Nuclear Energy Institute
to Wall Street Analysts
President and CEO
Vice President and Chief Nuclear Officer
Good morning. I'm delighted you were able to join us this
morning. It's a pleasure to see so many familiar faces at what
has become an annual event for us at NEI.
When we did this
the first time back in January 1998, only a dozen-or-so states
had restructured and there was a lot of concern in many
circles about the prospects for the U.S. nuclear energy
telling you all that competition was the best thing that had
happened to this industry in a long, long time because it
would focus political attention on the strategic importance of
nuclear energy; because it would remove stranded costs as an
issue and allow us to focus on operating economics going
forward; and because it would serve as a powerful impetus for
consolidation in the industry.
We still think
all that's true. In fact, it's all coming true and we think
the stars are aligned as favorably as they have been since the
early days of nuclear energy in this nation.
closely what the financial community writes and reports about
the electric power industry and we see a consensus that this
sector generally is undervalued by the market even though the
fundamentals—earnings growth, cash flow and so forth—are
As far as
nuclear energy is concerned, we tend to agree. We think the
fundamentals are very strong and we are convinced that we have
not yet fully unlocked the value in our 103 reactors.
This morning, we
want to update you on the fundamentals, and why those
fundamentals support the conclusion that these plants are
well-positioned for competition.
We want to
suggest a number of additional ways in which we can, and will,
unlock additional value from these plants—value which is
currently hidden or not fully realized.
We will also
show you what we're doing as an industry to manage or reduce
the major business uncertainties facing us.
It all starts
with the fundamentals, and the fundamentals are strong: cash
flow, safety, performance, reliability, output are up;
economic performance is solid; the business trends are moving
in the right direction.
Just to remind
you, 24 states have restructured their electric power
industries. Sixteen of those states have operating nuclear
power plants. That's 60 units out of a total 103, so we have a
pretty good idea of how nuclear energy will be treated under
restructuring. And most of the states that have not yet
restructured are in the Southeast, and these states
historically have acted responsibly in matters of electricity
We can see
several common themes in all the state restructuring plans.
First, all the
states have allowed the companies a reasonable opportunity to
recover their stranded costs, including the capital invested
in nuclear power plants, which accounted for approximately
one-third of the electric industry's stranded cost exposure.
Second, all the
states have recognized that nuclear plant decommissioning is a
public health and safety imperative and have generally made
explicit provision for continued collection of unfunded
decommissioning costs in rates, generally through some form of
many states have created compelling incentives for divestiture
of generating assets as a condition of stranded cost recovery.
This is a major stimulus to the consolidation of nuclear plant
ownership now underway.
nuclear plant performance, we estimate the industry's average
capacity factor for the operating units in 1999 will be about
90 percent. For all plants, which includes the two D.C. Cook
units that were shut down all year because of regulatory
problems, we estimate the average will be about 86 percent.
In 1997, the
year following the much-publicized problems at the Millstone
plant, we had 10 units closed because of regulatory issues and
a handful of others limping along with capacity factors in the
20 to 30 percent range.
elimination of the "watch list" and the dramatic improvement
in the regulatory process and regulatory environment since
then, we do not believe we will be subject to those kinds of
crippling business risks again.
As you would
expect from the capacity factor average, we saw a dramatic
increase in output from the plants last year. And we estimate
1999 output of approximately 720 billion kilowatt-hours,
likely the best year in our history. That's a record, and
approximately 50 billion kilowatt-hours ahead of 1998, which
is roughly equivalent to adding six to seven 1,000-megawatt
nuclear reactors to the grid.
Or put another
way: 50 billion incremental kilowatt-hours at a conservative 3
cents per kilowatt-hour represents an additional $1.5 billion
of cash flow in the nuclear power sector. The marginal cost of
producing those kilowatt-hours is very low.
