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TransActions - August 1999 (Vol
499)
Is It A Conspiracy? It could be the stuff of a thriller novel! A small number of powerful companies are quietly gaining control of nuclear reactors in the USA. Owners, desperate to sell, are grabbing almost any offer dangled before them. What’s going on? Is it a takeover conspiracy involving a few dark side, power hungry moguls? Or is it just smart business… a high-risk, high-reward business opportunity? More than likely, it’s the latter. A calculated opportunity. Still, it is an intriguing scenario that is based on a few simple facts.
The trouble with Clinton Some people are selling plants because they are incredibly expensive to maintain. Take the Illinois Power nuclear plant in Clinton. It is a troublesome plant that hasn’t produced electricity for more than two years. Its trail of tears goes back to when it opened in 1987…seven years behind schedule and 1000% over budget. In spite of its non-performance, Illinois Power has spent nearly $20 million a month to maintain the lame duck! That’s about as ripe for picking as you can get. Enter AmerGen Energy Company. (AmerGen is one of the well-heeled players who are quietly taking control of the nuclear power industry. AmerGen is a 50/50 joint venture between British Energy Plc and PECO Energy, a Philadelphia based utility. Another major buyer is Entergy Nuclear out of New Orleans. There are a spate of other buyers, too, but AmerGen and Entergy are by far the biggest and most aggressive.) But back to AmerGen and the Illinois Power plant in Clinton. Illinois Power spent $4.25 billion to build the plant. AmerGen will get it for $20 million! $4 billion less than it cost to build. Talk about a Red Tag Sale! And more are in the works. The Nine Mile plant in upstate New York, the Vermont Yankee plant, Boston Edison’s Pilgrim plant in Massachusetts, the remaining reactor at Three Mile Island in Harrisburg, PA…all are on the trading block. All will eventually and happily change ownership for a fraction of their original costs. And that, of course, is why no new plants are being built. Existing plants can be had, and brought up to snuff, for pennies compared to the cost of starting a gas-fired facility from scratch. Surviving the Indy 500 So why don’t present owners put up the "pennies" rather than sell at a huge loss? Smaller utilities are realizing they don’t have the resources or know-how to profitably operate a nuclear power plant. Too late the truth has sunk in. Just because you can drive in rush hour traffic doesn’t mean you’d survive in the Indianapolis 500. Utilities still remember the expensive 1978 disaster at Three Mile Island. They’ve found no foolproof way to protect shareholders and ratepayers from any future power risk. Deregulation of electricity has added to the financial risks. The plants that won’t survive deregulation would have had higher generating costs than the expected market price of electricity. And the cost of plant shutdowns can no longer be passed along. Utilities with only one nuclear plant find it a drain in money and manpower from their more focused business of non-nuclear energy. To many utilities that are evolving into simple distribution or transmission companies, any nuclear plant is an albatross. And stranded costs are hard to swallow. A study of the Vermont Yankee plant suggests that owners are caught between a rock and a hard place. They can keep Vermont Yankee open until the end of its operating license in 2012…and lose money the whole time. Or they can order an early shutdown of the plant and lose even more money! The study includes seven different scenarios for Vermont Yankee, but in every one, the owners share of total stranded costs is many millions more for an early shutdown vs. one that occurs at the end of the license life. One man’s trash is another man’s treasure Apparently one man’s trash really is another man’s treasure! The few buyers of nuclear power plants exude all kinds of confidence. The risks, to them, are worth the rewards. They can get into the nuclear power business for a song and already have the skill, the size, and the money to make things work. Operating shutdowns not only don’t worry them, they are anticipated. Resources and expertise exist for a quick-fix. The cost of nuclear fuel is so low that higher operating costs can be easily absorbed. And it’s not all just talk. Entergy has case histories to wave in front of any doubting Thomas. Two of Entergy’s acquisitions, Arkansas Nuclear One and Louisiana’s River Bend, were operating at about 60% of capacity in the late 1980’s. They’re up to nearly 90% now. Wait and see So what is the future of nuclear power? The consensus is, we’ll have to wait and see. We’ll have to wait to see if the positive, emissions-free effects on the environment help eliminate the doomsday image of nuclear power