The Clear Case for CWIP – A Rebuttal to Mark Cooper’s Analysis on “Advanced Cost Recovery”

Uprate at St. Lucie impossible without CWIP.

Two nuclear critics, Peter Bradford and Mark Cooper, recently published a report (pdf) explaining how “advanced cost recovery” for nuclear plants in Florida and South Carolina “creates another nuclear fiasco.” Cooper’s main argument seems to be that Construction Work in Progress (CWIP) shifts to ratepayers all of the risks of building nuclear plants. This is either a deliberate distortion or a misunderstanding of how the cost recovery mechanism works.

How “advanced cost recovery” (aka CWIP) works

When a utility builds any type of project, it uses a mix of debt and equity to pay for the construction. The debt comes from banks and other investors and, of course, the utility must pay interest to use the debt. The equity comes from the utility’s shareholders and also requires a return for its use. The CWIP financing mechanism, which is also allowed by the federal government for interstate transmission projects, allows a company building a project to include the interest on debt and a return on investor’s equity (known as carrying costs) in its electric rates while the project is under construction.

SCANA’s latest filing to the South Carolina’s public utility commission (pdf), Appendix 3 (page 27) explains how CWIP works for the two-reactor expansion at its Summer station. These carrying costs are classified in accounting and electric-utility parlance as “allowance for funds used during construction” (AFUDC). When CWIP is allowed, AFUDC is basically what the power company adds to its rates, and collects from the ratepayers during construction. The AFUDC in SCANA’s case is $238 million.

What’s also shown on page 27 is the yearly and cumulative amount of cash flow SCANA needs to build the two reactors. This is currently $5.5 billion and is funded by debt and equity. Cooper neglects to explain that SCANA’s customers are paying only about five percent of the construction costs of the projects (the AFUDC rate) during construction, while the owners and investors are contributing 95 percent.

Cooper also neglects to explain another significant feature of CWIP. Because the interest on debt and return on equity are being paid each year, these carrying costs are not accumulating as they would in the absence of CWIP, to be recovered when the plant begins operation. Because these costs, like all debt, compound over time, the quicker they are paid, the less they build up. When ratepayers pay these carrying costs while the plants are under construction, customers will save substantial sums over the life of the units. From Georgia Power:

“Approximately $0.5 billion of these customer benefits are associated with the inclusion of CWIP in rate base.” – p. 36 from Vogtle’s 8th Construction Monitoring Report (pdf)

From SCANA:

“Paying financing costs while construction is ongoing, as opposed to waiting until the project has been completed, will lower the cost of the new units by about $1 billion. We estimate this reduction will save our customers approximately $4 billion in electric rates over the life of the new units.” – SCANA Press Release

Peter Bradford asserted that these cost savings are false and the plants will cost customers more money in the end, but (typically) failed to provide any explanation of or factual support for these statements. A total of ten states – and the federal government – allow CWIP today because the legislators and public service commissions in these states know that such a cost recovery mechanism saves money for its customers.

“Ratepayers are on the hook”

Cooper’s paper claims that “ratepayers are on the hook” and taking all the risk of building a nuclear plant because of CWIP. Apparently, Cooper does not understand how utilities build and recover the costs of power plants in regulated states.

In regulated states, when a power plant is completed, the utility requests approval from the Public Service Commission to place the cost of construction in its rate base, which means that the utility begins charging its electric customers for the construction costs. State public service commissions analyze the costs to determine if they were spent “prudently.” If the PSC deems the costs to have been prudent, then they can be passed on to ratepayers. This occurs with or without CWIP.

When CWIP is allowed, public service commissions exercise even greater oversight and cost control. Costs are audited, reviewed and subject to a prudence determination by the PSC, typically on a quarterly or semi-annual basis. The utility must also demonstrate the economic viability of the project before it even begins construction. 

Cooper and his fellow anti-nuclear critics contend that CWIP allows utilities to collect costs without having to build the plant. Cooper’s paper claims that they can get halfway through the project, cancel it, and then collect the incurred costs of construction from ratepayers without having to pay anything. This is of course an erroneous view of how states govern projects.