Let's turn to
competitive position. If you look at the three-year (1996-98)
rolling average production costs for the U.S. plants divided
into quartiles, you can see that the fourth quartile numbers
are negatively skewed by the number of plants burdened with
regulatory issues in 1996 and 1997. As we get more current
data, you will see that fourth quartile approach the level of
the third quartile, and you will see a narrowing of the
spreads among each of the four quartiles.
Even so, you can
see that we can continue to improve our economic performance
to the level of the first quartile plants, which have O&M
costs below a penny per kilowatt-hour.
One of the most
obvious ways to improve is to boost output. You can see
there's a five-percentage-point difference in average capacity
factor between the plants in the third quartile and those in
is a useful way to compare the relative performance of the
nuclear plants. But it doesn't tell you the whole story about
whether or not they're competitive.
is not a total "going-forward" cost because it doesn't include
ongoing capital requirements, property taxes, administrative
and general expenses and some other important items, like
As a general
rule of thumb, we must add between 0.5 and 0.8 cents per
kilowatt-hour to production cost to get an approximate total
cost, and as we consolidate, those add-on numbers should start
And as you can
see, the first three quartiles are clearly competitive
assuming markets clear at between 2.5 cents and 3.5 cents per
kilowatt-hour, which is probably a little on the conservative
And, as I said
earlier, when we see full-year 1999 data, I'm confident the
fourth quartile will fall within that range, too.
thought on competitiveness. The chief executive of a
generating company with nuclear assets must decide whether to
continue to run the nuclear power plant or build new,
replacement capacity, which, today, would be combined cycle
We know the
nuclear unit can run at 2 to 2.5 cents per kilowatt-hour. And
we know the gas-fired plant has a total going-forward cost of
3 to 3.5 cents per kilowatt-hour, based on a capital cost of
400 to 450 dollars per kilowatt and a gas price of 2 dollars
per million Btu.
That's not a
difficult decision. I may need to build gas-fired generation
to meet growth in electricity demand, but I won't build it to
replace nuclear capacity.
We have been
saying for the last three or four years that we expected to
see significant consolidation in the U.S. nuclear energy
sector. It was obvious that the power plant side of the
business was ripe for consolidation. Ownership is (or was)
highly fragmented: 76 companies own less than 1,000 megawatts
of nuclear power production.
ownership and operating responsibility started in 1998 and
accelerated dramatically last year. Three nuclear plant
transactions—Pilgrim, Three Mile Island 1 and Clinton—closed.
And a number of others—Vermont Yankee, Nine Mile Point, Indian
Point 3, FitzPatrick, Millstone 2 and 3, Seabrook—are in the
consolidation involves more than outright plant sales.
Companies that are minority owners are selling back their
shares to majority owners, and companies are forming operating
companies, such as the Nuclear Management Company in the upper
Midwest, which will operate and perhaps eventually own the
seven units now operated by four separate companies.
consolidation is occurring throughout the industry—among
suppliers of equipment, services and fuel. Witness the
acquisition of Westinghouse's nuclear business by BNFL and
Morrison-Knudsen, the merger of Framatome and Siemens, and
more recently, BNFL's acquisition of ABB-Combustion
Engineering's nuclear business.
We regard all
this as a necessary and desirable step in the evolution of the
nuclear business, a natural business response to competitive
pressures and state restructuring. All of this positions
nuclear energy well for the competitive market now developing,
and will leave us with a safer, leaner, stronger industry
because ownership and oper-ating responsibility will be
concentrated in the hands of companies with nuclear energy as
their core business.
fundamentals are strong; cash flow is up; safety, performance,
reliability, out-put are up; economic performance is solid;
and the business trends, like consolidation, are moving in the
clearly is good for the nuclear industry, but it is
particularly beneficial with respect to license renewal. We
believe a competitive market creates a powerful business
incentive to extend the operating licenses of nuclear plants
from 40 years to 60 years.
