By John Murawski and Bruce Henderson
The merger between Duke Energy and Progress Energy makes it likelier that a new nuclear reactor would be built in the Carolinas in the next 10 years. It also means that customers could pay higher bills almost immediately to get a reactor built.
But the corporate financing advantages that come with sheer size don’t minimize the risks and challenges ahead. The merger is still at least a year from being finalized, but Duke and Progress CEOs have already agreed to work together to change North Carolina’s laws to allow a power company to raise rates without having to go through lengthy proceedings.
The chief executives orchestrating the merger – Duke’s Jim Rogers and Progress’ Bill Johnson – readily acknowledge that any future nuclear project will be daunting, even to a company as large as the new Duke will be. But they also say they have no choice but to take that risk.
“Even at this size that we will be when we combine, it’s a risky proposition,” Johnson told Progress employees last week. “The reality of having to do it gets closer. It gets closer every day.”
The first obstacle facing nuclear expansion is North Carolina’s law. Currently, utilities can request a rate increase to pay for a plant each year while the plant is being built, but these requests lead to contentious public hearings. The other option is to recover the costs after the plant is built, but utility executives say they can’t wait the 10 years or more that takes because interest payments add hundreds of millions of dollars to the project.
Recovering the money annually would ultimately benefit customers, because interest payments would be lower. But critics say that changing the law would have another effect: It would encourage power companies to gamble on nuclear plants and take unnecessary risks with their customers’ money.
They point to history as a warning of what can go wrong. The two sites where the new reactors would be built – the Shearon Harris nuclear plant in Wake County or the William Lee site in Gaffney, S.C., 50 miles west of Charlotte – were designed for multiple reactors. Today both serve as symbols of the nuclear miscalculations that nearly crippled the industry in the 1980s and could conceivably cause problems again.
The Shearon Harris site was originally designed for four reactors at a projected cost of $1.1 billion; it got just one reactor at a cost of $3.9 billion. The William Lee site, designed for three reactors, was never developed; Duke later raised rates to recover about a third of the $600 million it had spent on the project, from which customers saw no benefit.
“It could lead to the wild spending that plagued the industry in the 1970s and 1980s,” said Jim Warren, director of N.C. Waste Awareness and Reduction Network in Durham. “This is classic corporate welfare.”
A sympathetic legislature
A number of states, including Florida and South Carolina, already allow speedier rate increases for nuclear expansion. And prospects look good for passing a similar law in North Carolina with the state’s new, Republican-dominated legislature, said Rep. Pricey Harrison, a Democrat from Guilford County who backs environmental causes and has favored renewable energy.
“I don’t think there would be any opposition to [the change] if Duke decided to pursue it,” she said.
“We can’t raise the money on Wall Street unless we get that kind of regulatory structure,” Johnson told News & Observer reporters and editors last week. “For our business, access to capital is the key thing. Any advantage you get to raise capital on reasonable terms, that’s good for your customers.”
The utility might not select its preferred site for nuclear expansion for several years. Johnson, who will be CEO of Duke when it merges with Progress, said last week that the company will build on one site in the Carolinas but may develop the other site later.
The costs to customers could be substantial. In Florida, Progress has said rate increases would phase in over several years, ultimately adding $25 a month to pay for nuclear plants proposed in that state.
But a change in North Carolina’s law is just the first step. A nuclear budget is so enormous that Duke would have to bring in an outside partner to help finance the undertaking, which is expected to cost more than $20 billion for a pair of reactors. Already, Duke expects to spend $459 million in pre-construction costs for the William Lee site by 2013, when it expects to get a federal operating license. Progress has spent $48.9 million on the federal license application for new reactors at Shearon Harris.
Further complicating the nuclear equation is the uncertainty of future demand for electricity. In past years, the power industry has overestimated future needs. In the past several years, demand has slacked off, making it harder to justify the expense of nuclear plants to Wall Street investors and to state regulators who would have to approve the project.
Progress, for example, has delayed its planned nuclear expansion at the Shearon Harris site in Wake County by seven years, setting it back to 2025 at the earliest. The William Lee site was originally proposed for as early as 2018 but now wouldn’t be finished until 2021 at the earliest, according to Duke’s latest long-term planning document filed with the N.C. Utilities Commission.
Plants will age out
Johnson and Rogers see nuclear expansion as the only viable option to meet North Carolina’s future energy demand, even if demand projections are off. That’s because the nation will have to start replacing dozens of aging coal-burning power plants and older nuclear plants, which are slated for retirement in the coming decades.
“They start retiring in about 2030, and a lot of them retire in that decade,” Johnson told company employees. “Today about 20 percent of the [electricity] in this country comes from nuclear, and to have that dwindle over a 10-year period with no replacement seems like a bad idea to me.”
Since coal-burning power plants stand little chance of public acceptance, given concerns about pollution and climate change, the only remaining option for round-the-clock electricity generation is nuclear power, which generates no greenhouse gases and no air emissions, utilities say.
Industry experts agree that increasing the size of a utility improves its financial prospects. Mergers are almost always seen as positive developments that will help utilities finance new nuclear plants, digital power grids, transmission system upgrades, routine maintenance and other projects.
“In utility land, the conventional wisdom is that bigger is better; bigger is safer,” said Marc de Croisset, an analyst with FBR Capital Markets & Co.
For nuclear watchdogs, it makes little difference whether a nuclear plant belongs to Progress alone or a Duke-Progress combination. Both companies have had average performance, said David Lochbaum, director of the nuclear safety project at the Union of Concerned Scientists.
According to data compiled by the U.S. Nuclear Regulatory Commission, Progress reactors all have been taken out of the top performance column from time to time in the past decade.
Duke’s Catawba nuclear plant south of Charlotte is one of the best in the nation, consistently getting top performance scores for the past decade.
However, Duke’s Oconee plant in South Carolina has the worst performance scores in the nation, having spent two-thirds of the last decade dealing with performance shortcomings.