Deregulation issue raises new debate in nuclear power puzzle

CHICAGO -- The nation's nuclear power plants are delivering record quantities of electricity and doing it more efficiently and safely than ever before, according to industry statistics. But the never- ending debate about nuclear power's future is once again heating up, this time fanned by fears that many nuclear plants could become financial albatrosses as deregulation gives business and residential consumers choices about where they buy power.

The issue: How will investors, taxpayers and consumers share in paying for the $70 billion or so in debts piled up to build the plants and the billions more that will eventually be needed to retire them?

While the issue is far from settled, the new economics of competition is already driving the most basic strategic decisions at many utilities, ranging from the giant Commonwealth Edison Co., which supplies 70 percent of the Chicago region's power from 12 nuclear plants, to Long Island Lighting Co., which never sold a kilowatt of power from its Shoreham nuclear plant but is struggling with the $4.5 billion debt left over from that abandoned project. The high rates that LILCO charges to pay off that debt helped push it week toward a merger with Brooklyn Union Gas Co. Most nuclear utilities want a transition to free markets that could take as long as a decade. In that time, they want to be allowed to recoup their investment in nuclear plants from rate payers, even from those who switch to lower-cost competitors. Those who leave would be dunned in the form of so-called exit fees or surcharges on their new bills. Some nuclear utilities say they could be bankrupted or, at the least, badly punished on Wall Street if the transition comes too quickly and shareholders are asked to pick up more of the tab, in the form of reduced profits and dividends. The pressures to close marginal plants years before their licenses expire are already intense, as demonstrated by the decision in November of Northeast Utilities in Hartford, Conn., to shut its troubled Connecticut Yankee plant 14 years ahead of schedule. The fallout from early closures, nuclear supporters say, often includes layoffs, huge tax losses in some communities, more air pollution from increased reliance on fossil fuels and less overall capacity to meet energy demand. Consumer groups and some nonnuclear utilities pushing for a much quicker transition say that forcing consumers to continue paying for plants they are not using will give electricity users choices but no real savings. Taxpayers may well be nicked in the crossfire; utilities are pushing for tax breaks to give them more financial flexibility in cutting rates. With more than 100 nuclear plants from Maine to California generating nearly a quarter of the nation's electricity, every region has a stake in the outcome. Vermont got almost 80 percent of its electricity from nuclear plants in 1995, Connecticut just under 70 percent and New Jersey and South Carolina almost two-thirds. So far, legislatures and regulators seem disinclined to let electricity consumers off the hook for nuclear investments that look wastefully expensive in hindsight. A handful of states, including California and Pennsylvania, have already adopted a variety of rules that give utilities several years to recoup their investments from consumers. Typically, they have softened the sting with related measures that result in freezes or even reductions in overall rates. What happens in most of the nation, though, is a question this year in state legislatures and public utility commissions. Those decisions may in turn hinge on whether Congress and federal agencies like the Nuclear Regulatory Commission weigh in with rules of their own affecting how fast the $220 billion industry is opened to competition. The spotlight in the debate may soon shift to northern Illinois, home of Commonwealth Edison, a subsidiary of Unicom Corp. and the industry's largest and most experienced nuclear power generator. Com Ed charges customers up to 60 percent more than utilities in neighboring states, making it an obvious target for competitors. Com Ed's nuclear portfolio is efficient enough that the excess energy it produces on weekends is easily sold on the open market. But some of Com Ed's plants are among the worst performers in the industry, others face huge renovation expenses and rates must cover accumulated debts of more than $10 billion. Com Ed says it welcomes competition but deserves time and financial breaks from regulators to prepare for it. "If we can't figure out a way to make nuclear power a competitive advantage, no one can," Thomas J. Maiman, Com Ed's senior vice president for nuclear operations, said. Com Ed, which has been a pivotal power in the state's politics for more than a century, has plenty of influence to make its case. "There isn't a reservoir of good will, but everyone understands that putting them out of business won't do anyone any good," said Al Musur, energy manager at Illinois-based Abbott Laboratories, who warily backs a deregulation proposal by a coalition of users and utilities that includes Com Ed. "I'm more afraid we are going to take the 800-pound gorilla and make it a 2,000-pound one." In the Com Ed-backed proposal, like