Cooper’s paper cites an Iowa Utility Board analysis to make its case against CWIP. Last year, the Iowa legislature debated a bill that would allow CWIP which may have provided MidAmerican Energy the opportunity to build a nuclear plant in the state. The Iowa House passed the bill but the Senate didn’t act on it. There was much discussion about the issue and MidAmerican provided a short explanation of the bill (pdf). The explanation clearly states that the utility does not have the unilateral ability to cancel a project. State public service commissions must approve both the decision to build a plant, the decision to cancel one, and how much utilities can collect in rates based on the prudency of spending.

Cooper’s paper claims that CWIP puts all the risk on ratepayers. CWIP actually lowers the risks to ratepayers because it makes the projects more affordable to build, increasing the chance of successfully completing the project.

Most Economical

The five reactors under construction in the Southeast U.S. (Summer 2&3, Vogtle 3&4, and Watts Bar 2) are being built because they’re the most economical projects for those utilities. Cooper’s paper claims that there are many more economical alternatives than those plants. The utilities and state regulators in that region disagree.

Renewable resources in the Southeast are thin and natural gas plants (despite today’s low costs) are still not cheaper than the nuclear plants in the long-run. Utilities are also looking to diversify away from coal, and improved efficiency only gets a utility so far before new capacity is needed. Here’s what Georgia Power says on page 45 (pdf):

“The weighted average expected value of the relative savings for completion of the [Vogtle] Facility as compared to the gas-fired [combined cycle] alternative is $4.0 billion ….”

Paying it Forward

CWIP provides clear cost benefits for customers when building capital-intensive projects like nuclear plants. The two nuclear critics in this case simply do not like nuclear power and continue to misinform and skew the debate about the benefits of CWIP. Here’s their paper’s foregone conclusion on page viii:

“Nuclear power is inherently uneconomic because it relies on a catastrophically dangerous resource that is vulnerable to human frailties and the vicissitudes of Mother Nature.”

When one begins with such a conclusion, it’s easy to guess the rest of the paper.

Many generating plants and transmission lines operating today – not to mention the interstate highways, hundreds of bridges, and dams – have largely been paid for by customers who are no longer on the system. All customers benefit today from cost-effective capital that was deployed years ago. CWIP is not new and, as shown above, allows customers the benefit of lower electricity costs from a reliable, affordable, emission-free source of power that can last 60 to 80 to 100 years. Very few, if any, other technologies can provide such benefits.

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Seabrook Nuclear Plant Not Impacted by New England Earthquake

The USGS is reporting that a minor earthquake struck Maine near the town of Lake Arrowhead shortly after 7:00 p.m. this evening. The nuclear power plant closest to the epicenter of the quake, Seabrook, which is in the midst of a refueling outage, declared an unusual event in response. The following is an official statement from NextEra Energy, the owner of the plant:

This evening, by procedure, Seabrook Station declared an unusual event due to the seismic activity felt throughout the region. An unusual event is the lowest of four Nuclear Regulatory Commission emergency classifications.

The plant has been and is currently shut down in a planned refueling outage. There has been no impact to the plant from the earthquake and our outage activities have not been affected in any way. We expect to exit from the unusual event shortly.

By way of background, Seabrook is designed to withstand the strongest earthquake ever experienced in New England, and then some.

Thanks to the team at NextEra Energy for getting out the word.

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By the Numbers: The Benefits of New Hampshire’s Seabrook Nuclear Station

Today, the Seabrook Public Library is showing a film that highlights the start of the anti-nuclear power community. The film is about a long-ago protest in 1977 in which activists opposed to nuclear energy tried to occupy the Seabrook plant site during construction. Seabrook finally got built, and in the 22 years since it began producing electricity, it has amassed an impressive record of economic and environmental benefits.

Reliable Electricity

According to the Energy Information Administration, the Seabrook nuclear power reactor (1,247 MW) is the largest in New England and provided 42 percent of New Hampshire's 2011 electricity generation. Since it began commercial operation in 1990, the unit has produced a total of 189,684,433,000 kilowatt-hours, or more than enough electricity to power New York or Illinois for a year.

According to NextEra, its owner, Seabrook generates enough power to supply the annual needs of 1.4 million families and businesses.

Environmental Benefits

If Seabrook wasn’t in operation, the electricity for those 1.4 million families and businesses would likely be generated from fossil fuel plants. In 2011, based on data from EIA and EPA, Seabrook’s clean nuclear electricity avoided the emission of 6,200 tons of sulfur dioxide, 1,400 tons of nitrogen oxide, and 4.0 million metric tons of carbon dioxide that would have otherwise come from fossil fuel plants.

