DATELINE: 28 June 2009
CPS to unveil nuke plant cost estimates
By Tracy Idell Hamilton and Anton Caputo
Express-News
CPS Energy customers still are paying for billions of dollars in cost overruns on two nuclear reactors built more than 20 years ago.
Still, there is widespread consensus the plants were a good investment, allowing San Antonio to enjoy some of the lowest electricity bills in the nation and making the city an attractive place for companies looking to expand or relocate.
On Monday, CPS will unveil its long-awaited cost estimate for the construction of two new nuclear reactors to meet the region's burgeoning appetite for energy.
The release will mark the beginning of a public discussion expected to culminate this fall in a decision by the City Council whether to give its blessing to the utility to increase its investment, already close to $300 million.
Cost estimates from other sources have ranged from $10 billion, by CPS Energy's partner in the nuclear effort, NRG Energy, up to $22 billion by a former Texas Public Utility Counsel official.
That official says low-end numbers don't take into account the likelihood that unanticipated expenses would force costs up to the point where new nuclear is not worth pursuing.
But CPS officials, who emphasize a decision to go ahead with reactors 3 and 4 hasn't been made, say their numbers show nuclear power still is the best option for meeting the city's needs.
They promise to unveil an analysis that shows that nuclear is better than investing in coal or natural gas or buying energy on the open market.
Whether Monday's announcement will give ratepayers answers to the myriad questions surrounding the decision — most notably, a clear sense of how their bills might be affected — remains to be seen.
Big decision
Adding two nuclear reactors to the South Texas Project outside Bay City would be the most expensive project the city of San Antonio ever has undertaken. And politics likely will play as much into the choice as economics.
Most local officials have avoided the debate over the nuclear expansion, putting it off by saying their decision will be governed by the cost. That excuse could be eliminated Monday.
Mayor Julián Castro, who sits on the utility's board of trustees, was briefed last Monday; the new City Council was informed two days later during an executive session.
Their job will not be to OK the go-ahead per se, City Manager Sheryl Sculley said, but to approve the manner in which CPS chooses to finance the project, along with the attendant rate increases.
Sculley said the city hired an independent consulting firm in 2007 to “review whether CPS' assumptions were good.” The firm concluded they were, and the city has hired another firm to crunch the numbers going forward. That independent analysis will help the council make an informed decision, Castro said.
He agreed that once a nuclear plant is up and running, it offers low-cost, reliable energy with no carbon emissions. The remaining questions, he said, are whether upfront costs can be contained, and who would take on the risk?
“My main concern is to protect the ratepayer as much as possible,” he said Tuesday, a day after his briefing.
Castro also has floated the idea of reducing CPS' share in the project.
Because the city of Austin, which owns 16 percent of the two existing reactors at Bay City, STP 1 and 2, has chosen not to be part of 3 and 4, CPS and NRG are each responsible for 50 percent of the project. They're currently shopping for a third partner, and Mike Kotara, CPS Energy's vice president of energy development, said there's “a lot of interest.”
Much of that is spurred by the fact the STP expansion is one of four in the country in line for federal loan guarantees to back its financing.
Because of the huge investment and risks associated with nuclear power plants, experts say it's unlikely that projects without loan guarantees would find financing.
Effect on ratepayers
CPS customers will see their electric bills rise regardless of the nuclear decision, Kotara emphasized.
“Doing nothing is not an option,” he said.
CPS projects it won't face energy shortages until about 2021, several years later than previous estimates, in part because of stepped-up conservation efforts. That gives the utility some breathing room — sort of.
The nuclear decision needs to be made fairly quickly, Kotara said, because the deal already is moving forward. The project is two years into the licensing process. CPS and NRG already have spent hundreds of million of dollars on engineering, licensing and planning.
Even if the company decides to go forward with nuclear power, that doesn't mean the search for additional energy ends. The utility must reassess its energy mix every five or six years, Kotara said.
CPS, which leads the nation in wind energy among municipal utilities, said it's shifting its focus on future energy production to renewable sources like wind and solar. The nuclear reactors could be the last large centralized generating plants the utility builds, officials say.
Up until now, nuclear's impact on ratepayers — and how it would compare to other energy choices — has been largely absent from the discussion.
That has frustrated consumer and environmental groups, including COPS/Metro Alliance, a grass-roots group of mostly South and West Side churches that has been pushing the utility to be specific.
“They've already spent almost $300 million on planning this thing,” COPS member Paul Martinez said. “What happens when they spend billions?”
Nevertheless, the politically powerful business community seems to be firmly behind the plan.