so the market will be more receptive. We’ll have to wait to see if the US Government will renew licenses on plants, allowing them to operate beyond their 40 year license terms. We’ll have to wait to decide whether the nation’s ever-growing demand for power plus the consequences of deregulation add up to viable market conditions. Finally, we’ll just have to bide our time to learn whether our small core of buyers are as smart as we are beginning to think they are. For more information, contact Bill Jacobs or Jim McGaughy at 770-425-8100 or e-mail: info@gdsassociates.com. HERE'S SOMETHING GOOD FOR BOTH CUSTOMER AND UTILITIES In a word, it’s aggregation. Under retail open access, aggregation of, or combining customer loads into one purchasing group can be beneficial to customers and utilities alike. Customers join together to save Generally, customers participating in retail open access must purchase generation capacity to cover their highest hourly load during the month or year. When many customers with diverse (varying) load patterns come together and form a larger purchasing group, their combined load usually results in a group peak occurring at different hours than the individual customer peaks. For example, the combination of customers with loads that are higher during the day with customers who have strong nighttime loads can result in power supply savings for each. By definition, each individual customer’s contribution to the new group peak is less than or equal to its own highest peak. As a result, the aggregated group may be able to purchase less generation capacity together, than they would have to purchase individually if they had not formed a larger purchasing group. Customers who for larger purchasing groups can reduce their peak generation needs by up to 10% or more depending on the types of customers that come together. However, to be successful, customers will need to partner with someone who aggregates power supplies in clever ways, negotiates aggressively with generators or fuel suppliers, builds and/or operates power plants more efficiently or cheaply than others, and is experienced in moving power across transmission systems. These actions are invisible to its customers and not felt in the physical delivery of the supply, but do influence the prices that ultimately result from the power supply resources. Lower costs helps utilities Utilities are looking to sell generation services to new customers under retail open access who are dissatisfied with their local utility. Distribution and transmission services will generally remain regulated under open access. When competing utilities are vying for new customers to serve, the more diverse the customer loads, the cheaper the utility can serve those customers. As pointed out above, utilities must plan to supply and price generation capacity to cover the highest load of the customer. If a new customer group with highly diversified loads presents itself to the marketplace, utilities will have an easier time planning for, and serving these more efficient loads. The end result will be lower cost for the purchasing group, and a new customer for the utility. Fresh from the farm to the city An example of a live and kicking new aggregate is 1st Rochdale cooperative in New York 1st Rochdale is the nation’s first consumer owned metropolitan energy cooperative. Formed to serve urban housing cooperatives and former retail customers of Con Edison, 1st Rochdale is taking advantage of deregulation to focus on consumer-driven values, avoiding abuse of monopolies, and controlling its own destiny with regard to electricity costs. A throwback to the good ol’ days In many ways, 1st Rochdale is a throwback to the l930’s when rural Americans had to band together and form their own electric utility. Now, it’s fresh from the farm…to the city. 1st Rochdale has teamed up with North Carolina Electric Membership Corporation for operating and marketing. Coop members will be offered a line of surge protectors for the home as well as software systems that monitor electric consumption. The Alliance for Cooperative Energy in Indianapolis will be the wholesale power supplier. In addition, 1st Rochdale is a partner in the Touchstone Energy®, alliance which is comprised of cooperatives across the country serving five million homes and businesses. The implications are clear…especially to Con Edison. Consumers in big cities can have an alternative. They may not have to pay a premium to get a big power company to serve them. Lower costs are a reality. When 1st Rochdale went on stream in April 1999, the charge was 4.5 cents per kilowatt hour. For all customers, 24 hours a day, 365 days a year. Even in mid-town! For more information, contact Bill Jacobs or Jim McGaughy at 770-425-8100 or e-mail: info@gdsassociates.com. STATE RESTRUCTURING - AUGUST 1999
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