PART II: ECONOMIC MODELING AND IMPLICATIONS OF THE DECISION ON
11. PLANT OPERATION IN RESTRUCTURED VERSUS REGULATED UTILITY
11.2. Equations for plant operations in a regulated utility
A plant (or more specifically a NPP) operating within a regulated utility is subjected to a different set of rules than a plant operated within a restructured utility. The regulated utility owned plant operates as a cost center only, incurring capital-related and operating costs. Both sets of costs, if allowed by the regulatory agencies, are returned to the utility through the sale of electricity at regulated prices, as discussed below. All incoming regulated revenues go to the owner utility, not to the plant itself. The utility is also responsible, using its overall revenues pool to pay for all plant costs not approved by the regulators to be passed-through to the ratepayers. While this system, depending on how it is applied, allows the utility to recover all its ‘prudently accrued’ costs (as defined by the regulators), it does allow very limited and regulated profits and provides limited incentives to improve operating efficiencies so as to increase profits. On the other hand, the utility is guaranteed adequate returns to cover all prudent costs, so theoretically it could not incur major financial losses. We now discuss the impact of the regulatory process on the cost equations related to the construction, operations and decommissioning periods, assuming an original design plant life span.
11.2.1.
construction related costs reported by the utility and determine which costs were prudently incurred and which costs were imprudently spent. The regulatory agencies allow only prudently incurred costs to be included in the ‘Rate Base’. The rate base is defined as the cumulative, un-depreciated, prudently incurred investment on which a regulatory determined return is collected from the utility ratepayers. In the restructured or non-regulated utility system, the sum of all un-depreciated investments in the plant is referred to as the ‘Book Value’. The issue of investment prudence is not considered in the non-regulated utility, since power plant investment decisions and the risks thereof are not reviewed by the local state or regional regulatory agencies and are considered the sole responsibility of the utility. Thus we can, in general, say that if all plant investments were included in the rate base – the rate base would be identical to the book value. Conversely stated, the rate base represents the
Plant construction period — regulated utility
Periodically during the construction period the regulatory agencies review all plant
“prudently incurred’ book value. We thus define for each period j during the construction period a fraction of allowed costs PALOW (j) as determined by the regulators. It follows that during each period a fraction of (1 - PALOW (j)) represents the portion of the costs incurred which are disallowed by the regulators from the rate base and must be born by the utility stockholders rather than its ratepayers. We can thus modify Equation (9) above for the plant operated by a regulated utility as
REGNCFCon(j) = {S(j) × BCC+ Sown(j) × OWNC} × PALOW(j) × (1 + Cont) × (1 + iIDC) – j -1 (26) Where
REGNCFCon(j) – Net annual regulatory-allowed cash flow by year j during the construction period [M$/year]
PALOW(j) – the fraction of construction costs in year j considered by the regulators as prudently incurred and allowed into the rate base
All other cost definitions are similar to those reported for equation (9).
We can sum up all annual prudently incurred construction cost increments in similar way to Equation (10) above, to define the allowed rate base at the end of the construction period and the start of the operations period as
REGI(t = 0) = -
{
REGCUMFC(j = - NCon) + First Core Cost}
(27)where
REGI(t = 0) – The regulatory approved Rate Base (or the allowed discounted cumulative net cash flow) at the end of the construction period [M$]
REGCUMFC(j = - NCon) – The cumulative discounted prudently incurred plant construction costs at the end of construction [M$]
Equation (27) is equivalent to equation (11) for the non-regulated case. As mentioned above using the term (1 - PALOW (j)) in equations (26) and (27) will allow us to compute the amount of construction-related investments incurred which are not allowed by the regulators and will have to be absorbed by the utility stockholders. The inclusion of the first core costs introduces here a nuclear-specific issue. If we introduced here instead first coal pile cost or related cost component this equation could represent a coal-fired plant-specific case.