greater incentive to renew their nuclear plant licenses in a
competitive market than in a regulated, cost-of-service
market. In a regulated market, earn-ings are based on rate
base. A 40-year-old nuclear plant is fully depreciated, and
has minimal rate base value and, thus, limited earnings
potential. In a competitive market, productive assets with
little or no embedded capital have enormous earnings
the substantial interest in license renewal during the last 12
to 18 months. Five reactors have already filed and are
undergoing Nuclear Regulatory Commission review. And another
21 reactors intend to seek license renewal over the next few
years. We expect that virtually all U.S. nuclear plants will
renew their licenses, partly because these plants have
significant earnings potential and partly because it is
dramatically less costly to renew the license of a nuclear
plant than to build replacement capacity of any kind.
Let me turn now
a brief summary of the ways in which we can unlock additional
value in our nuclear assets. When we discuss the competitive
position of our nuclear units, we tend to focus on the market
clearing price of electricity in the day-ahead market and
compare that price with the going forward cost of electricity
from a nuclear power plant.
That's not the
end of the story.
In fact, it is
just the beginning of the story, and the first step in the
value chain. We can add to that energy value in a number of
First, and most
obvious, we can add to that value by improving the performance
of the nuclear plants in any number of ways, including uprates
to boost the capacity, improving capacity factor through
shorter refueling outages and other means, achieving fuel
savings through higher fuel burnup, and reducing O&M costs
through better management, improved efficiency, procurement
improvements and other techniques.
an industry survey on reactor uprates and upgrades. We don't
have all the data in yet, but it suggests that we've added
approximately 1,000 megawatts of capacity over the last 10 to
12 years through uprates. There is at least that much more yet
to be gained. Remember, too, that these uprates are low-cost
undertakings, $15 million to-$20 million for another 10
percent to 20 percent of output from a plant. I am not aware
of any other technology that can deliver additional output at
such modest cost.
We can also add
to the value of the nuclear assets by leveraging the unique
characteristics of these plants—among them the ability to
provide a high degree of price stability. In competitive
markets like California, we are seeing large electricity users
willing to pay a premium above the average market clearing
price to lock in an assured source of electricity supply at a
known price. This protects them against the damaging effects
of price volatility in the day-ahead electricity market.
We are aware of
transactions in the bilateral contract market in California in
which large users were prepared to pay a premium of $5 to $8
per megawatt-hour above the day-ahead market clearing price to
protect themselves against upside price risk.
also have additional value, which typically is not yet
recognized, in pro-viding ancillary services, such as voltage
support, and they should be compensated for those services.
Nuclear plants also play a key role in maintaining the
reliability of the grid, and this service has value in an
unbundled market. As we continue to liberalize the market,
these ancillary services will become even more important.
Many of our
nuclear power plants also have significant additional site
value. In many cases, sites that host single units were
originally scheduled for two, and sites that hold two units
were originally planned for four. That means the sites have
switchyards, access to the grid, spare cooling capacity, and,
in some cases, room to expand to build additional generation.
In fact, there
are some attractive synergies. Imagine a situation where a
nuclear plant operator builds gas-fired peaking capacity on
its nuclear plant site. This company cov-ers its nuclear costs
by committing a portion of its nuclear output through forward
sales in the bilateral contract market, generates additional
revenue by moving its remaining nuclear output in the
day-ahead market, then generates yet more revenue by selling,
say, 10-minute spinning reserve capacity or other peaking
capability in the day-ahead market where prices for these
services can be quite astronomical.
building block in the value-added chain is the clean air
compliance value as-sociated with emission-free reactors. We
have completed a number of analyses over the last year to
satisfy ourselves that this compliance value exists, even
though nuclear plants do not, at present, derive economic
recognition for that value. Specifically, we evaluated the
role of nuclear power plants in reducing the compliance
obligation imposed on coal-fired power in reducing sulfur
dioxide (SO2) emissions under Phase 1 of the Clean Air Act. We
also analyzed the compliance value of nuclear power in
reducing compliance costs for nitrogen oxide (NOx) emissions,
using New York state as a case study.
