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Citizen Power 2121 Murray Ave Pittsburgh, PA 15217 (412) 421-6072 (412) 421-6162 Fax info@citizenpower.com	Citizen Power Reports Stranded Costs and CAPCO's Nuclear Debacle If your residential electricity rates are substantially higher than the national average of 8 cents per kilowatthour (kWh), it is likely because your utility decided to build nuclear powered generation. In many cases, the decision to build nuclear plants led to construction cost overruns that nearly bankrupted many utilities, had it not been for state regulators passing on those costs to ratepayers. One of the major electricity deregulation issues facing regulators, utilities and their customers is whether ratepayers will have to continue paying the costs for these huge nuclear investments once the price for generation is left to the marketplace. Utilities are concerned that, in a competitive environment, they will not be able to recover these costs. In other words, under regulation, ratepayers have been forced to pay high rates to pay for high cost investments, but, once deregulated, the competitive price for generation will likely be much lower. Utility companies worry that they will have to eat the construction costs they have yet to recover. Utilities call the debt they may not recover "stranded costs". The following is a case study to illustrate how this all plays out in reality In 1967, after the massive east coast black outs, Duquesne Light Company (Pittsburgh), Cleveland Electric Illuminating Company, Toledo Edison, Ohio Edison (Akron), and Penn Power (owned by Ohio Edison), formed the Central Area Power Coordinating Group, or CAPCO. CAPCO developed an ambitious plan to build 17 generating units, 9 of which were to be nuclear plants. Over the next few years, CAPCO scaled back its construction schedule, primarily because the growth in demand that it had projected never materialized. Of the nine nuclear units planned, only three were started and two were actually finished, the Perry Plant, on the shores of Lake Erie, 45 miles east of Cleveland, and the Beaver Valley II unit, on the Ohio River, about 25 miles northwest of Pittsburgh. Perry 1 and Beaver Valley II were planned in the late 60's and early 70's, and were projected to cost a combined $1 billion. They ended up going on line in November 1987 at a combined cost of $10 billion. These cost overruns are the primary reason the CAPCO companies' residential rates are so high. It is also the reason why the companies are being permitted to recover over $10 billion in "stranded costs" during the transition to competition, regardless of who supplies the generation. You might wonder why CAPCO chose the nuclear option, and why it continued to build nuclear plants when the safety and economic problems with nuclear power were well known. The answer can be found in the history of the Duquesne Light Company, but first a little background. A utility must borrow money to pay for construction of a generating plant. Only when the plant actually becomes "used and useful", i.e., begins transmitting electricity to customers, can the utility begin to charge customers for the construction costs. The state regulatory commission is supposed to conduct and investigation to determine whether (1) the construction costs were prudently spent, (2) the plant's capacity is needed to meet demand, and (3) the electricity will be produced at the least cost. In short, the addition of the generation plant must provide an economic benefit to ratepayers. The regulators determine the need for the new capacity based on the utilities (multi-year) projection of growth in demand for electricity in its service territory. This is a basic flaw in the process. A utility's revenues are based on the value of its assets. The more generation plants it has, the more money it makes. So, there is a built in incentive for utilities to inflate their projections of growth in demand in order to justify building additional capacity. In 1967, CAPCO projected nearly an 8% growth in demand for electricity between 1967 and 1977. To meet this projection, CAPCO formulated the ambitious plan to build 17 generating units, much more capacity than it would need if the growth in demand projections had been accurate. Unlike many utilities that had to be persuaded by the U.S. government to go the nuclear--"too cheap to meter"-route, Duquesne Light management had a love affair with nuclear power that began in the early 1950's. The Company was the first utility to open a commercial reactor in 1957 at Shippingport, PA. In its 1970 Annual Report to Shareholders, Duquesne boasted that it was proud to be the utility that led all other utilities into the nuclear power business: The Company's research and development efforts in the field of nuclear power starting in 1954, launched the investor-owned electric utility industry's use of nuclear energy Duquesne invested billions in nuclear projects. Beaver Valley I went on line in 1979. Construction of Perry 1 and 2 began in