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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Is This $25 Billion Nuclear Project A Go?

Southern Company, one of the largest and most respected utilities in the U.S., must decide this month whether to follow the lead of neighboring South Carolina and cancel its Plant Vogtle nuclear project. Or, Southern could announce their decision to finish the project. We believe that Southern's senior management will opt for completion.

Admittedly, the numbers look discouraging. Cost estimates have now mushroomed to $25 billion for the two-reactor project. The in-service date has also slipped from this year to 2023-24.

Southern, and its three utility partners (Oglethorpe, MEAG and City of Dalton), are building two-unit Westinghouse designed AP 1000 reactors in Georgia--the same design as the cancelled South Carolina plant.

Tom Fanning, Southern’s CEO indicated that his company would provide revised cost estimates later this month along with a rationale to proceed or, like SCANA, cancel the project. Mr. Fanning’s comment that “...on a lot of scenarios going forward with (new) nuclear makes sense” hints at the company’s preferred course of action. The Georgia Public Service Commission (PSC) has also asked the company for similar data by year end.

Mr. Fanning underscored the difference between the two AP1000 nuclear construction projects. Appearances aside, he likened a comparison between the two as “apples and oranges”. Perhaps in a show of support, the Georgia PSC, in a one-page statement, noted that the “dissimilarities of these projects should be recognized”. An independent financial consultant hired by the PSC, however, last week filed a report finding that Plant Vogtle was uneconomic and that the project should be halted. The consultant’s recommendations are non-binding.

Related: Goldman Sachs Warns Of Global Oil Demand Peak

Arguments supporting continued Plant Vogtle construction rest on two grounds. First, Southern expects to receive a $3.7 billion cash settlement from Toshiba/Westinghouse which can be applied towards offsetting future ratepayer funds for construction. This amount is almost double the $2.2 billion to be received by SCANA and Santee Cooper, the South Carolina utilities. These termination payments from Toshiba/Westinghouse are presumably intended to resolve all outstanding financial commitments with respect to their obligations in South Carolina and Georgia. These payments are expected to be made in October.

Southern Company’s second reason for completing the nuclear project relates to relative size. Southern’s largest electric utility subsidiary, Georgia Power, is three times the size of SCANA’s South Carolina E&G, with 2.4 million customer’s vs the latter’s 700,000.

In economic terms, ratepayers in Georgia have seen a 5 percent increase in utility bills due to Plant Vogtle while neighboring South Carolinians have experienced a whopping 18 percent increase in residential retail electric bills due to the now cancelled V.C. Summer nuclear project. The Georgians are essentially saying to their neighbors, “We can afford this and you can’t.”

The Georgia PSC, in its supportive statement last week, also said that “Plant Vogtle may be in a better position to move forward than the project in South Carolina”.

But there is always something. Georgia Power, Southern’s subsidiary, agreed in 2016 that once Plant Vogtle’s capital costs exceeded $5.6 billion, it would have to justify to the PSC collection of these incremental costs. If we assume Vogtle’s ultimate completion costs approximate $25 billion, and the Southern subsidiary owns 46 percent, this leaves about $7 billion of costs over that self-imposed cost cap. But, depending on how they’re applied, settlement payments from Toshiba/Westinghouse could significantly mitigate a portion of this financial-regulatory exposure. Related: How Much Fuel Does It Take To Get To The Moon?

In addition, Georgia Power agreed to a lower return on the equity component of its investment in Plant Vogtle if the units are not in service by 2020. Typically, a utility finances its activities with a roughly equal mix of debt and equity. Based on published reports we believe a 2023-24 in service date is now more likely so a financial penalty should be regarded as a given. This penalty of unknown size is the principal financial uncertainty facing the shares of Southern Company.

There is one other political situation that bears watching. The citizens of Georgia elect the commissioners that serve on the state’s PSC. Between now and 2023, the likely revised in-service date for Plant Vogtle, all five of the sitting commissioners will have to run for re-election. Our parting caution, then, is that the statements made by today’s sitting commissioners may not reflect the opinions of the commissioners who will have to act when Georgia Power seeks its substantial, Vogtle-related rate increase request.

By Leonard Hyman and Bill Tilles for Oilprice.com

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Leave a comment
  • Sergio on August 13 2017 said:
    UAE is currently building 4 nos Nuclear reactors in Barakah. The first was started in 2011 and will start supply electricity in 2017. What a shame to United States
  • Bill Simpson on August 31 2017 said:
    An explanation of why the cost has increased so dramatically would be nice. Is it labor? Is it materials? Is it design changes as construction proceeds? Is it because of a new design which turned out to be much more costly to build than was anticipated? And if so, who screwed up in the cost estimates?
    The explanation would make a good business book or PhD project.

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