Legislation aimed at encouraging the expansion of nuclear power in Iowa is “a bad idea that gets worse by the minute,” according to a new report by Mark Cooper, Senior Fellow for Economic analysis at the Vermont Law School’s Institute for Energy and the Environment. Iowa Physicians for Social Responsibility commissioned the report, and Cooper summarized its conclusions at a Des Moines press conference today. He analyzed the nuclear industry as a whole and lessons learned from states that have adopted legislation similar to Iowa’s House File 561 and Senate File 390.

Cooper’s report focuses on the immense costs that this legislation would impose on customers of MidAmerican Energy, even if no new nuclear facility is ever built. The average MidAmerican customer may see utility bills go up $50 per month before any nuclear reactor comes online. MidAmerican President Bill Fehrman told Iowa lawmakers yesterday that nuclear power is less expensive than pursuing other methods of generating more electricity, such as solar power and natural gas. Perhaps he was unaware of recent comments by Exelon CEO John Rowe, who runs the largest nuclear plant operator in the U.S. Rowe is convinced that

“At the present time in the United States, new nuclear power reactors are not economical anyway with low load growth and very cheap natural gas. Natural gas generation is now the economic way of choice for low-carbon electricity and that will be true for at least a decade,” he said.

Cooper’s report demonstrates that nuclear power is not competitive with any other major method of producing electricity in terms of cost or efficiency. Massive up-front costs are one reason why nuclear projects in other parts of the U.S. have gone nowhere despite federal loan guarantees (see also here). Building nuclear power plants will only become more expensive in light of the ongoing disaster at Japan’s Fukushima facility.

Nuclear power projects also create relatively “few jobs per dollar invested,” “drain resources from household budgets,” “raise the cost of doing business” and primarily benefit foreign equipment vendors. Because the licensing and construction process for nuclear power plants is so slow, Cooper writes, “choosing nuclear reactors over efficiency and renewables not only produces many fewer local jobs in the aggregate, but takes much longer to get those jobs.”

For decades, activists opposed to nuclear power have focused on health and security concerns, such as the lack of appropriate long-term storage for nuclear waste, or the potential for an accident or terrorist attack to release large amounts of radiation. Cooper’s report shows that even if one sets aside all health and environmental concerns, nuclear power is a raw deal for consumers. MidAmerican ratepayers are unlikely ever to break even on this deal. The American Association for Retired Persons has been trying to get legislators to view the proposed bills from this perspective as well.

Governor Terry Branstad’s mind appears to be made up: he supports anything MidAmerican wants to help it build a nuclear power plant, because “we really can’t do it all with renewable.” I reject Branstad’s premise that efficiency measures and renewable energy projects can’t meet Iowa’s baseload electricity needs, but even if that were true, new natural gas-powered plants would be a far better use of resources than nuclear.

House File 561 has already cleared the Iowa House Commerce Committee and probably will pass the House easily. Senate File 390 is still being considered in subcommittee, and nine Democratic senators have urged their colleagues to shelve the proposal. (Cooper notes that other states that were considering similar legislation have put it on hold following the crisis in Japan.) Senate Commerce Committee Chair Swati Dandekar has scheduled a subcommittee meeting on this bill Monday, March 28 from 11:30 am to 1:00 pm in room 116 at the state capitol. Opponents of this bill should contact their representatives and senators, and members of the Senate Commerce Committee in particular.

After the jump I’ve posted today’s release from Iowa Physicians for Social Responsibility and several longer excerpts from Cooper’s report on advanced cost recovery for nuclear reactors.

UPDATE: MidAmerican disputes Cooper’s estimates on how much the average ratepayer’s utility bill would go up. I don’t put much stock in estimates from a company whose president claims nuclear power is less expensive than natural gas.

SECOND UPDATE: Paul Deaton of Iowa Physicians for Social Responsibility discusses MidAmerican’s shifting cost estimates and argues, “no single document lays out all of the impacts of HF 561 and SF 390 to consumers and that’s the point. The Iowa legislature needs to slow down, get the facts and then make a decision about nuclear power.”

Press release from Iowa Physicians for Social Responsibility, March 24, 2011:

MidAmerican’s Nuclear Energy “Tax” Could Cost Ratepayers $50 or more per month

Des Moines, Iowa. March 24, 2011 – A bill under consideration by the Iowa Legislature that would shift the upfront costs and financial risks of building a new nuclear reactor to MidAmerican Energy’s customers is an unfair tax, according to a recent fiscal analysis conducted by national economics expert, Dr. Mark Cooper. Dr. Cooper, who conducted the analysis on behalf of Iowa Physicians for Social Responsibility, says in a new report that the legislation’s advanced cost recovery imposes severe harm and risk on ratepayers.