nuclear plants avoid approximately 5.1 million tons of SO2
emissions, 2.4 million tons of NOx emissions, and 150 million
tons of carbon emissions. This corresponds to 42 percent of
SO2 emissions, 33 percent of NOx emissions, and 26 percent of
carbon emissions from electric utilities. These avoided
emissions alleviate the compliance obligation and associated
costs for affected fossil-fueled power plants. Emission-free
nuclear power permits emitting generation to avoid or minimize
capital outlays for compliance with federal and state emission
Let me give you
just a couple of examples. Most of the states east of the
Mississippi are operating under statewide budgets for NOx
emissions. Thirty percent of the New York state NOx budget
would be needed if nuclear plant generation were replaced by
natural gas combined cycle generation, which complied with new
source review (NSR) require-ments. Thus, the existing fossil
power plants would have only 70 percent of the allo-cated NOx
allowances available for compliance, meaning that there would
be greater emission reduction requirements imposed on each
plant. And greater reduction re-quirements generally mean
higher compliance costs. In Illinois, replacing the nuclear
units would consume 47 percent of the state NOx budget;
Pennsylvania, 41 percent.
environmental services provide substantial benefit to the
electric supply system and support regional economic
growth—essentially by providing offsets to pollution that
allow industrial growth and expansion. We are working toward
the day when this environmental service is recognized,
appropriately valued, and benefits nuclear plants and the
shareholders of the companies that own them. We are working
particularly hard to ensure that we capture this value as it
applies to reducing carbon dioxide emissions.
And finally, we
see potential additional value in the unique capabilities and
management tools and techniques required to maintain and
operate a world-class nuclear operation.
operation of a nuclear facility requires a substantial
investment in informa-tion technology, meticulous
record-keeping, maintaining configuration control and design
and engineering drawings, personnel records, training,
tracking the pedigree of spare parts and equipment, scheduling
of maintenance activities, and supply chain management.
These tools and
techniques have value, witness the decision last May by Sears
to retain Carolina Power & Light to provide maintenance
management services for all 845 Sears full-line stores around
the country. This will include processing maintenance work
orders, scheduling equipment maintenance, tracking and
ordering parts, maintaining warranties, and ensuring
compliance with safety, environmental and other workplace
we believe these building blocks of additional value represent
significant potential for nuclear power plants, and we know
our member companies are already planning ways to unlock this
value and move it to the bottom line.
Today, the nuclear power industry faces two major business
uncertainties—the regulatory process and used fuel management.
We've been able to manage both areas with sufficient success
that neither represents an appreciable business risk to
operating our plants safely and economically.
Let me start
with the truly dramatic progress made over the last 18 months
in working with the Nuclear Regulatory Commission to achieve
fundamental, revolutionary reform of the regulatory process.
There has been a remarkable improvement in the regulatory
environment and, at the same time, the NRC remains a credible,
effective regulator, which is absolutely essential.
As you would
expect, our goal is to drive unpredictability out of the
regulatory system, to develop a high degree of certainty about
what is expected at our plants, and to reduce the business
risk associated with the regulatory process.
with NRC to develop a new process to monitor and evaluate
nuclear plant performance and all stakeholders have sufficient
confidence in that process that the NRC has eliminated the
"watch list" of plants requiring additional regulatory
over-sight. That alone was a huge step toward greater
certainty, greater objectivity and greater integrity in the
achieved notable success in working with the NRC to create a
more disciplined and businesslike process for processing
license transfers and license renewals. License transfers have
become fairly routine. For example, it took the NRC just four
months to approve the transfer of Clinton's operating license
from Illinois Power to AmerGen Energy.
We have a high
degree of confidence that companies will be able to implement
business decisions and reposition their nuclear assets within
a credible, effective regulatory process.
