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Is nuclear power industry poised to repeat 'managerial disaster'?

The failure of the U.S. nuclear power program ranks as the largest managerial disaster in business history, a disaster on a monumental scale.

The rant of an antinuclear activist?

Hardly. It was the first sentence of an in-depth story in a conservative business magazine, Forbes.

In 1985.

Forbes' point then — that out-of-control costs and poor decisionmaking doomed the nuclear power industry — may prove as relevant in 2012 as it was a generation ago. And it points up a looming question as Tampa Bay faces its own $22.4 billion nuclear project:

Is the U.S. nuclear power industry poised to repeat its own troubled and, at times, inept history?

• • •

Eerie parallels link then and now. Just as today, it was an age that began with great nuclear optimism.

In 1954, the chairman of the Atomic Energy Commission, Lewis Strauss, predicted that nuclear technology would let "our children enjoy electrical energy … too cheap to meter."

By the 1960s and early 1970s, utilities stumbled over one another to order about 50 nuclear plants. The industry assumed U.S. demand for electricity would skyrocket, especially in places like fast-growing Florida, and justify an investment boom in nuclear power.

A lack of experience and standardized designs caused many utilities to suffer soaring costs. Some plants had to be redesigned. Parts of others repeatedly were rebuilt or reinforced. Major deficiencies began sprouting up — a reactor installed backward, a control panel that caught fire, defective concrete. In one case, the Nuclear Regulatory Commission approved designs for a reactor even though the utility was building a different type of reactor.

"The bungling the industry is capable of boggles the mind," the Forbes article stated. "The ineptitude had no pattern, and virtually anything could go wrong."

Progress Energy, then known as Florida Power, jumped into the fray in the early 1970s, choosing to build its first nuclear plant by the Gulf of Mexico in Crystal River, located in Citrus County about 90 miles north of Tampa Bay.

At first, Florida Power said its nuclear plant would cost $150 million to $200 million. Final cost: $375 million.

At least it got built.

Mismanagement killed off other projects. Then, in the early 1970s, the "Arab oil embargo" crisis struck. That spurred high inflation in the United States, driving up costs as many utilities struggled to complete their nuclear plants.

Then came 1979's partial meltdown of the Three Mile Island nuclear plant in Pennsylvania. The resulting safety backlash led to rising costs that drove the price of a nuclear plant closer to $2 billion.

The industry canceled 75 nuclear power plant projects between 1978 and 1985. Some utilities simply ran out of cash to finish their plants. Back then, they could not force their customers to help pay to finish them.

Forbes said wildly differing prices to build the plants amounted to "a prima facie case for mismanagement in the first degree."

Financing for new nuclear projects disappeared.

"The truth is that nuclear energy was killed not by its enemies, but by its friends," Forbes wrote.

The final nail came in 1986 with the meltdown at the Chernobyl plant in Ukraine.

Charging customers

Fast forward to 2005. Congress passed the Energy Policy Act, authorizing tax incentives and loan guarantees to encourage new energy sources — including nuclear power.

President George W. Bush signed the bill into law. President Barack Obama proposed expanding the program.

Fifteen power companies jumped at Uncle Sam's sudden financial generosity, announcing plans to build at least 29 plants. That rush ushered in an era known as the "nuclear renaissance."

Legislatures in mostly Southern states — Florida, Georgia and South Carolina among them — passed laws allowing power companies to shift much of the risk of building a nuclear plant to ratepayers.

By charging customers in advance to cover the expense of building nuclear plants, projects have gone forward that otherwise would never have found financial backing.

The industry also adopted several standardized nuclear plant designs, including the popular Westinghouse AP1000, a move to help avoid the construction fiasco that bedeviled the industry 30 years earlier.

Despite those advantages, the euphoria did not last.

Today, only two nuclear projects — in Georgia and South Carolina — are under construction and likely to be built in the near future. Both already report construction delays and cost overruns. Elsewhere, many other proposed plants are already mothballed. A handful of utilities continue modest preconstruction site work on about half a dozen U.S. projects while they await a license. Their fate is unclear.

What's killing the renaissance this time? Critics point to three familiar culprits: high costs, safety concerns and mismanagement.