That volume of carbon dioxide is equivalent to the CO2 emissions from 774,000 cars each year. For perspective, there are only 619,000 cars in New Hampshire.

If a coal plant had been built instead of Seabrook, it would have emitted nearly 190 million metric tons of CO2 over 22 years - more than the CO2 emissions from the entire state of New York in 2009. If a natural gas plant had been built instead of Seabrook, it would have emitted nearly 94 million metric tons of CO2 over 22 years - nearly equal to all of Arizona’s CO2 emissions for the whole of 2009. (For background, one metric ton of CO2 is emitted for every megawatt-hour (MWh) generated by a coal plant. Similarly, one-half of a metric ton of CO2 is emitted for every MWh generated by a gas plant.)

Natural Resources Saved

Besides avoiding emissions, operation of the Seabrook nuclear station also avoids massive quantities of coal, natural gas and land resources that would otherwise be consumed in replacing Seabrook’s electricity output.

The amount of coal saved since 1990 is about 95 million short tons, or nearly the amount of coal consumed in a year by Texas - the largest state consumer of coal.

Had Seabrook been a natural gas plant, 1.5 trillion cubic feet of gas would have been consumed since 1990 which is more gas consumed in a year than each of the three largest state consumers of gas: Louisiana, Florida and New York.

(Based on EIA figures, about half a short ton of coal is consumed to generate one MWh and about eight cubic feet of gas is consumed to generate one kWh.)

Besides the amount of coal and gas avoided by Seabrook, it’s useful to point out how much land would be required if the unit were replaced by wind turbines or solar panels. In order to produce the same amount of electricity in a year as Seabrook does, you need about 290 square miles of wind turbines or about 80 square miles of solar panels. The Seabrook station, on New Hampshire’s coast, covers 1.5 square miles.

(The source of the renewable land info is found here and the calculations above account for solar and wind’s low capacity factors.)

Although it doesn’t burn coal or gas, Seabrook does use nuclear fuel. Since it began operation 22 years ago, Seabrook has used 550 metric tons of nuclear fuel. This quantity is small enough to store on Seabrook’s site and even small enough to fit on a Best Buy parking lot, including the fuel assemblies and protective covers.

Economic and Community Benefits

According to NextEra’s website, Seabrook provides many economic benefits to its employees and the community. During normal operations, the station employs 1,100 people. During the refueling and maintenance outages that take place every 18 months, the number of employees doubles to 2,100.

Further, each year, the plant pays $100 million in employee salaries which then trickle down through the economy, and another $20 million in property taxes that goes to the local communities to pay for schools, roads and other public services.

Many More Years of Service

Seabrook is one of the younger nuclear stations in operation and has another 18 years before its current 40-year license expires. The unit has applied to the Nuclear Regulatory Commission to operate for 60 years and there is much discussion and research going on in the industry to determine how nuclear plants can operate for 80 years. Seabrook could be around for quite a few more generations -- helping to avoid emissions and save resources while providing substantial economic benefits and reliable electricity to its community, New Hampshire and New England. As the nuclear critics will celebrate their efforts, in reality, it’s a great thing for the community, and the country, that the station was actually completed and put into service.

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A Good Time to Speed Up – Vietnam, Iowa, FOE

Not getting respect:

“We also have a good chance in Vietnam,” the minister added. “The United States, France, Canada, Russia, Japan and Korea can build nuclear power plants, but the U.S. lags behind in technology as it hasn’t built one for 20 to 30 years. This is a good time for us to speed up (atomic power plant construction).”

Ouch! That stung a little.

This is South Korea’s Knowledge Economy Minister Hong Suk-woo. He’s not exactly right – falling behind in construction and in technological advance are two different things and the U.S. has not fallen behind – at all – in technology. But Hong is selling Korean capacity in both, so fine. Still – ouch!

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Land of corn and plenty:

Dueling videos debuted Wednesday on possible nuclear power expansion in Iowa.

A group that opposes nuclear power launched a television ad on the eve of today’s Senate committee hearing on a proposed compromise that advocates hope will push the bill ahead.

And minutes later, MidAmerican Energy released its own Web video, featuring Bill Fehrman, the company’s president and chief executive officer.

The opposing ad is from Friends of the Earth, our old FOEs. I generally find anti-nuclear advocates interesting if not always on target, but not FOE. It’s notably fact free.