I must tell you
that none of this would be happening if it wasn't justified by
the improvements in nuclear power plant performance. This is a
mature industry with sufficient operating experience to
warrant a critical reexamination and overhaul of regulations
and requirements that were put in place over the past 30
years, regulations imposed in a piecemeal, incremental fashion
where one set of requirements was simply layered on top of
learned over the years is that, in some cases, we are focusing
resources on areas of the nuclear plants with little or no
safety significance. We're now in a position to reduce that
regulatory burden without compromising safety in any way. In
fact, we will enhance safety because we place management
attention on those areas that have greatest safety
significance. We're also finding a few areas which the risk
assessment tools tell us have greater safety significance than
We find the NRC
open to working with all stakeholders. One of the more
interesting features of the new plant assessment process is
that the approach enjoys the unqualified support of the NRC
management, the industry and the intervenors, like the Union
of Concerned Scientists. All regard it as a quantum step
forward toward a more objective, understandable and
I should add
that none of this would have happened as quickly as it has
happened without a keen level of interest from the NRC
oversight committees in Congress, and we expect that oversight
interest will continue.
dramatic change involves the new assessment process for our
nuclear power plants. We know this is a top-of-mind issue for
the financial community because this replaces the SALP
(Systematic Assessment of Licensee Performance) process, which
you and others used as a barometer to track plant performance,
and the "watch list," which constituted a huge business risk
because assignment to this list represented such a crippling
drag on earnings for the companies affected.
assessment process is really a three-part program, involving a
new system to monitor plant performance using a set of
19-quantitative performance indicators as well as a revised
inspection program and a new approach to enforcement.
All of the
parties involved believe the new assessment process is a
marked improve-ment from the old system. It replaces
subjective criteria with objective performance indicators, it
establishes clear, quantitative thresholds separating
acceptable performance from unacceptable performance, and it
discards lagging indicators like SALP and the "watch list" and
replaces them with real-time indicators of plant performance.
assessment process was field-tested last year at nine plants.
All agreed that the new system achieved most of its goals and,
with some refinements, is ready for in-dustrywide
implementation in April.
I said earlier
that the new assessment process is more transparent. For the
pilot plants, and for all the plants when the program is
rolled out industrywide, you will be able to log on to the
NRC's web site and read the performance record of any nuclear
plant in the country. The performance indicator results will
fall into one of four color-coded bands—green, white, yellow
or red. Where the indicators fall will determine the
In the revised
inspection program, the areas for inspection are selected
based on safety significance and other factors. Like the
performance indicators, the inspections results will be coded
green, white, yellow or red. As long as indicators and
inspection results are in the green band, NRC will maintain
only routine interactions with the licensee and conduct a
baseline inspection program.
To the extent
plant performance and inspection findings fall in the white or
yellow bands, the level of NRC involvement will increase. In
the unlikely event that performance and inspection results
degrade into the red band, that would indicate an unacceptable
reduction in safety margin and the plant would not be
permitted to operate.
used nuclear fuel represents the second major business
uncertainty facing the nuclear industry, and, as with the
regulatory process, we don't believe this uncertainty
represents a threat to the competitive position of our
plants—with just one or two unique exceptions.
including some in the industry, have developed a somewhat
jaundiced view of this program. But I must tell you that
although we're not satisfied with program implementation by
the Department of Energy over the last several years, much of
the news is good and we still believe the DOE program can
achieve the desired result.
Many people talk
of our waste management "problem." We don't have a waste
management problem. What we have is one of the best examples
in any industry of an ef-fective cradle-to-grave waste
management system. We can account for, and have carefully
controlled, every gram of used fuel produced by this industry
since its inception. Let's not forget also that we have the
most advanced nuclear fuel management program in the world. No
other nation is even close to the site characterization we
have underway at Yucca Mountain.
work at Yucca Mountain is going well. The DOE's viability
assessment report, published at the end of 1998, and the draft
environmental impact statement issued in 1999 show
unequivocally that we have a very solid technical basis for
proceeding to develop a repository at Yucca Mountain.
