January 26, 1999 Nuclear Energy: The Year 2000 and Beyond Remarks by Joe F. Colvin President and CEO The Nuclear Energy Institute Infocast Conference Washington, D.C. January 26, 1999 Good morning, and welcome to today's discussion of nuclear energy in the competitive market. I'm glad this conference is looking at the 21st century because the future of nuclear energy is brighter today than at any time in my 35-year career. That opinion is shared by a growing number of people who have rediscovered nuclear energy's benefits and vitality. From policymakers to pundits … from the financial community to the people at our nuclear power plants … there is a growing awareness that this is a proven industry with more than 2,000 years of operating experience … and with a product that will become increasingly valuable as we tackle the demands of the 21st century. Perhaps the highest praise for nuclear energy's prospects comes from one of the industry's long-time doubters: the Washington International Energy Group. In October, the group said: "For the first time in more than two decades, a new consensus is emerging that nuclear energy needs to play a role, as countries attempt to fulfill Kyoto Protocol climate change commitments." Then, in its 1999 Energy Industry Outlook, the Washington International Energy Group went a step further, saying: "Confidence in the viability and performance of nuclear plants has significantly increased. …The best nuclear plants have now proved that on a sustained basis they can generate electricity at very low cost compared to all but some hydro units." Some people have implied during the past year that this rediscovery of nuclear energy is serendipity … that the industry is merely capitalizing on current events to push its agenda. Let me assure you that this rediscovery of nuclear energy didn't just happen. The industry is ready to meet the future because we never stopped preparing for it. The opportunities before us were not simply handed to us. To a large extent, we created them-through cooperative industry programs and years of hard work by individual companies. Long before anyone dreamed of harnessing the power of the atom, writer Samuel Johnson observed that "great works are performed not by strength, but by perseverance." Pride compels me to tell you the nuclear industry has plenty of both. Our strength is demonstrated by the fact that more than 100 nuclear power plants produce 20 percent of the nation's electricity … safely and cost-effectively. The industry's perseverance is proven every time our adversaries throw out false claims about nuclear energy-despite our unparalleled safety record and the fact that more than 60 percent of Americans consistently favor the use of nuclear energy. Our perseverance is proven every time we respond the Energy Department's failure to begin accepting used nuclear fuel according to decades-old laws-forcing the industry back to court to rectify this environmental issue that affects Americans in 34 states. And it's proven every time we address inefficient and subjective regulations that divert our focus from nuclear plant safety … and unfairly drive up the price Americans pay for electricity. What is most gratifying to me is that our perseverance has begun to pay off in myriad ways. It's paying off now because … finally … the time is right for change. Take regulatory reform, for example. Until 1998, recent Congresses hadn't paid much attention to NRC oversight. Lawmakers didn't see a pressing need. As long as nuclear utilities operated in a cost-of-service environment, lawmakers could safely assume that the cost of regulatory inefficiency wouldn't affect a company's bottom line. But industry restructuring and the gradual shift from a cost-of-service environment are changing everything. In a competitive market, burdensome, inefficient regulation will severely impact nuclear plant economics. Unduly burdened plants will close if they can't compete. Their generation will be replaced by plants that emit greenhouse gases and air pollutants. Carbon dioxide, sulfur dioxide and nitrogen oxide emissions will increase. And the United States will find it impossible to meet international carbon dioxide reduction goals and increasingly stringent clean air regulations. Obviously, that isn't Congress' intent. In fact, members demonstrated that last July, when the Senate held its first Nuclear Regulatory Commission oversight hearing in more than four years. While I'm very pleased by Congress' recent interest in regulatory reform, I'm convinced that our perseverance—laying the groundwork over the years—enabled Congress and the NRC to react swiftly and ably once the calls for change reached a critical mass. When Subcommittee Chairman James Inhofe called the regulatory process "somewhat out of control," and reminded the NRC commissioners attending the July hearing that … without regulatory reform … the future of the nuclear energy industry would be threatened, he wasn't speaking off the top of his head. Chairman Inhofe knew—from years of interaction with our industry and other regulated industries—where the regulatory process was broken and how it could … and should … be fixed. In the months since the Senate oversight hearing, the commission has rolled out a number of new proposals and rules that promise greater efficiency … greater objectivity … a greater focus on safety … and greater emphasis on risk-informed regulation. I'm also pleased to