“Advanced cost recovery is nothing more or less than a tax on ratepayers to fund nuclear reactors that the capital market won’t touch,” Dr. Mark Cooper,  Senior Fellow for Economic Analysis,

Institute for Energy and the Environment, Vermont Law School, said in releasing an analysis of advanced costs recovery in Des Moines, Iowa.

“There are two ironies about the advanced cost recovery legislation in Iowa,” Cooper added.

“First, policy makers who claim to be free market fiscal conservatives turn into nuclear socialists when they think they can tax people through their electricity bills.  

“Second, in the wake of the major nuclear accident in Japan, every other state that was considering advanced cost recovery has put the law on hold, but Iowa appears to be blindly rushing ahead in spite of the dramatic increase in uncertainty about nuclear power.”

The report, entitled Advanced Cost Recovery for Nuclear Reactors: A Bad Idea that Gets Worse by the Minute,

shows that advanced cost recovery imposes a number of severe harms and risks on ratepayers. The report shows:

·         The increase in ratepayer bills before any electricity is generated by new nuclear reactors can be as much as $50/month for the average consumers.

·         The pre-approval of costs reduces scrutiny over cost escalation and overruns, so ratepayers are likely to end up paying a higher price than anticipated for the facility.  Utilities steadfastly resist proposals to protect ratepayers from the risk of cost overruns.

·         Even with subsidies, these projects are so risky and large they have adverse impacts on the utility’s financial rating, which results in substantial increases in the cost of service.

·         Advanced cost recovery for nuclear reactors crowds out lower cost alternatives and discriminates against non-utility resources.  The size of nuclear projects is so large that utility financial and managerial resources are consumed by nuclear reactor construction and utilities are resist alternatives that might reduce the need nuclear power.

·         Alternative approaches to meeting electricity needs, like wind and solar, will produce more jobs sooner for the Iowa economy.

“After a major nuclear accident, responsible regulators, policymakers and financial analysts would be foolish not to re-examine every aspect of nuclear power,” Cooper added. “A careful re-evaluation will make nuclear power less attractive and advanced cost recovery even more harmful to ratepayers for a number of reasons.”

Cooper’s report outlines the following reasons:  

·         More safety measures are necessary, which requires more resources to be expended and lengthens the construction period, which is a key determinant of costs, will be lengthened.

·         The societal costs and benefit ratio has shifted to favor alternatives options.

·         There is great value in gathering more information before committing substantial resources to huge projects that that are locked in.

·         The cost of capital for nuclear reactor construction will rise because reactors will be viewed as more difficult to complete, have become less attractive compared to alternative options, and are seen as imposing more financial risk on utilities.

“Advanced cost recovery was a bad idea before the events of the past few weeks in Japan, and it is getting worse by the moment,” Cooper concluded. “The legislature never should have gone down the path in the first place, but to rush blindly ahead is remarkably irresponsible.”      

ISSUE BRIEF

ADVANCED COST RECOVERY FOR NUCLEAR REACTORS A BAD IDEA THAT GETS WORSE BY THE MINUTE

Mark Cooper Senior Fellow for Economic analysis Institute for Energy and the Environment, Vermont Law School March 2011

Reconsidering Advanced Cost Recovery

Before the dramatic nuclear incident in Fukushima Japan, the high cost and large capital expenditures associated with the construction of nuclear reactors in the U.S. had made the technology vastly more expensive and risky than alternative approaches to meeting the need for electricity in the United States. For these and other reasons, capital markets have rejected nuclear reactor construction. Recognizing that they cannot raise sufficient funds in capital markets to build new reactors, nuclear utilities have demanded massive subsidies in the form of loan guarantees from U.S. taxpayers and advanced cost recovery from ratepayers.

Imposing rate increases on ratepayers years, or even decades before reactors produce power and guaranteeing that the costs incurred in attempting to construct a new nuclear reactor are paid in full, even if the reactors project is cancelled or abandoned, shifts the risk of nuclear construction onto ratepayers and discriminates against alternative technologies and non-utility developers. This paper explains why, from the consumer and economic points of view, advanced cost recovery for nuclear reactors was a bad idea before the dramatic nuclear accident at Fukushima from the consumer and economic points of view. If it was a bad idea before the accident, after the idea it is a worse idea.

After a nuclear accident, regulators would be foolish not to re-examine safety. When they do, they are likely to conclude that

• more safety measures are necessary, which requires more resources to be expended,

• the construction period, which is a key determinant of costs, will be lengthened, and

• retrofits of existing plants may be required.