Yes, we have
frustrations—mostly with the government's failure to meet its
obligation and start moving fuel as required by law beginning
in January 1998. But the industry is coping well with that
delay, and taking actions to recover the money caused by that
built 14 on-site storage facilities and another 16 are planned
in the near-term. Licensing of these facilities is generally
routine and non-controversial, and the additional cost of
on-site storage will not place any nuclear unit at competitive
Used fuel management is a major public policy issue that must
be re-solved, but it is not a major business risk. As with the
regulatory process, our goal is to manage the uncertainty in
this area to minimize the business risk to operation of the
plants. We have a four-pronged program to achieve that goal.
obviously make sure that companies retain the ability to build
additional on-site storage capacity when needed, and we are
working with the NRC to streamline further the process for
certifying storage casks.
As far as the
Yucca Mountain program is concerned, we are approaching a
window of opportunity to make further progress there. Later
this year, the Department of Energy is scheduled to issue for
public comment its site recommendation report on the
suitability of Yucca Mountain as a geologic repository. That,
in turn, will lead to a site recommendation decision by the
President sometime in late 2001, and then to submittal of a
license application to NRC in 2002-2003.
We also know we
can count on continued congressional oversight of this
program, which will encourage the Executive Branch to hold to
its schedule. The industry has for several years pursued
legislative initiatives to correct deficiencies in this
program. We will continue to pursue these initiatives: To
authorize early receipt of spent fuel at Yucca Mountain, to
assure adequate funding for the program, to ensure a safe,
rational radiation standard for licensing and design purposes
and to protect the Nuclear Waste Fund.
In addition, the
industry continues to press forward with development of two
private storage facilities for used nuclear fuel—the Private
Fuel Storage venture in Utah and the Owl Creek project in
Wyoming. Both continue to look promising.
companies will be pursuing their legal rights, through the
U.S. Court of Federal Claims and in private negotiations with
DOE, to recover damages from the government's failure to begin
moving used fuel on January 31, 1998. Recovery of damages
likely will include reimbursement for any costs incurred to
build additional on-site storage.
As I said at the beginning, the fundamentals for out industry
are very strong. Costs are coming down and can come down
further. Virtually all nuclear power plants are—or can
be—competitive, and performance is outstanding and getting
better. The consolidation we've been anticipating for the last
three or four years has moved into high gear, and we know
there is substantial untapped value in these plants.
plants have unique advantages compared to other sources of
generation. Unlike gas-fired power plants, which are extremely
sensitive to fuel price changes, nuclear plants are relatively
insensitive to fluctuations in fuel price. In addition, they
are immune to escalating environmental requirements, which can
have a dramatic impact on the cost of fossil-fired generation.
we expect the year 2000 will see complete implementation of
the NRC's new assessment process, continued progress at Yucca
Mountain leading to a site rec-ommendation, continued
consolidation of ownership and operating responsibility, and
additional license renewals for nuclear plants.
important, we expect continued, even growing, support from
policymakers and the political establishment for two reasons:
We see growing concerns over reliability of electricity supply
as electricity demand grows significantly faster than
expected. And we see a growing recognition that the large,
baseload nuclear units are indispensable in assuring the
stability of the grid and reliability of the supply system.
And second, we see growing recognition of the dominant role of
nuclear energy in preserving air quality and reducing
emissions, particularly emissions of greenhouse gases.
recently published the results of voluntary reductions in
carbon emissions in 1998 under a program authorized by the
1992 Energy Policy Act. U.S. industry across the board reduced
carbon dioxide emissions by 212 million tons in 1998, and
improvements in nuclear power plant performance—just the
improvements, mind you—accounted for almost one-half of that
amount—100 million tons.