Progress Energy's project in Levy County is becoming Exhibit A of soaring expenses.

In 2006 the utility, which provides electricity to west-central Florida, announced the plan to build the two-reactor site. The project quickly stalled. Progress originally estimated it would cost $5 billion and be up and running by 2016. Now Levy's price tag has soared to $22.4 billion with start-up in 2022 or later.

Progress failed to gain federal loan guarantees, which could have kept costs lower. It has yet to secure an operating license and faces multiple lawsuits and environmental challenges with the site it selected to build the plant.

And the $22.4 billion price tag may already be outdated. Last month, the Nuclear Regulatory Commission said proposed projects may face new delays and costs as the agency analyzes U.S. nuclear plant safety based on lessons learned from Japan's 2011 meltdown at its Fukushima Dai-ichi nuclear plants. The disaster in Japan, like Three Mile Island and Chernobyl, has also forced the U.S. nuclear industry to again fight the public perception that nuclear isn't as safe as other energy sources.

No matter what, Progress will spend at least $1.1 billion on Levy, a tab its customers are already paying as part of their electric bills.

As the Tampa Bay Times reported last month, Progress will make $150 million on the Levy plant even if it cancels the project right now. And it will clear $3.5 billion if it finishes the job at $22.4 billion.

Progress recently negotiated the right to cancel the construction contract for the plant, should it so choose.

What does all this mean? Progress wants to spend more of its customers' money long enough to get a license to operate the Levy plant. And it may yet decide not to build it.

But thanks to the strange accounting in the utility business, betting big on nuclear is still appealing. Utilities see a nuclear power plant as a huge capital investment that can earn them fat returns based on how much they spend on it, says Ellen Vancko, a former utility executive and now the nuclear energy and climate change project manager with the Union of Concerned Scientists, a watchdog group on energy.

"The bigger the project and the more capital that has to be invested in it, the more money they make," Vancko says.

Financial pitfalls

The latest "nuclear renaissance" has other similarities to what happened in the 1970s and early '80s.

Back then, as Forbes pointed out, other countries like France and Canada were building nuclear plants faster and for less cost than the United States.

This time around, China, Russia, India and South Korea are putting up plants at a comparatively rapid pace.

And as in the late 1970s, the economy took a quick and devastating turn down, casting previous economic assumptions to the wind.

In 2006, fuel prices were rising, tough new air pollution controls seemed imminent and electricity demand was rising. Now, the appetite for new emission laws has waned, natural gas prices have plunged and, thanks to the Great Recession, power demand has fallen.

Industry supporters still insist the nation needs nuclear to diversify its energy sources. Once built, nuclear plants generate far less greenhouse gases than coal. Nuclear can cut dependence on unreliable sources of oil and protects against potential upswings in natural gas prices. And new nuclear can slowly replace the country's aging first-generation nuclear reactors.

"If we want to keep nuclear energy as a key component of the U.S. energy supply, we have to build 20 to 30 nuclear energy reactors in the next couple of decades to replace ones that go offline and to keep up with the growing requirement of energy," warns Patrick Moore, co-chairman of the Clean and Safe Energy Coalition, a pro-nuclear group funded by the Nuclear Energy Institute.

But even with customer subsidies and federal loan guarantees, some utility executives don't think nuclear makes financial sense.

"I've wondered how anybody makes the numbers work," says J. Wayne Leonard, CEO of Entergy, which operates 12 nuclear units in 10 states.

John Rowe, a 40-year utility and nuclear power veteran, echoed similar remarks last year as CEO of the giant Exelon power company in Chicago. Nuclear power has a future in this country, he said, but not while so many things conspire against it.

"I do not know what the future holds for new nuclear," Rowe said last year. "I personally think the odds for the (nuclear) renaissance are five to four against."

In February, Westinghouse CEO Aris Candris praised the NRC's historic decision to license the Vogtle nuclear plant in Georgia. But even Candris, whose company makes the AP1000 reactor, predicted delays in nuclear expansion for years.

When natural gas prices start to rise, he predicts, nuclear will revive.