report that cooperation between the industry and the NRC staff is at an unprecedented high … and that every commissioner is squarely committed to reforming the regulatory process. Last month, we learned that Chairman Jackson will be leaving the NRC when her term expires in June. Since that announcement, I've seen several stories that her departure could short-circuit regulatory reform. I couldn't disagree more. Chairman Jackson already has left a laudable legacy, and in the transition to a new chairman, our perseverance will really prove its worth. Just as important, every commissioner fully supports regulatory reform. Yes, reform will continue … unabated … because we have laid the foundation for change through years of hard work and interaction with the staff, the commission and Congress. Much as our hard work and persistence is bearing fruit in terms of regulatory reform, we are seeing benefits in other areas, as well. Some of these gains surprise even me. Yet they are further … undeniable … proof that the nuclear energy industry has matured and vastly improved in recent years. I'm repeating myself, but I firmly believe that praise from one's critics is the most meaningful. For that reason, I welcome the fact that in the past two years, we have seen a turnaround in the Clinton administration's perception of nuclear energy. First, the President's Committee of Advisors on Science and Technology recommended in 1997 that the Energy Department triple its nuclear energy research budget by 2003. The department followed through last year by sponsoring the Nuclear Energy Research Initiative. Though modestly funded at $19 million, the creation of this program is significant because it comes at a time when the administration and Congress are looking for programs not to fund. I expect that momentum to continue this year, when DOE proposes another new program … one that will address plant aging issues, license renewal and generation optimization. Further evidence of the administration's rediscovery of nuclear energy is its recognition that carbon reduction targets … as well as other clean air goals … cannot be reached without continued contributions from our existing emission-free nuclear power plants. As Stuart Eizenstat, Under Secretary of State and chief negotiator on global climate change, said in October: "Those who think we can accomplish these goals without a significant nuclear industry are simply mistaken." A report last fall by the administration's Energy Information Agency confirmed that notion. It concluded that nuclear energy must continue to play a substantial or increased role in U.S. electricity generation … if our nation has any hope of meeting the emission reductions envisioned in the Kyoto Protocol. But perhaps the most compelling proof of a rediscovery of nuclear energy came last year at Chernobyl. There, Vice President Al Gore said, and I quote: "Nuclear power, designed well, regulated properly, cared for meticulously, has a place in the world's energy supply." Designed well … regulated properly … cared for meticulously. That is the U.S. nuclear energy industry. The nuclear industry owes our bright future to more than perseverance. If you're not doing the right things to begin with, it doesn't matter how persistent you are. Well, I'm here to tell you that America's nuclear power plants are poised for competition because the industry has been doing the right things—and it has done them well. During the past year, the U.S. nuclear energy industry has demonstrated time and again that it is successfully reinventing itself for competition. Perhaps the most dramatic evidence of that fact came with the first-ever acquisitions of operating nuclear power plants in the United States. Defying conventional wisdom—that nuclear plants will have limited earnings potential in a competitive market—AmerGen Energy and Entergy Nuclear each made astute investments when they agreed to buy the Three Mile Island Unit 1 and Pilgrim nuclear power plants. These acquisitions demonstrate that companies with substantial nuclear management skills believe nuclear power plants will be highly attractive and profitable assets in a restructured electricity industry. The plant purchases also signaled the start of consolidation in the U.S. nuclear business. Why does that matter? Consolidation will enable companies to exploit economies of scale. Northern States Power certainly understands this dynamic. That's why … last August … the company announced plans to form a regional generating company to run its nuclear plants in Minnesota, along with several others operated by companies in Iowa and Wisconsin. As Northern States Power Chairman Jim Howard said last year: "The time is right for change, because in my view, the nuclear industry—as it presently exists—is not effectively organized. … "The time is right to place our top-performing nuclear plants into separate nuclear operating companies. This would enhance the value of our assets and help us address industry issues more effectively. "In addition, separate nuclear operating companies would be stronger and better equipped to work with regulators and the industry. They would share expertise and leverage procurement of materials. And they would be able to grow." The reinvention of the nuclear energy industry can be seen in at least two other areas, as well. First, a joint venture of Morrison-Knudsen and BNFL Inc. announced … last summer … its intent to buy the