[cdn-nucl-l] notes on Point Lepreau's costs and AECL historic involvement in retubing

[Tom Adams <TomAdams@nextcity.com>]

Saint John Telegraph Journal – March 6, 2002

N.B.’s electricity rates must go up
By Tom Adams

Electricity customers in New Brunswick and PEI face rate hikes possibly
as high as 30 per cent to cover costs at the troubled Point Lepreau
Candu nuclear power station unless NB Power gets permission from the
provincial Public Utilities Board (PUB) and the government to invest
$845 million to extend the reactor’s life expectancy. But, approving the
refit megaproject creates the risk of an even worse financial crisis in
future if the reactor fails to achieve the aggressive production targets
expected by its owner, NB Power.
  Some of the coming rate impacts relate to historically underestimated
costs for depreciation and nuclear waste, but others relate to
undisclosed expenses revealed for the first time at a regulatory hearing
last week in Fredericton.
  The testimony reveals an undisclosed liability of $120 million. In
1999, faced with worse aging of parts than had been expected at Point
Lepreau, NB Power reduced the life expectance of the unit by six years.
Shortening the recovery period for the money sunk in the reactor
resulted in a $450-million charge.
  Although NB Power recognized the cost of the reduced life expectancy,
the utility did not make a corresponding increased charge by recognizing
the liabilities associated with cleaning up and dismantling, or
decommissioning, the station after its use. Instead, the utility
continued to report decommissioning liabilities as if the station would
continue to operate at a high level of production until the end of the
original, longer life expectancy.
  NB Power’s annual report notes that the assumptions underlying
decommissioning costs are different than those used for the recovery of
money sunk in the reactor. The impact of this discrepancy wasn’t
revealed until testimony filed last week by NB Power at a hearing before
PUB. The undisclosed liability of $120 million translates into a 3 per
cent rate increase if all other costs and assumptions remain the same.
(This was revealed in the testimony of Sharon MacFarlane, NB Power’s
vice-president of Finance and Information Systems, p. 4. The figure of
$120 million breaks down into $30 million a year for four years. $30
million divided by NB Power’s 2001 domestic revenue of $931mm equals 3.2
per cent.)
  However, the damage is not limited to undisclosed decommissioning
costs. The $450-million writedown in 1999 resulted from NB Power taking
the most optimistic interpretation of an external technical review of
Point Lepreau’s decay.
  The utility now claims that the life expectancy of the station must be
cut by another two years, to 2006, consistent with the most pessimistic
scenario set out back in 1999. The utility is also suggesting that the
end may come as early as 2005, an event that would increase the
potential writedown significantly.
  If the option of investing in a refit for Point Lepreau is turned
down, the financial impact of recovering the money already sunk in the
station - based on the most optimistic estimate for the shorter
remaining service life, combined with the need to recover the
undisclosed decommissioning costs - would result in a rate impact of 13
per cent. (This also was revealed in Mr. MacFarlane’s testimony. For the
period 2002-2006, subtracting the amortization and decommissioning
expectations for the retubing scenario [$758 million] from the
non-retubing scenario [$1183 million] equals $425 million. Assume that
approximately $50 million in ‘new’ amortization and decommissioning
costs are recovered in this period under the retubing scenario.
Therefore, the incremental amortization and decommissioning costs are
estimated at $475, equal to an annual impact of $147 -13 per cent of
rates.)
  Even if NB Power had no other undisclosed and underestimated costs,
the utility would be facing a severe financial crunch due to
under-recognized nuclear waste disposal and decommissioning costs.
  The utility estimates its costs for waste disposal and decommissioning
at $843 million. Although Point Lepreau is more than three quarters
through its service life and its best production years are behind it, NB
Power only recognizes $205 million in provisions for these future costs.
Recovering its forecasted exposure to nuclear waste disposal and
decommissioning costs may drive rates up by 16 per cent. ($638
million/four  years/$931 million in domestic gross revenue = $157
million a year. The current collection rate reflected in rates is $10
million a year. The difference - $147 million, divided by $931 domestic
gross revenue - equals15.8 per cent.)
  Nuclear waste disposal and decommissioning costs may rise further. NB
Power’s estimated decommissioning cost is below the most optimistic
estimate used by the nuclear regulator in the United States. NB Power
estimates $454 million, whereas  the NRC’s range is $475 million to $715
million for pressurized water reactors, which are smaller and less
radioactive than CANDUs. (See http:// www.nrc.gov
/reactors/decommissioning/funding.html)
  Canada’s nuclear safety regulator has grown increasingly uncomfortable
in recent years with the nuclear utilities’ historic waste-funding
practices, and thankfully so. Canada’s nuclear utilities have not set
aside money providing for these so-called “back-end” costs in funded
accounts at arm’s length from the utility and its other financial
obligations, as could be done through segregated trust accounts.
Instead, the money collected for back-end costs has been used by
utilities to invest in general operations. NB Power’s severe debt crisis
directly threatens these investments.
  Armed with recently upgraded legal powers, the federal regulator is
moving toward tighter, U.S.-style financial standards with full funding
of back-end costs. Ontario’s decision to start funding back-end costs
for nuclear reactors is one of the factors driving up electricity rates
there.
  If the Point Lepreau refit is approved and the reactor works as
efficiently as the utility forecasts, the massive buildup of
undisclosed, underestimated and under-recognized costs can be stretched
over the next 30 years. That is a big “if.” Experience with other Candu
reactors shows that such refits are commercially risky.
  From 1983-1989, Ontario Hydro attempted the same refit on four
Pickering reactors that NB Power is proposing for Point Lepreau. Between
1993 and 1997, Ontario Hydro recognized that the refit had been a
failure, wrote off the debts it had accumulated to pay for the refit,
and put the four reactors into an extended lay-up condition.
  A large element of Ontario Hydro’s Pickering refit write-offs was
debts owing from Atomic Energy of Canada Limited (AECL), the federal
nuclear company. AECL and Ontario Hydro had a risk-sharing partnership
in two of the Pickering reactors. AECL has a risk sharing partnership
with NB Power in the Point Lepreau project.
  The failed Pickering refit was one of the main causes of Ontario
Hydro’s financial collapse in 1997. A failed Point Lepreau refit would
have a more severe impact on New Brunswick than the impact Pickering has
had on Ontario.
  NB Power’s assumptions used to evaluate the refit are aggressively
optimistic. For the expected 25-year service life after the refit, the
utility’s feasibility estimates assume that the reactor will operate
about 20 per cent more productively than it has averaged in the last six
years. (NB Power is assuming a post retubing capacity factor of 89 per
cent, whereas in the period 1995-2001 the average has been about 73 per
cent.)
  Rates for customers in PEI are indexed to 110 per cent of the rates in
New Brunswick. With the exception of PEI and the Territories,
small-volume rural New Brunswick electricity customers already pay the
highest rates in Canada.
  NB Power’s tactic of holding ratepayers hostage unless the utility
gets approval for its pet project has maneuvered the Public Utilities
Board into a corner. The Lord government’s recent declaration of support
for the Point Lepreau refit megaproject makes the prospect of
independent regulatory oversight even more remote.
  No government or utility senior management team wants to be around
when the music stops and costs can no longer be pushed off to future
generations.
    NB Power’s massive buildup of undisclosed, underestimated and
under-recognized costs should not come as any surprise to the New
Brunswick government. A financial analysis published in 1995 by Norman
Betts, then assistant dean and accounting professor in the Faculty of
Administration MBA program at UNB, now Minister of Business New
Brunwsick, and until recently the Minister of Finance, concluded that
“NB Power is in financial crisis.” He correctly forecast steep power
rate increases to residential electricity users and recommended
“significant cost control measures.”
   New Brunswickers, particularly children, can only hope that the
government heeds Professor Betts’ old advice and stops NB Power from
further ramping up its debt in a vain attempt to put off judgement day.
 Tom Adams is executive director of Energy Probe, a national
environmental and consumer watchdog organization specializing in energy.