But the pleasant surprise is that MidAmerican isn’t standing for it and has put its own ad in response. It’s simply done but that means there’s no manipulation or appeals to emotion. It’s simply Fehrman providing the company’s viewpoint:

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Hey, South Korea was talking about Vietnam above, wasn’t it? Care to know just what Vietnam is up to these days?

"The consistent view of Vietnam is to utilize nuclear energy for peaceful purposes in a responsible manner while ensuring safety and security," [Le Dinh Tien, deputy minister of the Vietnamese Ministry of Science and Technology, which] is responsible for overseeing the country's nuclear power, said in January.

By 2030, Vietnam aims to build 10 reactors and, by 2050, it hopes to generate enough nuclear power to account for 20-25 percent of its energy consumption.

Now you know.

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NEI’s main site and the Safety First site have been doing a good job of keeping you up to date on post-Fukushima information and updates (Safety First has a great infographic up right now showing how FLEX, the industry’s response to Fukushima, will work – poster worthy – really), but we’d be remiss not to note good work done by some of the nuclear companies out there.

If you have a few minutes, check out these pages by FPL (Florida Light & Power) and NextEra Energy to see how they are presenting nuclear energy, the accident in Japan and the drive to apply the lessons learned to their fleets. Both are very nicely done – corporate speak kept to a minimum, little to no attempt at spin. (We noticed FPL redid its nuclear energy launch page, too – a lot less text heavy and more inviting.)

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Sen. Bingaman Announces Clean Energy Standard Act of 2012

Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.) unveiled the Clean Energy Standard Act of 2012 today to steer the country in a direction of reducing overall carbon emissions. The bill aims for large power companies to begin increasing their electricity output from low-carbon sources like wind, solar, nuclear energy and natural gas by 2015, with the overall goal of producing 84 percent of their overall electricity from low-carbon sources by 2035.

The chairman explains:

“The goal of the CES is ambitious – a doubling of clean energy by 2035. But analysis has shown that the goal is also achievable and affordable. Meeting the CES will yield substantial benefits to our health, our economy, our global competitiveness and our economy,” Bingaman said.

A fact sheet on the bill says the CES will only apply to retail utilities, not small utilities, and will be measured by the number of credits given to generators of clean energy. In other words, the higher the number of credits a utility has, the less emissions per unit of electricity. The fact sheet says:

This flexible framework naturally allows a wide variety of sources (solar, wind, nuclear, natural gas, coal with carbon capture and storage, etc.) to be used to meet the standard; allows market forces to determine what the optimal mix of technologies and fuels should be; and makes it easy for new technologies to be incorporated.

Each energy source, depending on its emissions, would receive varied levels of credits. For instance, Platts explains:

Under [Sen. Bingaman’s] proposal, electricity generated by zero-carbon sources, such as wind, solar, geothermal, hydropower and nuclear, would get full credits.

Whereas, Platts continues:

Electricity from coal-fired generation with carbon capture and storage or coal co-firing with biomass would receive partial credits if they emit fewer carbon emissions than 0.82 mt/megawatt-hour, the equivalent of new supercritical coal generation.

The Platts article also points out that the credits could be accumulated and banked indefinitely, or transferred, traded or sold through an Energy Department trading system that would be set up as part of the legislation.

Sen. Bingaman, who is retiring at the end of this Congress, acknowledged that it may be difficult to get the legislation through both houses of Congress and to the president’s desk during this session. However, the White House’s spokesman Clark Steven praised today’s announcement as a step in the right direction:

“As the president has said consistently, a CES will drive innovation and investment in a range of clean energy sources — including renewables like wind and solar as well as nuclear, efficient natural gas and clean coal. A CES will also help America remain a leader in the clean energy economy, with all the jobs that it will bring. We look forward to working with Congress as the bill moves forward.”

Several organizations today also publicly expressed similar views to the bill, including NextEra Energy’s Chairman and CEO Lew Hay:

“Senator Bingaman's bill provides the right incentives for the nation's electric utilities and equipment manufacturers to create good, high-paying jobs for American workers and for private capital to accelerate investment in innovative energy technologies. The bill's market-oriented standard would allow many different types of fuel sources to be competitive, while rewarding innovation, early action, efficiency and project execution.”

For more information on the CES, see the Senate committee’s website for links to the press release, bill text, two-page summary, and section-by-section summary.

Photo: Sources of Emission-Free Electricity in the United States (2010).

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