nuclear business of Westinghouse Electric Corporation. Second, the federal government's uranium enrichment enterprise now is in the hands of the private sector. And USEC's $14.25-per-share initial public offering last July certainly demonstrates investor confidence in nuclear energy. If you haven't gathered by now … this is not your father's nuclear energy industry. Today's nuclear industry is attending to the business of nuclear energy … by maintaining and maximizing asset value … and by increasing shareholder value. U.S. nuclear plants are producing more power than ever … for less money. Capacity factors at most plants are climbing … while O&M and production costs decline. The industry's improved economics has captured the attention of the financial community. In the past year, we've seen a new-found bullishness for nuclear energy on Wall Street. Last spring, Prudential Investments' David Kiefer said: "I think people are realizing that, whether or not nuclear investments should have been made in the past, once you have a nuclear plant—if it operates well—it's a pretty darn cheap source of power." Nuclear energy becomes more cost effective still with license renewal. A number of utilities have run the numbers and come to that conclusion. Baltimore Gas and Electric and Duke Power have submitted license renewal applications for their Calvert Cliffs and Oconee nuclear power plants. That means five units already see economic benefit in an extra 20 years of operation. And six or seven other companies have told the NRC they will soon file license renewal applications. The reason is quite simple. We estimate the cost of nuclear plant license renewal at $10-50 per kilowatt. The cost of building the closest non-nuclear alternative comes in around $440 per kilowatt. You do the math. I think you will quickly realize that it's vastly less expensive to extend the life of an existing nuclear plant than to replace it with a new generating facility. The switch to competition provides one other powerful incentive to extend nuclear plant licenses. In today's cost-of-service environment, an electric utility's earnings are a function of its rate base—which allows the company to recover its investment in plant and capital equipment, plus a set profit. But here's the catch: Once a plant is fully depreciated, it is taken out of the rate base. That severely limits an older plant's earnings potential … and acts as a disincentive for license renewal. The opposite is true in deregulation. With the rate base eliminated, earnings will be based solely on the difference between a plant's going-forward costs and the market price of power. In a competitive environment, a fully depreciated plant will have enormous earnings potential. For well-run, efficient nuclear plants, the profits could be quite handsome … and well worth extending the operation by 20 years. Beside maximizing asset value, there's one other compelling reason for license renewal: Nuclear energy is America's only large-scale, reliable source of emission-free electricity. As I mentioned earlier, the Clinton administration now acknowledges the crucial role nuclear energy must play in any strategy to reduce the emission of carbon dioxide, as well as air pollutants like sulfur dioxide and nitrogen oxide. In fact, an October report by the Energy Information Agency projects that to reduce carbon emissions 3 percent below 1990 levels, most existing nuclear plants will have to renew their operating licenses … and 42,000 megawatts of nuclear capacity will need to be built. Well, I'm not going to suggest that we'll be building dozens of new nuclear plants anytime soon—although we do have three advanced designs approved by the NRC and ready for order. But I will point out that we must maintain our current fleet of nuclear plants if we have any hope of meeting future emission-reduction targets. And that means license renewal. The industry understands that. And the administration is coming around. Congress, too, has become acutely aware of nuclear energy's clean air contributions. Senator Frank Murkowski, chairman of the Energy Committee, has proposed creation of an emission-free portfolio standard as a part of restructuring legislation. I support Senator Murkowski's plan—in which the U.S. would generate a certain percentage from non-emitting sources like nuclear energy, hydropower and renewables. Congress has also asked NEI and the industry to look at several concepts related to recognition of emission-free sources of electricity generation. One is an output-based cap-and-trade system, whereby allowances for air pollutants would be based on generation output. Under the current cap-and-trade system, allowances are based on fuel inputs, which means that nuclear energy and other emission-free sources gain no economic recognition for their clean-air compliance value. A 1998 study by Energy Resources International found that during 1990-95, increased nuclear generation prevented 480,000 tons of sulfur dioxide emissions. Since Clean Air Act amendments exclude non-emitting units from the core elements of the cap-and-trade system, coal plants were able to bank those SO2 allowances … with a market value of about $60 million. In an output-based system, those credits would devolve to emission-free nuclear power plants. Senator Joe Lieberman appears to be on the right track with legislation he sponsored last year that would allow companies that voluntarily reduce