After a nuclear accident, policymakers would be irresponsible not to re-examine energy policy. They should focus on

• a re-assessment of standards of care and safety including,

• a re-evaluation of the process by which standards are set and nuclear projects reviewed,

• a re-examination of the weighting of societal costs and benefits of all available options, and

• consideration of the value of gathering more information before committing substantial resources that are locked in.

After a nuclear accident, rational financial analysts would be irresponsible not to re-examine the economics of nuclear reactors. Capital markets are likely to increase the cost of capital for nuclear reactor construction because reactors will be

• viewed as more difficult to complete,

• become less attractive compared to alternative options, and • seen as imposing more financial risk on utilities.

Thus, if regulators, policymakers and financial analysts do what they are supposed to, nuclear reactor construction will be much more costly and much less inviting as a policy option. This re- evaluation will have a particularly negative effect on ratepayers who are bearing the burden of advanced cost recovery because

• increasing the construction period means utilities hold ratepayer money longer before delivering any value,

• ratepayers have the most to lose when utilities chose to develop nuclear reactors instead of lower cost resources, especially as nuclear costs rise, and

• ratepayers are likely to bear the greatest burden when projects are abandoned.

Later in the report, Cooper explains why “Advanced Cost Recovery Alters the Relationship between the Utility and the Ratepayer”:

Allowing utilities advanced cost recovery dramatically alters the aforementioned consumer protection process in a number of ways. The utility gets to charge ratepayers before the plant is used and useful. In some cases the utilities demand “guaranteed” recovery of costs. Even when cost are not officially guaranteed, once the costs are pre-approved, the Commission is less likely review the prudence of actual costs and utilities will argue that overruns were unavoidable. The prudence review may be less rigorous (e.g. no review of individual cost elements). Advanced cost recovery becomes particularly troublesome when the reactor is not completed (abandoned). The consideration of abandoned costs under CWIP is likely to be much less rigorous.

This section of the report focuses on Iowa bills that some have described as being written “by MidAmerican, for MidAmerican”.

The bills moving through the Iowa legislature are among the most aggressive in removing consumer protection as any in the nation.

• The rolling review applies to all costs associated with development and construction,

• with annual true ups that appear to escape prudence review.

• The return on equity cannot be adjusted for the shifting of risk to ratepayers.

• There is guaranteed recovery of all costs of an abandoned plant and stranded costs for facilities displaced by the nuclear reactor at a full rate of return.

• All advanced costs recovered from ratepayers are excluded from the possibility of refunds that might result from a court case.

• It excuses the utility from showing that it “has considered other source for long-term electricity supply,” of that the nuclear reactor is “reasonable when compared to other feasible alternative sources of supply,” While it applies such language to all other feasible alternative sources of supply.

• Language that would have allowed alternatives other than nuclear to be selected on the basis of competitive bidding was stricken from the Senate versions.

Nuclear reactors would be excused from the used and useful standard and the least cost principle, while prudence reviews will be rolling and partial at best because they are based on rolling, forward looking analysis and preclude or discourage backward looking examination of actual utility behavior. The approach is an open invitation to cost overruns and the utility is on record as opposing mechanisms that would protect ratepayers from overruns.

Between the relaxed regulation of nuclear costs, the guaranteed recovery of abandonment and stranded costs, and the disadvantage at which alternative resources are placed, ratepayers in Iowa are certain to have higher electricity bills as a result of this legislation that they would have if it is not enacted.

The report’s analysis of job creation is also worth reading:

The high cost and capital intensity of nuclear reactors affects another of the benefit that is frequently claimed for new nuclear reactors – job creation. The inherent characteristics of nuclear reactors – huge capital costs and long, slow construction periods resulting in expensive power – mean they are an extremely poor approach to addressing the current concern of unemployment. Because nuclear reactors involve large expenditures and are large construction projects, they tend to create construction jobs and require operational labor. The claim to superior job creation collapses when one considers the alternatives.

• Because they are capital intensive, they produce relatively few jobs per dollar invested.

• Because they result in high-cost power, they drain resources from household budgets, which means consumers have less to spend on other goods and services that have much higher economic multipliers, particularly in the local economy.

• Because they raise the cost of doing business, they tend to hamper the ability of other enterprises in the state to compete in regional, national and global markets.

• Because the equipment vendors are foreign corporations and the capital expenditures generate high levels of income, the drain on the local economy is compounded.

Given the long licensing and slow ramp up in construction, they are the antithesis of “shovel ready” projects. In short, choosing nuclear reactors over efficiency and renewables not only produces many fewer local jobs in the aggregate, but takes much longer to get those jobs.