October 1974, at a projected cost $632 million. Construction of Beaver Valley 2 also started in 1974, at a projected cost of $424 million. Both plants were to be completed in 1979, but numerous company-ordered delays extended the start up date to November, 1987. As a result, the cost of the projects skyrocketed to a combined cost of nearly $10 billion. Perry Unit 2 was abandoned in 1986 at 60% completion, costing Duquesne customers $150 million. In 1988 and 1989, after a heated public debate, the Public Utility Commissions of Pennsylvania and Ohio, respectively, allowed the CAPCO companies to begin charging customers for Perry 1 and Beaver Valley 2. This decision caused customer rates to increase 42% over 6 years. The CAPCO companies justified their claim to recover the nuclear investment based on the contention that: The PUC "ordered" them to build generating capacity to meet growing demand. Federal regulatory laws, particularly the Clean Air Act and the Fuel Use Act, forced them to build nuclear generation The "energy crisis" created a need for a domestic fuel source, and Expected growth in the steel industry required a proportionate increase in generation capacity. These are the same arguments the CAPCO companies are using in the late 1990's to justify recovering 100% of their "stranded costs" during the transition to retail competition. In the January 1997 issue of Executive Report magazine, Duquesne Light CEO David Marshall gives the company line on the decision to build their nuclear plants: One of the differences between a company like PECO and Duquesne and Allegheny Power is the kinds of investment choices they had back in the time of the energy crisis. At that time, all of our customers and the PUC encouraged us to build these nuclear plants. They were the only real alternatives in the urban areas under the Clean Air Act. It was a time too when the steel industry was clamoring for more electric arc furnaces and our legal obligation was to be able to meet these forecasts. Allegheny Power, being largely rural, could build plants using very high sulfur coal at very low prices because they weren't included in clean air standards. Clearly, all of the urban areas in the whole north- east had no real alternative. First lets look at the dates of these events. The first mention by Duquesne of the steel industry's plans to build electric arc furnaces was on February 15, 1971.The PUC Order Duquesne claims made them build the nuclear units is Order No. 138, dated March 13, 1972. The so-called energy crisis was in 1973-74. The Clean Air Act amendments dealing with power plants were passed in 1977. The Fuel Use Act became law in 1978. Were these really the reasons behind Duquesne's decision to go nuclear? Consider the following: Duquesne began its nuclear power program in 1954, culminating in the first commercial reactor opening at their Shippingport site in 1957. In 1967, As described above, in 1967, Duquesne joined with four other utilities in forming a power pool that planned to build 17 generating units, 9 of which were to be nuclear. In 1968 engineering began on Beaver Valley 1. In 1971 Duquesne announced construction plans for Beaver Valley 2 and Perry 1 and 2. It is clear that the Duquesne's love affair with nuclear power started long before any of the events the utility cites to justify their decision to go nuclear. The Pennsylvania PUC not only did not order Duquesne to build additional capacity, it questioned whether Pennsylvania's electric utility "industry's construction program calls for excessive capital investment at the expense of existing rate paying customers." Therefore, one has to wonder why Duquesne made this unfortunate decision, when other utilities saw the light and refrained from building nuclear generators. Regardless of the reason, however, history proves that it was not a decision forced on Duquesne. Contrary to Mr. Marshall's reasoning above, there was an alternative available at the time. In fact, like Allegheny Power, Duquesne was also building coal units at the same time it was building the nuclear units. Duquesne and the other CAPCO companies revised history in the hope that they would get 100% of their "stranded cost" request. Citizen Power was successful in getting the true history of CAPCO's nuclear debacle into the public discussion. Citizen Power believes that if a customer chooses a new supplier, it should not have to pay these "stranded", or what are now called "transition", charges. Restructuring of the electricity generation business provided an opportunity to right a terrible wrong. Unfortunately, the state PUCs didn't agree and decided to give Duquesne $1.45 billion and FirstEnergy $8.7 billion in "stranded cost" recovery. It is likely that this decision will cause customers to not shop because this bailout will offset any savings to be gained from switching to another power supplier. For more on this, go to our section entitled: Electricity Deregulation: What's it all about? Return to CP Reports Main Home \| Search \| Feedback \| Links

