 at 22. The rate order then provides that the appropriate annual decommissioning contributions are determined [u]tilizing the company's projection of decommissioning costs ... [and] the CPI-U projection of inflation. [11] Id. at 24. Finally, the Commission asserts that the 1990 decommissioning estimate includes a significant contingency factor which safeguards against cost misestimates. Mr. Baron testified that the contingency factor in the 1990 decommissioning cost estimate is designed to cover, at least in part, potential escalation greater than the general inflation rate in the decommissioning cost estimate. Dir. Test Mr. Baron at 16, L.P.S.C. (10/95). The Commission does not suggest that this safeguard alone is sufficient. Rather, the rate order emphasizes the use of periodic studies to provide more realistic and updated figures. L.P.S.C. Order No. U-21485 at 13. We think the Commission properly resolved this issue. The Commission is not suggesting that the Company be denied any portion of the decommissioning cost to which it is eventually entitled. Rather the Commission has relied upon expert testimony and the decommissioning cost estimate provided by the Company to determine the estimated, future decommissioning cost, which is decidedly speculative. The Commission further indicates its willingness to review periodically future decommissioning cost estimates. On the other hand, the Company did not prove that not applying the 5.5% inflation rate was arbitrary or capricious. Rather, on cross-examination, Mr. Volpi's testimony on behalf of the Company suggests that the 5.5% factor may itself be inaccurate: Q. So you don't recall any work papers or any calculations that developed the 5-and-a-half percent number? A. I don't recall any work papers that developquotes, the 5-and-a-half percent number. I believe what I have included in my exhibits to my testimony addresses the historical evidence that I have talked about and the projections for inflation. But there's, to my recollection, we don't have, quotes,  work papers  or analysis that says 5-and-a-half percent is the number. . . . Q. You do not know if any reliable information exists as to the actual escalation of decommissioning costs, as opposed to estimates. Is that right? A. I'm not aware of any information that would indicate to us that the actual costs of decommissioning power plants such as River Bend.... I don't have any knowledge of that information being readily available. . . . Q. Well, you haven't looked at it in developing the 5.5 percent number? A. I have not, no. Cross Exam. Mr. Volpi at 1019-20, L.P.S.C. (1/17/96) (emphasis added). It is apparent that the Company's expert was not even able to support an escalation factor of 5.5%. Accordingly, we hold that the Commission decision is supported by the record, and that the Commission did not act arbitrarily or capriciously, or abuse its discretion by escalating the cost according to the CPIU.