By Tom Adams
Saint John Telegraph Journal – March 6, 2002
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 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.
Tom Adams has published two major papers on the future of NB Power, discussing major challenges the utility faces and recommendations for sound public policy on the future of the Crown corporation and the electricity industry in the province. He also wrote a major paper on the lessons for this region to be learned from Ontario’s attempts to open its electricity market to competition.