11.2.2. Plant operations period — regulated utility
Two mechanisms of regulatory costs review are available during the plant operations period and are used to control plant generation costs charged to the utility ratepayers. These apply separately to capital related costs and to operations costs. All allowed capital investment costs deemed prudent are allowed into the Rate Base and are depreciated using a regulatory approved rate of return rALOW. By design rALOW should be slightly higher than the real average cost of money r defined in Equation (2). The difference in recovering costs with the allowed rate of return - rALOW and with the real rate of return r, is the net profit allowed the utility by the regulatory agencies. If rALOW ≥ r then the utility obtains a net profit. However if financial conditions changed between periods of regulatory costs review and rALOW ≤ r then the utility might incur a loss, and must appeal to the regulators to hurry their review process so as to avoid a ‘Regulatory Lag’ phenomenon.
The operating costs including fuel and O&M expenses were usually allowed by the regulatory agencies with only limited prudence review to be directly passed through as they occur to the ratepayers. Recently a new regulatory review process related to operations costs has been instituted and is referred to as performance based regulations (PBR). Under PBR all operations costs are periodically reviewed to establish their prudence, and to create incentives to the utility to improve the operations efficiency and reduce the operations costs of its NPP.
If operations targets, including capacity factors and O&M cost values are met, the utility can recover all its costs. If the performance targets are not met, the utility is penalized by having a portion of its operations costs disallowed. These disallowed costs must then be born by the utility stockholders and can not be passed through to the utility ratepayers.
Turning to the cost equations derived in Sub-section 10.2, we note that by definition REV(t) = 0 and the net annual cash flow obtained from the ratepayers equals the allowed capital depreciation and operations costs. Thus a modified equation (12) will read as
REGNCF(t) = REGOM(t) + REGFL(t) + REGDD(t) + REGI(t-1) × {(N – t + 1) -1 + rALOW} (28) Where
REGNCF(t) – Regulatory approved net annual cash flow in year t, [M$/year]
REGOM(t) – Regulatory approved (PBR Process) annual O&M Costs in year t, [M$/year]
REGFL(t) – Regulatory approved (PBR Process) annual fuel costs in year t, [M$/year]
REGDD(t) – Regulatory approved annual outlay to the NPP Decommissioning Fund costs in year t, [M$/year]
REGI(t-1) – Regulatory approved allowed Rate Base accumulated by year (t-1) and depreciated at a rALOW rate, [M$]
The process of determining the allowed rate base and the allowed return on the rate base includes also a review of the annual capital addition costs so that only prudently incurred costs are allowed into the rate base. The explicit mention of a decommissioning fund cost component turns equation (28) into a nuclear specific equation, since other type power plants do not yet list this as an explicit cost item. Thus a modified equation (13) will include:
REGI(t) = REGI(t-1) × {(N-t) / (N-t+1)} + REGCAPADD(t) × PALOW(t) (29) Where
REGCAPADD(t) – Regulatory approved annual capital addition costs included in the rate base by the year t, [M$/year]
PALOW(t) – Fraction of capital addition cost in year t, considered prudent and allowed into the rate base [%]
Proceeding along similar lines to Sub-section 10.2 we compute the discounted cumulative net cash flow by year t, as approved by the regulators through both allowed rate of return and PBR review processes. Similar to a part of equation (14) we define
t
REGCUMCF(t) =
Σ {
REGNCF(k) × (1+r)-K } (30)k = 1
Where we defined above all component cost items. Note that we depreciate using the allowed rate of return rALOW .while we discount using actual cost of money r. We choose the nominal cost of money r as the discount rate in all cases rather than the allowed cost of money rALOW in order to assure consistency and comparability with the plant operated by non-regulated utility cases.
Note also that the first term on the right hand side of equation (14) i.e. — REGI(t = 0) is not required and is not included in equation (30). This is so since in the regulated utility case we do not have a distinction between a (negative-value) investment and positive-valued net annual cash flows used to recover it. All cash flows represent costs (are negative). The allowed annual cash flows are determined such that they are just adequate to cover prudently incurred investment-related and operations costs. The utility collects revenues from the ratepayers such that it recovers all its allowed costs. The sum of the annually incurred net cash flow includes the amount required to return the initial plant investment and provide a return on it. We thus do not need to include the initial investment twice in equation (30).