emissions to receive credits for these early actions. At the November climate change summit in Buenos Aires, Senator Lieberman called his proposal "goal oriented" and assured that it would "not discriminate against methodologies" to achieve carbon reductions. The industry strongly supports such a plan. And for good reason. As part of the administration's voluntary Climate Challenge Program—in which electric utilities pledged to cut carbon emissions by 45 million metric tons between 1993 and 2000—the nuclear industry accomplished one-third of those reductions, thanks to increased efficiency, power upratings and shorter refueling outages. Assuming a reasonable price for carbon emission credits of $50 per ton, that increases the value of our nuclear power plants by $750 million. Another concept we've been asked to consider is a production tax credit, in which nuclear plants receive the same 1.5 cents per kilowatt-hour credit extended to two other emission-free sources: wind energy and closed-loop biomass. Extending the tax credit—which expires in June—to all emission-free sources … including nuclear and hydro … would encourage electricity generators to reduce emissions of greenhouse gases and air pollutants. Finally, the creation of an investment tax credit would encourage maintenance and extended life for existing nuclear power plants. Of course, no discussion of nuclear energy's future would be complete without a mention of the used fuel situation. Many of you know about our on-going legal battles to get the Energy Department to begin moving used fuel from our nuclear power plants. As an industry executive, I am appalled at the administration's lack of responsiveness on this issue. And as a member of the public, it bothers me to think the government would rather pay nuclear utilities some $56 billion in damages … in taxpayer money … rather than apply a readily available solution. That solution, of course, is legislation. And as an eternal optimist, I believe this is the year Congress will reform DOE's used fuel management system, and establish a temporary storage facility until a repository opens. What's different about this year? First of all, I'm optimistic because legislation was introduced in the House on the opening day of the 106th Congress, and we expect hearings early this year. Not only does that piece of legislation … known as H.R. 45 … enjoy the bipartisan support of 47 original co-sponsors, its passage is considered a priority by House Commerce Committee Chairman Tom Bliley—who called the administration's refusal to support temporary storage "an environmental disgrace." Our support is just as strong in the Senate. Majority Leader Trent Lott has committed to taking up the waste bill in early 1999. And Energy Chairman Frank Murkowski remains a tireless champion in the effort to resolve this issue. A second reason for optimism is that $56 billion I referred to earlier. I simply cannot fathom that Congress would squander that much money, when it could end our stalemate with DOE by creating temporary used fuel storage. My third reason for optimism is last month's release of the viability assessment of Yucca Mountain. For years, the Clinton administration has asked Congress to wait until the assessment was complete before acting on legislation to create temporary storage. On December 18, Energy Secretary Bill Richardson reported that the viability assessment reveals "no showstoppers." Now that the administration's defense for opposing temporary storage has evaporated, I hope to see greater interaction between the White House and Congress to solve this problem. While the nuclear waste legislation will draw the lion's share of attention this year, the Nuclear Energy Institute is undertaking other initiatives to preserve the value of nuclear power plants and ensure that companies have the flexibility to reposition these assets in a competitive market. One is to amend the Atomic Energy Act to remove duplicative anti-trust regulations … to allow foreign ownership of U.S. nuclear power plants, as long as there is a two-way street for American companies … and to clarify the NRC's hearing process for licensing. Another is to ensure that nuclear plants fully recover money spent on federal nuclear obligations, like decommissioning. And a third initiative is to amend the tax code to ensure that corporate restructurings do not create adverse tax consequences. The nuclear industry has a vision for tomorrow. And in it, nuclear energy plays a crucial role … maintaining a safe, reliable energy supply … minimizing the environmental impact of electricity generation … and contributing to our economy. In many respects that vision is being realized today. Nuclear plant production is up … costs are down. Our safety record is second to none. And no other fuel generates as much electricity without emitting greenhouse gases or air pollutants. While these facts point to a bright future, we still have a lot of work to do. All of us. There's restructuring legislation … the creation of systems that fairly compensate nuclear energy's clean air benefits … and certainly issues related to solving the used fuel problem. It may not be easy … but as a united industry … we're going to make it happen. It's that perseverance and persistence that I've been talking about. And it's the reason countless Americans are rediscovering the benefits and value of nuclear energy. Because this industry made it happen. Thank you.