That eventual uptick now lies at the heart of the U.S. nuclear industry. And it's a key reason Progress Energy seems in no hurry to push forward on its Levy project. Right now, it's simply bad economics.

Aging reactors

Today, 104 mostly aging nuclear reactors supply 20 percent of this country's electricity. Given the current financial scene and an inability to build new plants on time and on budget, the nuclear industry will be hard pressed to increase or even maintain that percentage in the coming years.

It doesn't help that nuclear industry managers hurt their cause by fumbling some other big issues. For instance, utilities operating 20 older nuclear reactors whose licenses expire soon failed to save enough money to promptly close the plants, as expected, at the end of their scheduled lives, the New York Times recently reported.

Twenty-seven years ago, the Forbes cover story with the headline Nuclear Follies condemned the mismanagement and runaway costs of a then young nuclear power industry for failing to achieve its potential.

Last month, the conservative British news magazine The Economist published a special report on nuclear power. It singled out the Levy project, saying its exorbitant price tag "strongly suggests that the reactors will not be built."

The special report's title? The dream that failed.

Contact Robert Trigaux at trigaux@tampabay.com.

Timeline | Nuclear power

1955 The federal government and fledgling nuclear power industry start to develop commercial power plants.

1959 The first nuclear power plant in the U.S. — Dresden 1 Nuclear Power Station in Illinois — is built without any government funding.

1976 St. Petersburg's Florida Power Corp. starts up Crystal River 3, its first nuclear power plant, in Citrus County. A second nuclear plant under consideration on same site is shelved.

1979 Equipment failures and human error contribute to an accident at Three Mile Island nuclear reactor, which becomes the worst nuclear accident in U.S. history and triggers a decades-long decline in the nuclear power industry.

1978–85 In this troubled span of seven years, 75 nuclear power plant projects are canceled because of cost overruns and safety concerns.

1986 Runaway reactions at the Chernobyl nuclear reactor in Ukraine spark explosions that rupture the containment structure and send massive amounts of radiation across the Northern Hemisphere.

2000 Carolina Power & Light merges with Florida Power Corp. to become Progress Energy, which now owns five reactors in the Carolinas and Florida, including the single Crystal River plant north of Tampa Bay.

2006 The Florida Legislature passes a law allowing power companies to charge customers in advance for certain costs associated with building nuclear power plants.

Progress Energy unveils a plan to build a nuclear power plant on 3,000 acres in Levy County, its first new nuclear plant in Florida since the 1970s.

2009 Progress Energy botches a do-it-yourself repair project on its sole Florida nuclear power plant in Crystal River. The plant remains shuttered, forcing the utility to buy electricity from other providers. The future of the plant — to repair it for $2.5 billion or shut it down permanently — has yet to be decided.

2011 Duke Energy says it will buy Progress Energy in a $13 billion deal likely to be finalized by mid 2012. Combined, the pro-nuclear companies will operate 12 power reactors, the largest regulated nuclear fleet in the nation, and have proposed new plants including Florida's Levy County project.

A Japanese earthquake and tsunami badly damage Fukushima Dai-ichi multireactor nuclear power plants. An earthquake triggers shutdown of three active reactors, then the tsunami cripples the site. Lack of cooling leads to explosions and meltdowns — jeopardizing Japan's nuclear industry and sending a safety backlash against the global nuclear industry.

Germany becomes the biggest industrial power to decide to give up on nuclear power, with a plan to close all plants by 2022.

2012 Number of operators of U.S. nuclear plants drops to 25, from 45 in 1995, in a major consolidation of expertise.

Buzz over the U.S. "nuclear renaissance" fades in the wake of the Japan nuclear disaster, low prices for natural gas, weaker federal support and lower demand nationwide for electricity. Nuclear plant building remains popular in China, India, South Korea and the Middle East.

For first time in more than 30 years, U.S. regulators vote to grant licenses for two new nuclear plants: Southern Co.'s Vogtle plant will be in Georgia, and Scana Corp.'s will be in South Carolina.

Source: Times research

Is nuclear power industry poised to repeat 'managerial disaster'? 04/07/12 [Last modified: Saturday, July 21, 2012 10:37am]

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