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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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Southern Company Just Raised Cost Estimates For This Megaproject Again

Power

Southern Company's Georgia Power subsidiary announced yet another increase in the estimated cost to complete the Vogtle 3 and 4 nuclear units. At this moment this is the only ongoing nuclear construction project in the United States. Georgia Power has raised its cost to complete the nuclear project by 15 percent. This pushes the final cost estimate for these units to almost $28 billion. Perhaps more significant for investors, Southern's management agreed to write off almost $1.1 billion of Vogtle costs, rather than attempt to charge ratepayers for the expenditures.

Georgia Power owns 45.7 percent of the two Vogtle units under construction, with public power agencies owning the balance. Later this fall, all owners will vote on whether to continue the project. (A similar, meaningfully over budget nuclear project was cancelled in South Carolina earlier this year.)

These revised cost estimates indicate that total cost of the two units could approach $28 billion upon completion. Back in 2012, when the Georgia Public Service Commission regulators approved them, the cost estimate was $14 billion. This is a 100 percent cost increase over initial estimates and represents incremental financial risk for investors.

Southern Company's Vogtle misadventure raises three questions that go beyond the perils of estimating costs for massive projects with long lead times to completion. Dealing with these issues may, in our view, enable regulators and utility managements to make better decisions in the future.

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Question 1. How did the regulators and managements evaluate their options and what were the alternatives to and risks of the projects? Most utilities in this country have steered clear of nuclear construction for some time presumably for a reason. Did the availability of federal money sway the decision? Was there an ingrained bias in favor of large, central station projects? Is there also an ideological issue or a regulatory incentive with large central station power generating plants? Why did the regulators of and participants in Vogtle believe that they could succeed?

Question 2. What events during the construction project caused Vogtle costs to rise so much? The difficulties of the builders and Westinghouse's bankruptcy is well known. But could they have been predicted, given the nature of the project? Could the problems that emerged be prevented in future projects or are they inherent in any massive building project? In other words, are these unlikely, one-off events or likely consequences of the choice?

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Question 3. Should nuclear construction decision-making and financing remain a responsibility of state regulatory commissioners? Should it even be paid for exclusively by local consumers? After all, among the main reasons cited by the utility industry to go nuclear nowadays is to limit carbon dioxide emissions and to provide base load power for a large region often beyond the state borders. Everything is interconnected regionally in the electric grid. Presumably, those outside the state would benefit, too. Perhaps all consumers should pay a nuclear surcharge to finance these plants, not the consumers of one sate.

It's a little late to second guess Southern Company's senior management and the compliant Georgia Public Service Commission is no doubt owed its share of blame. And federal legislators and policy makers also encouraged the Vogtle project.

But it is not too late to examine the Vogtle fiasco for the lessons that it provides. Nuclear powered electric generating stations will have an extremely limited future in this country unless potential builders can answer those three questions ahead of time.

By Leonard Hyman and William Tilles for Oilprice.com

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