New Year: No Nuke Subsidies

By Published On: January 9, 2004

Ratepayers no longer must pay for the operating costs of nuclear power in California. At the beginning of January, subsidies for Southern California Edison’s San Onofre Nuclear Generating Station expired. Similar allowances above the cost of normal ratemaking disappeared for Pacific Gas & Electric’s Diablo Canyon plant in 2002. The California Public Utilities Commission-approved subsidies, called “incremental cost incentive pricing” (ICIP), paid off investments (“sunk costs”). This was essentially the equivalent of the payoff of stranded assets of investor-owned utilities’ nuclear facilities as proposed by the initial deregulation legislation. For utilities’ nuclear investments, those costs ran in the billions of dollars. “The future for these plants looks rosier, given the advantage the utilities gained from accelerated sunk cost recovery,” Bob Finkelstein, The Utility Reform Network executive director, said. “The going-forward operating costs will likely have the added advantage of being considered in isolation of associated costs such as decommissioning and waste disposal.” “Edison made close to $1 billion” on subsidies, estimated Bill Marcus, principal economist with JBS Energy. At the time of the settlement, Edison predicted it would instead save ratepayers $1 billion. Marcus does not have a similar cost estimate associated with Diablo’s subsidies. But he figured that three years?about halfway?into PG&E’s renegotiated Diablo Canyon deal, the subsidies cost about $417 million over the actual cost of running the plant. Edison owns 75 percent of the SONGS plant; most of the rest is owned by San Diego Gas & Electric. As with Edison, San Diego ratepayers paid the nuclear subsidy until the end of 2003. The now-departed ICIP was implemented as a way to avoid utilities? having to regularly plead with regulators for rates for nuclear power. The “incremental” part of the term includes fuel, operation and maintenance, administration, property taxes, and capital additions. It eliminated forecasting costs and target capacity factoring. Most importantly, it removed regulators’ review of the reasonableness of utilities’ nuclear spending. The main risk for nuclear owners was that they could underestimate the cost of running nuclear plants. That did not occur. With the sunk costs paid off, what happened to the price of producing energy and its wholesale market price during deregulation made nuclear power relatively competitive with other forms of electricity. If the subsidies had expired five years ago, nuclear power would have run twice the cost of fossil-fueled plants. “Incremental” rates for San Onofre started at $0.038/kWh in 1996 and increased to $0.0415/kWh in 2003, according to the 1995 general rate case settlement. At the time of the settlement, the cost of other power was running about $0.025/kWh?thus, the cost of nuclear power was higher than what the market price would have been if there had been a market at the time. The subsidies for Diablo Canyon were even higher at the time, as they included the $5.5 billion in capital costs and associated other costs. Diablo Canyon’s cost, including the ICIP, ended up totaling more than $25 billion. SONGS began construction in 1975, before the partial meltdown of Three Mile Island in 1979. After that, nuclear capital costs mushroomed because of safety concerns. Those costs were inflated again with rates of return. For instance, the building cost for San Onofre at $4.5 billion had an attendant rate of return of around 10 percent. When Diablo Canyon cost $1 billion more than that, owner PG&E got a similar rate of return?only on more investment, leading to higher total costs. Diablo’s subsidies were different. For Diablo, when competing power was about $0.05/kWh to $0.07/kWh, PG&E was charging about $0.12/kWh a decade ago. About $0.043/kWh was related to subsidies in the following years, while the total cost for Diablo power was about $0.09/kWh. In a 1994 settlement with the CPUC, PG&E reduced the amount of ratepayer funds it was getting for Diablo Canyon. At the time, the utility was under a regulatory deal from 1988 that had it collecting as much for the plants as it would have without the huge disallowance meted out by the CPUC for what was essentially poor judgment in investing in and building the plant. Diablo Canyon is the most expensive nuclear plant to date and the subject of massive protests concerning safety and, to a lesser extent, economics in the early 1980s. With mounting consumer and regulatory resistance a decade later, PG&E renegotiated its ICIP deal?still to the utility’s advantage, just not with as high a return. Edison and SDG&E followed with the subsidy deal that just expired.

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