The more detailed annual cost equations for the component cost items are identical to those derived in Sub-section 10.2, except all costs included are those allowed by the regulatory agencies through the various prudence review processes.
Finally, the boundary conditions in the transition between the operations and the decommissioning periods are modified versions of those defined in equations (19) and (20) such as
REGI(t = N) = REGCAPADD(t = N) × PALOW(t = N), and
REGCUMCFDD(k = 0) = CDD × (1 + r) -N – REGCAPADD(t = N) × PALOW(t = N) × (1 + r) –N (31) Where we define all cost items as above. The second part of equation (31) implies that at the beginning of the decommissioning period for the regulated plant, the utility receives a large positive capital injection in the form of the decommissioning fund. When subtracting the last carry-over capital addition cost from the operations period, this is the sum available to pay all decommissioning period expenses. There is no net positive accumulated cash flow from the operations period, since only costs (and no revenues) are accrued to the plant. Allowed rate payments suffice just to pay for all allowed costs and thus no net positive cash flow accumulates. The graphic depictions of the annual and cumulative net cash flows of a regulated plant over its original design plant life span are shown in Figures 5b and 6b, respectively. These can be compared with the annual and cumulative cash flows of a plant operated by a non-regulated utility, shown in Figures 5a, and 6a, respectively. In these four cases we applied the detailed analysis specifically to a NPP, however the general computational methodology and resultant overall shape of the cash accumulation curves equally apply to all plant types.
Net Annual Cash Flow [M$/Year]
Base
Construction Cost
IDC
Decommissioning Fund released
Year
C.O. Date
Net Revenues to Utility Match Net Allowed Costs to Plant
Fig. 5b Plant net annual cash flow over original design plant life*
– Plant operated by regulated utility
*Axes and figures not drawn to scale
Dscounted Cumulative Net Cash Flow [M$]
C.O. Date Total Construction Investment
Decommissioning Fund
No Net Profit
Year
Fig. 6b Plant cumulative net cash flow over original design plant life*
– Plant operated by regulated utility
*Axes and figures not drawn to scale
11.2.3. Plant decommissioning period — regulated utility
There exist only a limited experience set related to the regulatory review process of decommissioning activities, since there have been only few cases where a shut down plant has undergone through a complete decommissioning programme. Regulatory reviews mostly concentrate on analyzing the adequacy of the decommissioning funds, both with regards to the sufficiency of final amount of money the utility would like to accumulate, and with regards to the security of the financial instruments the decommissioning fund is invested in.
The regulators are also interested in reviewing the financial health of the plant (in this case NPP) utility owner, its ability to continue paying annually the right amount into the decommissioning fund, and the impacts of utility mergers and acquisitions on the disposition
of the decommissioning fund. A new issue under regulatory scrutiny now is the determination of who owns title to and responsibility for the stored nuclear spent fuel on or off the plant site in case of utility mergers and changes in corporate identity.
Regulatory review of actual decommissioning programmes has been limited to prudence reviews, and was intended more to guarantee that the various activities proposed will accomplish the declared tasks safely, with minimal radiation exposure to the plant staff and to the general public. The availability of low level waste (LLW) nuclear waste storage sites and the charges for storing LLW shipments in those sites (tipping charges) have also been reviewed by the regulators, to prevent overcharging by monopoly LLW site owners.
The above indicates that there exists little need to modify the decommissioning period cost equations derived in Sub-section 10.3 to account for NPP decommissioning performed within a regulated utility. All the equations derived in Sub-section 10.3 are applicable here using the notation indicating that we are dealing with a regulated utility case. Thus, the basic cost equation for the decommissioning period discounted cumulative net cash flow – equation (25), can be modified and expressed for the regulated NPP case as equation (32) below.
k
REGCUMCFDD(k) = REGCUMCFDD(k = 0) - Σ{REGCAPADDDD(k) + REGOMDD(k)} × (1+r)-(N+k) k = 1 (32) Where all the definitions of the cost component items in equation (32) are identical to those used in equation (25), and are applicable here to the NPP operated in a regulated utility case.
All other cost equations from Sub-section 10.3 are similarly re-expressed.
12. EQUATIONS FOR CONTINUED OPERATION