“We know it will be expensive, but we're a fast-growing city and we'll need options,” San Antonio Hispanic Chamber of Commerce President Ramiro Cavazos said. “I think it's a wise investment in the long run.”
The Hispanic Chamber is sponsoring a luncheon on July 8 with speaker Christine Todd Whitman, former Environmental Protection Agency Administrator under Bush and a nuclear supporter, in the interest of contributing to the public debate.
“We do know that the community made an excellent investment when it decided to go nuclear,” Greater San Antonio Chamber of Commerce President Richard Perez said. “It cost a heck of a lot of money, but now we have the lowest energy costs in the nation.”
The years with no rate increase have ended, though.
Last year, CPS said it likely will seek a boost of 5 percent or less every other year starting in 2010, but after last year's request was knocked down to 3.5 percent by the City Council, CEO Milton Lee said CPS could be back, hat in hand, this fall.
How quickly ratepayers will be hit with nuclear-related increases is going to depend on how the utility finances construction, said Paula Gold-Williams, CPS' chief financial officer, adding that the various financing options will be part of the public discussion this summer.
She said Monday's presentation would show what kind of rate increases the utility would need with and without the new reactors.
Learning from history
STP 1 and 2 may have helped make San Antonio's energy rates among the lowest of any large city in the nation, but there are few who refute that the project was viewed as a debacle of cost overruns and delays when it was built.
A series of problems pushed the project's cost to $8.25 billion, including financing costs, according to Clarence Johnson, former director of regulatory analysis for the Texas Office of Public Utility Counsel, a state agency that provides legal representation to ratepayers at state hearings.
Original costs estimates were just over $1.2 billion, though that number didn't include financing costs and a direct comparison is unavailable. The original construction timeline of five years ballooned to almost 12 years.
NRG's own cost estimates for 3 and 4 have risen steeply over the past two years. That much was confirmed by lawyers for STP, who revealed during an Atomic Safety and Licensing Board hearing in Bay City last week that NRG estimated construction costs at $5.4 billion when it filed its application two years ago.
That number, with finance charges included, has since ballooned to $10 billion — and most experts say even that's on the low end of industry estimates.
If STP 3 and 4 sees cost overruns like those that plagued 1 and 2, the effect would be disastrous for San Antonio, say Johnson and others who are pessimistic about nuclear energy's economic viability.
“We keep hearing that the regulatory process has been streamlined since the 1980s,” Johnson says. “But the cost overruns and scheduling problems, the problems with quality control and quality assurance, those don't have anything to do with the regulatory environment.”
Johnson now is a private consultant. He analyzed the project earlier this year for Public Citizen, a consumer group that opposes the plan. He concluded that building two more reactors would cost 50 percent more over the life of the plants than building natural gas plants to provide the same power.
CPS and NRG are using optimistic cost estimates for 3 and 4, he says, while some of the issues that plagued construction of 1 and 2 have not changed appreciably.
For example, he notes that the Nuclear Regulatory Commission, which analyzed STP in 1984, found inexperience was the primary cause of delays, both with the contractor and “key individuals involved with the project.”
Moving forward
While neither NRG nor CPS has experience building nuclear reactors, they've hired Toshiba, which has been involved in building four reactors in Japan using the same technology CPS would use here, called an Advanced Boiling Water Reactor, or ABWR.
Although recent nuclear plants have had significant cost overruns and construction delays, most notably one in Finland, it appears Toshiba has completed all four on time and within budget, said Swaminathan Venkataraman, a director with Standard & Poor's.
The units in Japan took between 40 and 65 months to build, according to Standard & Poor's. But labor conditions are different in Japan, and Kotara said the company already has indicated it probably wouldn't be able to finish the plants as quickly here.
One factor working in CPS' favor is that Toshiba, because of its experience, is the best-positioned company in the world to offer something close to a fixed-price contract for a nuclear reactor, Venkataraman said.
A fixed-price contract means the contractor, rather than the energy companies — and by extension, ratepayers — would not be on the hook for cost overruns. But even Toshiba likely won't offer a true fixed-price contract, Venkataraman said, because of the difficulty finding the highly specialized labor needed for the core of the nuclear power plant.
“There is not enough expertise or labor available in the U.S. because the last plant in the U.S. was built in the '70s,” he said. “It is possible the U.S. will have to import labor or project managers.”
Still, even with all the potential challenges, CPS Energy remains optimistic about the project.
Monday's presentation still may raise more questions than it answers, especially for skeptics, but it will give city officials and ratepayers a place to begin the discussion.
“We have to get this one right,” Castro said. “And if I believe that it's not in the best interest of the city or ratepayers, it will be stopped.”
Business Writer Vicki Vaughan contributed to this report.
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