Citizen Power
2121 Murray Ave
Pittsburgh, PA 15217
(412) 421-6072
(412) 421-6162 Fax
info@citizenpower.com

Citizen Power Reports

Stranded Costs and CAPCO's Nuclear Debacle

If your residential electricity rates are substantially higher than the national average of 8 cents per kilowatthour (kWh), it is likely because your utility decided to build nuclear powered generation. In many cases, the decision to build nuclear plants led to construction cost overruns that nearly bankrupted many utilities, had it not been for state regulators passing on those costs to ratepayers.
One of the major electricity deregulation issues facing regulators, utilities and their customers is whether ratepayers will have to continue paying the costs for these huge nuclear investments once the price for generation is left to the marketplace. Utilities are concerned that, in a competitive environment, they will not be able to recover these costs. In other words, under regulation, ratepayers have been forced to pay high rates to pay for high cost investments, but, once deregulated, the competitive price for generation will likely be much lower. Utility companies worry that they will have to eat the construction costs they have yet to recover. Utilities call the debt they may not recover "stranded costs".
The following is a case study to illustrate how this all plays out in reality
In 1967, after the massive east coast black outs, Duquesne Light Company (Pittsburgh), Cleveland Electric Illuminating Company, Toledo Edison, Ohio Edison (Akron), and Penn Power (owned by Ohio Edison), formed the Central Area Power Coordinating Group, or CAPCO. CAPCO developed an ambitious plan to build 17 generating units, 9 of which were to be nuclear plants. Over the next few years, CAPCO scaled back its construction schedule, primarily because the growth in demand that it had projected never materialized. Of the nine nuclear units planned, only three were started and two were actually finished, the Perry Plant, on the shores of Lake Erie, 45 miles east of Cleveland, and the Beaver Valley II unit, on the Ohio River, about 25 miles northwest of Pittsburgh.
Perry 1 and Beaver Valley II were planned in the late 60's and early 70's, and were projected to cost a combined $1 billion. They ended up going on line in November 1987 at a combined cost of $10 billion. These cost overruns are the primary reason the CAPCO companies' residential rates are so high. It is also the reason why the companies are being permitted to recover over $10 billion in "stranded costs" during the transition to competition, regardless of who supplies the generation.
You might wonder why CAPCO chose the nuclear option, and why it continued to build nuclear plants when the safety and economic problems with nuclear power were well known. The answer can be found in the history of the Duquesne Light Company, but first a little background.
A utility must borrow money to pay for construction of a generating plant. Only when the plant actually becomes "used and useful", i.e., begins transmitting electricity to customers, can the utility begin to charge customers for the construction costs. The state regulatory commission is supposed to conduct and investigation to determine whether (1) the construction costs were prudently spent, (2) the plant's capacity is needed to meet demand, and (3) the electricity will be produced at the least cost. In short, the addition of the generation plant must provide an economic benefit to ratepayers.
The regulators determine the need for the new capacity based on the utilities (multi-year) projection of growth in demand for electricity in its service territory. This is a basic flaw in the process. A utility's revenues are based on the value of its assets. The more generation plants it has, the more money it makes. So, there is a built in incentive for utilities to inflate their projections of growth in demand in order to justify building additional capacity.
In 1967, CAPCO projected nearly an 8% growth in demand for electricity between 1967 and 1977. To meet this projection, CAPCO formulated the ambitious plan to build 17 generating units, much more capacity than it would need if the growth in demand projections had been accurate.
Unlike many utilities that had to be persuaded by the U.S. government to go the nuclear--"too cheap to meter"-route, Duquesne Light management had a love affair with nuclear power that began in the early 1950's. The Company was the first utility to open a commercial reactor in 1957 at Shippingport, PA. In its 1970 Annual Report to Shareholders, Duquesne boasted that it was proud to be the utility that led all other utilities into the nuclear power business:

The Company's research and development efforts in the field of nuclear power starting in 1954, launched the investor-owned electric utility industry's use of nuclear energy
Duquesne invested billions in nuclear projects. Beaver Valley I went on line in 1979. Construction of Perry 1 and 2 began in October 1974, at a projected cost $632 million. Construction of Beaver Valley 2 also started in 1974, at a projected cost of $424 million. Both plants were to be completed in 1979, but numerous company-ordered delays extended the start up date to November, 1987. As a result, the cost of the projects skyrocketed to a combined cost of nearly $10 billion. Perry Unit 2 was abandoned in 1986 at 60% completion, costing Duquesne customers $150 million.
In 1988 and 1989, after a heated public debate, the Public Utility Commissions of Pennsylvania and Ohio, respectively, allowed the CAPCO companies to begin charging customers for Perry 1 and Beaver Valley 2. This decision caused customer rates to increase 42% over 6 years.
The CAPCO companies justified their claim to recover the nuclear investment based on the contention that:

The PUC "ordered" them to build generating capacity to meet growing demand.

Federal regulatory laws, particularly the Clean Air Act and the Fuel Use Act, forced them to build nuclear generation

The "energy crisis" created a need for a domestic fuel source, and

Expected growth in the steel industry required a proportionate increase in generation capacity.

These are the same arguments the CAPCO companies are using in the late 1990's to justify recovering 100% of their "stranded costs" during the transition to retail competition.
In the January 1997 issue of Executive Report magazine, Duquesne Light CEO David Marshall gives the company line on the decision to build their nuclear plants:

One of the differences between a company like PECO and Duquesne and Allegheny Power is the kinds of investment choices they had back in the time of the energy crisis. At that time, all of our customers and the PUC encouraged us to build these nuclear plants. They were the only real alternatives in the urban areas under the Clean Air Act. It was a time too when the steel industry was clamoring for more electric arc furnaces and our legal obligation was to be able to meet these forecasts. Allegheny Power, being largely rural, could build plants using very high sulfur coal at very low prices because they weren't included in clean air standards. Clearly, all of the urban areas in the whole north- east had no real alternative.

First lets look at the dates of these events. The first mention by Duquesne of the steel industry's plans to build electric arc furnaces was on February 15, 1971.The PUC Order Duquesne claims made them build the nuclear units is Order No. 138, dated March 13, 1972. The so-called energy crisis was in 1973-74. The Clean Air Act amendments dealing with power plants were passed in 1977. The Fuel Use Act became law in 1978. Were these really the reasons behind Duquesne's decision to go nuclear?
Consider the following: Duquesne began its nuclear power program in 1954, culminating in the first commercial reactor opening at their Shippingport site in 1957. In 1967, As described above, in 1967, Duquesne joined with four other utilities in forming a power pool that planned to build 17 generating units, 9 of which were to be nuclear. In 1968 engineering began on Beaver Valley 1. In 1971 Duquesne announced construction plans for Beaver Valley 2 and Perry 1 and 2.
It is clear that the Duquesne's love affair with nuclear power started long before any of the events the utility cites to justify their decision to go nuclear. The Pennsylvania PUC not only did not order Duquesne to build additional capacity, it questioned whether Pennsylvania's electric utility "industry's construction program calls for excessive capital investment at the expense of existing rate paying customers." Therefore, one has to wonder why Duquesne made this unfortunate decision, when other utilities saw the light and refrained from building nuclear generators. Regardless of the reason, however, history proves that it was not a decision forced on Duquesne. Contrary to Mr. Marshall's reasoning above, there was an alternative available at the time. In fact, like Allegheny Power, Duquesne was also building coal units at the same time it was building the nuclear units.
Duquesne and the other CAPCO companies revised history in the hope that they would get 100% of their "stranded cost" request. Citizen Power was successful in getting the true history of CAPCO's nuclear debacle into the public discussion. Citizen Power believes that if a customer chooses a new supplier, it should not have to pay these "stranded", or what are now called "transition", charges.
Restructuring of the electricity generation business provided an opportunity to right a terrible wrong. Unfortunately, the state PUCs didn't agree and decided to give Duquesne $1.45 billion and FirstEnergy $8.7 billion in "stranded cost" recovery. It is likely that this decision will cause customers to not shop because this bailout will offset any savings to be gained from switching to another power supplier. For more on this, go to our section entitled: Electricity Deregulation: What's it all about?

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