many around the nation supported by high-cost utilities, the transition period to open competition stretches into the next century. Some of the arguments for moving cautiously are technical -- new billing systems need to be developed and tested, for example. Moreover, it is still unclear how parts of the system that will remain regulated, like long-distance transmission lines, will be managed. But the utilities also argue that customers should not be allowed to duck paying for the existing plants and other assets like huge transmission systems built to provide reliable power. In the traditional regulatory system. those investments were made only after regulators had agreed they were necessary to meet anticipated growth. The utilities were then guaranteed that users would shoulder all design and construction costs the regulators found to be "prudent" over the lifetime of the plant. Customers have been forced to pay for such investments even if it turned out that another type of power plant -- or purchases of power from other utilities -- could have met their needs much more cheaply. Here, as elsewhere, the debate about nuclear power is part of a larger battle over what are widely called "stranded costs," which include a broad range of utility expenses that might make it hard for them to compete in a free market. Com Ed, for example, has programs to subsidize electricity for low-income customers that would be "stranded" costs in a competitive market unless regulators ordered all electricity consumers to pay for them. Another significant family of stranded costs, common in California and the Northeast, is known as "purchase power" agreements. These agreements force utilities like Consolidated Edison Co. of New York to buy energy from independent power generators, even if it is more expensive than power being sold by other utilities or power the utility can generate itself. Many such programs were created to support the development of solar energy and other "alternative" energy programs. Purchase power contracts are threatening to bankrupt Niagara Mohawk Power Corp., an upstate New York utility. Nationwide, utilities face somewhere between $45 billion and $400 billion in stranded costs as they try to gear up for competition, according to various studies. Investments in big power plants, mostly nuclear, account for 40 percent of the total, taxes and other regulated subsidy programs another 40 percent and uneconomic "purchase power" from independent producers about 20 percent, according to David K. Owens, senior vice president for finance, regulation and power supply policy at the Edison Electric Institute, the industry's Washington-based trade group. The controversial history of nuclear power, though, makes it the most visible stranded cost. A number of nuclear plants were built before costs soared, enabling those operated by better-managed utilities to provide some of the least expensive power around. But many of the nuclear plants that have come on line the last decade or so, even those that operate efficiently, are likely to become white elephants in the age of competition if investors in Com Ed's parent and other utilities have to pick up too much of the tab. More than profits for investors are at stake: the NRC has already served notice that it wants to make sure that deregulated nuclear utilities are financially healthy enough to sustain spending on safety. And some environmental groups want to make sure that utilities in the Northeast are not given any incentive to close down nuclear plants and rely more on electricity bought from Midwest coal plants, which cause acid rain and other forms of pollution. Com Ed's proposed transition program includes a five-year freeze on rate increases that began in 1996, annual rate cuts of 1.5 percent starting in 2000 and a completely open market for residential users by 2005. By that time, Com Ed estimates, its rates will have been cut 35 percent, after adjusting for inflation. That will put huge pressure on the company to become more efficient to avoid an earnings collapse, Com Ed vice chairman Leo Mullin said. "It's coming at the same time we have to build up," added Com Ed president Samuel Skinner, a former White House chief of staff under President George Bush, citing a number of big development projects. Shareholders will help bear the load under Com Ed's proposal for accelerated depreciation of the nuclear plants -- an accounting measure that will not affect cash flow but will reduce net profits. "Our shareholders have already paid dearly," Skinner said, noting that the dividend had been slashed from $3 to $1.60 four years ago after repeated delays in getting regulatory approval to charge consumers for nuclear plants that began supplying power in 1987 and 1988. But they have not paid enough, according to critics like Howard A. Learner, executive director of the Environmental Law and Policy Center. The Chicago-based research and advocacy group has battled Com Ed over rate increases for years and expects to campaign to shift more of the transition burden to investors. According to Learner, "The public and the political leaders of the state have to say, `Get real,' to Com Ed to force a reasonable deal.

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