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Vogtle: Nuclear Renaissance Gone Bad (Georgia Power’s rent-seeking nightmare)

By Jim Clarkson -- March 11, 2015

“Despite Georgia Power’s early confidence about staying on track, the massive nuclear expansion of Plant Vogtle south of Augusta is more than three years behind schedule. The company’s share of costs are at least $1.4 billion, or 23 percent, over original projections — enough to build two new Braves stadiums and still have a fortune left over.”

– Matt Kempner, “Overruns Invite Questions about Vogtle Approval,” The Atlanta Journal-Constitution, March 5, 2015.

“The new generation of nuclear plants was supposed to be simpler, more efficient, and safer.  The construction was to be easier with the use of modular components. Implementation of the new designs are in trouble all over the world because designs are seriously flawed.” (Jim Clarkson, below)

“Iceberg off the Starboard Bow!” The big ship Vogtle is headed for trouble. Georgia Power and its lenders have already filled the life-boats. When Vogtle goes down its passengers–the electricity users of Georgia–will suffer greatly. Owner Georgia Power, however, is poised to make out like a bandit.

The highly touted nuclear renaissance is over, at least in the United States. Subsidies, pre-payments, loan guarantees and tax credits cannot overcome flawed designed, poorly managed projects. The new generation of nuclear plants was supposed to be simpler, more efficient, and safer.  The construction was to be easier with the use of modular components. Implementation of the new designs are in trouble all over the world because designs are seriously flawed. The earliest model plant in China, which claimed to be under budget and ahead of schedule, is now projected to be at least three years behind schedule.

There was ample warning these projects were high-risk. Georgia Power went to the trouble to have a state law passed to guarantee recovery and profit on the Vogtle Plant, located just south of Augusta, Georgia. This was in addition to obtaining the same sort of guarantees from the Georgia Public Service Commission (GA PSC). The estimated cost was low-balled to obtain approval. The revealing of additional costs and schedule delays are carefully timed after sufficient sunk cost is in place to keep the project going.

At this point the final costs and construction completion dates are unknown. What is known is that the project was a big mistake, which will cost the Georgia economy dearly. What is also known is that the project is a huge moneymaker for Georgia Power. Why? The more Vogtle costs, the more profits for the Company. It’s called ratebase.

A History of Mistakes

When regulated utilities decide to branch out and get into unregulated lines of businesses, there are one of two outcomes.  One, the utility sponsored business gets their head handed to them by entrepreneurial competitors without the stifling utility background. Or, the unregulated enterprise makes money through sweetheart deals with the regulated side of the business.

Such is the history of Southern Company ventures. There was Southern International that offered utility support services to other utilities then evolved into owning foreign power plants and even distribution companies. The business model of Enron influenced many utilities at the time. Southern International even had an electricity trading floor and used Enron accounting methods.

Then these lines of business evolved into the Mirant and Southern Power companies. Mirant had Enron infection and purchased over-priced generation projects from developers and became highly leveraged. Mirant was spun off to Southern Co stockholders.

Georgia Power executives were big stockholders in the new standalone company. But like Enron, Mirant crashed and burned, went into bankruptcy, and sued Southern Company claiming the business was overpriced. This was strange; we saw Southern and Georgia Power executives in the role as Mirant stockholder plaintiffs and as the defending management of Southern Company. The case was settled with Southern paying out a lot of money to Mirant.

Southern Power, another unregulated subsidiary of Southern Company came out of nowhere to bid on building a power plant to sell power to Georgia Power. While the GA PSC saw no problem with this, the other bidders pointed out that the people evaluating the bids of other suppliers were also the developers of the Southern Power bid.  The matter went to the Federal Energy Regulatory Commission and things looked badly for Southern Company.

Then two things made the case go away. One, a FERC attorney spiked the case and then went to work for Georgia Power’s law firm. Two, Georgia Power bought the plant in question from Southern Power. By then market conditions had changed, and the independent plant was uneconomical.  Southern Power continues to operate, making deals and owning generating facilities.

After the collapse of the early 1990s version of utility run Demand–Side Management programs, Southern Company created Southern Company Energy Solutions.  This unregulated subsidiary was supposed to cash in on the advances in energy efficient equipment by installing such equipment for the customer and being paid out of the stream of savings generated by the new equipment.

This venture didn’t go belly up; Southern spun it off to employees because it was determined the utilities could make more money with these services under regulation.  Hence the end of efficiency services by unregulated subsidiaries and the re-birth of utility-run DSM programs.

While these mostly failed ventures were going on, Southern developed its Grand Strategy.  Its regulated utilities and its unregulated Southern Power would build extra power plants in the Southeastern territories that had slacker regulation than other states. Being long on power supply, Southern and subsidiaries would sell to other utilities where regulatory hurdles stifled new construction.

A corollary to the strategy was to build the more lucrative generators with Southern Power as owner and put the risky projects on the books of the regulated companies. This is why the nuclear project is owned by Georgia Power instead of by Southern Power.

Once again Southern Co zigged when they should have zagged. Stuck with way too many assets the Southern family of companies is now trying to shut down any asset they can and have ratepayers pay for unused idle plants.

Southern’s deal with EPA was to have rules making it easier to create these “zombie” plants while Southern would provide the proof that clean coal was a viable requirement to regulate coal plants out of business. Whoops again: the Kemper Plant was to demonstrate that the concept was achievable, but bombed out on that goal.

So far the facility has demonstrated a lot about the mixing of politics and business while creating a looming financial disaster for Southern.

The Truth Comes Out

During Georgia Power’s last round of filings and testimony the Company dodged and evaded telling the Commission, the staff and the parties to the case about the true status of the costs and schedule of the dual unit nuclear project.  Instead the Company focused on blaming the contractor and then refused to answer the criticisms of the PSC staff.

It was in a later Southern Company filing with the Security Exchange Commission where it was disclosed the project had additional cost of $750 million and the schedule would be delayed yet again by 18 months.

However, it was Georgia Power’s idea to have almost continuous filings and hearings to keep the GA PSC informed of the construction status of the project. It was instead a filing with the no-nonsense SEC where the status of the project was first reported truthfully. Unlike the GA PSC, the SEC does not stand for double-talk, blame shifting, prevarication, and spinning of phony benefits.

Fuel Case Delayed Again

The last time Georgia Power had a fuel cost recovery case they promised they were taking steps to not run huge under-collections as they had in the past. That case was in 2012 and since there was to be a reduction in collections it was rushed in time to protect the Commissioners up for election.

The next case was scheduled for the fall of 2014. However, that was also an election year and this time the Company had a deficit approaching $200 million in unrecovered fuel cost. In that atmosphere the political thing to do was ignore past promises and set the next fuel case for filing after the elections of the Company’s favorite incumbents.

Now the Company wants to delay the case further.  This time they say that low gas prices are allowing them to recover more revenue than costs, and the past deficit is being eaten up each month.

At this time delaying the case is not a bad idea. However, in general, the monkeying around with the fuel cost for political reasons is sending false price signals to customers.

The marginal cost component of sales on the RTP rate recover the true fuel cost in real time so these rates are not affected by the shenanigans surrounding the timing and rationalizations of the fuel recovery cases. We need all fuel costs to be part of the Company’s costs that are collected in base rates. The rationales for having a separate fuel charge for standard rates are long gone.


Note: The problems of nuclear power in the U.S. was the subject of a recent Wall Street Journal article, “Nuclear Power Firms Feel Squeeze” (March 6, 2015).

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