Saint John Telegraph Journal – March 5 2002
Lepreau deal will be safe: minister
POLITICS: Jeannot Volpé says utility won't repeat Ontario Hydro's
mistakes


ALAN WHITE
Telegraph-Journal

Natural Resources Minister Jeannot Volpé expects NB Power to learn from
Ontario Hydro's experience, should it be given approval to refit the
Point Lepreau nuclear generating station.

Atomic Energy of Canada Ltd. is offering to team up with NB Power to
extend the life of the nuclear station beyond 2006. The $845-million
refurbishment project, which doesn't include having to spend $300
million on buying replacement power when Lepreau is offline for
upgrading, would extend the life of the plant for 30 years.

However, nuclear watchdog Tom Adams of Energy Probe is warning the deal
proposed to NB Power by AECL is "virtually identical" to one that saw
Ontario Hydro have to write off $410 million that it couldn't collect
from AECL in promised performance guarantees in 1993.

Mr. Volpé said he doesn't know how similar the Ontario Hydro contract is
to the one being proposed to NB Power, but said he expects that "due
diligence" by NB Power would protect the utility from the Ontario Hydro
experience.

"I would imagine they won't sign the same contract to get the same
experience," said Mr. Volpé. "I would imagine that once you've been
through an experience where the contract wasn't fully respected, the
next one you try to put some clauses in there to make sure that this one
will be respected.

"I don't know the reason why AECL decided not to pay (in Ontario), but I
would hope that NB Power, if they have permission to go ahead with the
refurbishment, I would imagine they will make due diligence on it to
make sure that their contract will be fully respected."

Under the proposed agreement, government-owned NB Power and Atomic
Energy would share the risks and benefits over the extended life of
Lepreau.

The deal would see Atomic Energy pay penalties to NB Power when it fails
to generate 80 per cent or more of its capacity. When the plant exceeds
80 per cent capacity, the parties would share the extra profits.

NB Power's application to refurbish Point Lepreau goes before the Public
Utilities Board in a hearing in May. The board will then forward its
recommendation to the government, which will ultimately decide if the
mega-project goes ahead.

"The question that was asked by Mr. Adams will probably be asked around
the table when NB Power comes back to us," said Mr. Volpé. "If we've got
a contract out there, we would like to have a contract that will be
respected by those who sign it.

"That is a good question and we'll make sure we get all the necessary
safety behind the agreement before we sign it."