by Jon Sanders
Director of the Center for Food, Power, and Life, Research Editor, John Locke Foundation
The scuttlebutt is that the General Assembly could see a proposal to allow utilities to hike electricity rates automatically in order for them to recover the costs of constructing nuclear power plants. Such a proposal would also allow Duke Energy or Progress Energy (or the beast of merger) to recover construction costs from ratepayers even if the project were canceled.
Consider that idea’s implications. In the midst of a revolution in recovering natural gas, which was already decidedly price-competitive against nuclear power, such legislation would insulate a government monopoly from all financial risk of attempting to build a nuclear power plant. Who would bear it, then? Ratepayers, who would have no choice.
Who would support such a notion? Well, for example, South Carolina, Georgia, and Florida. All three have Construction Work In Progress (CWIP) legislation on the books. Utilities defend CWIP by saying it will keep ratepayers from being hit by large rate increases when fully constructed nuclear power plants come on line and that it will help them pay for the plants as they go rather than spend years and far more money paying interest. The argument assumes the plants will come on line, and that they will not be beset with huge cost overruns — assumptions that have been proven false in such places as … South Carolina, Georgia, and Florida.
The opening paragraphs in the Tampa Bay Times article (linked under "Florida" above) are instructive about the risks of CWIP — and illustrative of why North Carolina should avoid it like it’s radioactive:
Progress Energy plans to cancel the main development and construction contract for its proposed nuclear plant in Levy County, but its customers will have to keep paying in advance anyway.
The move could add hundreds of millions of dollars to what customers are already paying, if Progress decides to restart the project. It also raises questions about the "pay as you go" advance fee set up by the state Legislature explicitly to speed up nuclear plant construction and save money.
It’s bad enough to raise the price of electricity on the poor for the highly dubious benefit of necessary cronyism for green energy. What do you call raising the price of electricity on the poor for nothing?
But there’s another shoe to drop. The Energy Policy Act of 2005 authorized federal loan guarantees for new nuclear plant construction of up to 80 percent. Nevertheless, the nuclear industry argues that the risks of construction are so great that such an extensive guarantee isn’t enough to get private investors to pitch in for the rest — and Wall Street investment banks agree. In 2007, Citigroup, Credit Suisse, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley wrote to the U.S. Department of Energy to state that anything less than a 100 percent unconditional guarantee would not be enough to jumpstart private investment.
This situation had Cato Institute’s Jerry Taylor and Peter Van Doren write in Forbes on April 5, 2011, that "for principled supporters of a free market, that should be information enough about the merits of this commercial enterprise." But they went further, pointing out that those few utilities that were interested in building nuclear power plants
do business in states where construction costs are automatically plugged into the rate base. So in theory at least, risks would be transferred from the utility to the ratepayer with utilities at least guaranteed to break even. Even so, the increasing cost gap between nuclear and gas-fired power makes it unclear whether any of these generators will actually get built.
As Peter Bradford, a former member of the U.S. Nuclear Regulatory Commission and former chair of the New York and Maine utility regulatory commissions, puts it, "In truth, the nuclear renaissance has always consisted of the number of plants that government was willing to build." Regardless, federal attempts to jump-start the industry–as Herculean as they have been–haven’t come even close to closing the competitive gap with gas-fired generation.
In other words, CWIP is that last bit of government guarantee needed to get utilities and investment banks to the magic 100 percent. Force ratepayers to cover the miniscule amount that taxpayers weren’t compelled to bear, and abracadabra, suddenly the whole gosh-darn enterprise makes business sense.
Unsurprisingly, there is buyer’s remorse in Florida. Earlier this year, Florida State Senator Mike Fasano, a Republican from New Port Richie who voted for Florida’s CWIP legislation in 2006, wrote a mea culpa in the Tampa Bay Times that included the following:
When I originally supported the advanced cost recovery, I never thought the Florida Public Service Commission would turn a blind eye to the high risks associated with such capital-intensive and complicated projects. I know that my fellow lawmakers did not intend to give utilities a blank check, but that is in essence what has happened. …
I am one who has traditionally supported nuclear power projects. But these dicey investments ought to be the responsibility of utility shareholders and their investment partners who profit from them, not the average ratepayers who are already struggling to pay their monthly utility bill or keep their business afloat.
Why should people pay now for something that may never benefit them? Who would ever agree to provide an interest-free loan to someone (in this case, multibillion-dollar utilities) who cannot guarantee that a product will even materialize?
One hopes policymakers in North Carolina will never have to apologize for falling for corporate welfare for nuclear power.
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