Progress Energy customers could be on hook as insurer hesitates on $2.5B payout

The key question: Were cracks that developed at the Crystal River nuclear plant an “act of God” or operator error?

WILL VRAGOVIC | Times

The key question: Were cracks that developed at the Crystal River nuclear plant an “act of God” or operator error?

Progress Energy already plans to stick its customers with a $670 million bill for the botched upgrade to the Crystal River nuclear plant. Now those customers have reason to fear that Progress will try to stick them again.

Why? Progress' oft-repeated contention that insurance will pay the rest of the $2.5 billion repair bill looks increasingly shaky.

• The insurer, which goes by the acronym NEIL, already has stopped paying some earlier claims on the construction accident, which shut down the plant in 2009 during replacement of a steam generator.

• NEIL has created a high-ranking committee to investigate whether the accident was, as Progress contends, unforeseeable, unpredictable and unpreventable.

• Now NEIL has delayed an expected decision on whether to pay Progress' claim as its review continues.

That in turn has delayed a final decision on whether the plant ever reopens.

State Sen. Mike Fasano, R-New Port Richey, said utility officials told him that they'll shut down the plant in Crystal River, in Citrus County, if NEIL denies the claim.

Rather than choosing an all-or-nothing approach, NEIL is just as likely to pay only part of the claim, some nuclear power experts think. At issue is whether Progress was in any way responsible for causing the damage to the plant.

"It's difficult for NEIL or anybody else to say (the construction accident) is fully foreseen," said Dave Lochbaum, a nuclear engineer with the Union of Concerned Scientists. "To say (Progress was) totally blameless … isn't possible either."

Tim Leljedal, a Progress spokesman, said the utility continues to expect that NEIL will cover most of the repair bill, with customers paying about a quarter of the tab.

"We are not going to speculate on the potential impact of any less-than-expected NEIL reimbursement," Leljedal said.

Still, not since the Three Mile Island nuclear disaster in 1979 has a U.S. insurer grappled with so large a payout to a utility for damage to a nuclear plant.

All eyes are on NEIL, as Progress, its customers and its investors await the insurance company's decision. What NEIL decides could hit any or all of them in the pocketbook.

• • •

NEIL, the Nuclear Electric Insurance Limited, is a Delaware company that insures the nation's 104 nuclear plants against property damage, decontamination expenses, premature decommissioning costs and interruptions in electricity supply.

The board of directors that runs the private company is made up largely of officials from investment firms and the utility industry, including Progress chief executive officer Bill Johnson.

But even with the utility industry presence on the board, payment for a claim is not assured. Any large claim is sure to come under scrutiny.

For example, FirstEnergy Corp. of Akron, Ohio, filed a $200 million claim with NEIL after the reactor head at its Davis-Besse nuclear plant nearly blew off.

Before NEIL could make a decision, the U.S. Nuclear Regulatory Commission cited the utility for lying, and the company was fined $28 million. At that point, according to the Toledo Blade, FirstEnergy dropped its claim.

In the Crystal River case, a critical part of NEIL's analysis likely will be the definition of "accident" and a claim that's more than 10 times more costly and far more complicated than FirstEnergy's.

Crucial to NEIL's decision are the events that led to the troubles at Crystal River.

As Progress moved to replace old steam generators at the plant, the 42-inch-thick concrete containment building that houses the reactor cracked. After Progress repaired the first crack, the building cracked two more times. The plant will not reopen until at least 2014.

Steam generators had been successfully replaced at 34 other U.S. nuclear plants. All those jobs were supervised by just two engineering firms.

As the Tampa Bay Times has reported, Progress handled the Crystal River project in a fundamentally different fashion.

• Rather than rely on either of the experienced engineering firms to supervise the work, Progress self-managed the project.

• It discounted its own internal study that concluded it lacked the expertise to do the work.

• It hired two subcontractors that had no experience with the type of work they were asked to do at Crystal River.

• Progress adopted procedures for the work that differed from those used at other nuclear plants, and it ignored warnings from experienced subcontractors who expressed concern about those procedures.

Other than stating that the claim is still under review, NEIL's legal office declined to comment about the case and referred further inquiries to Progress Energy.

• • •

Progress' insurance policy gives the utility financial protection against an accident, which "means a sudden and fortuitous event, an event of the moment, which happens by chance, is unexpected and unforeseeable."

Lynne McChristian of the Insurance Information Institute said the question at Crystal River becomes: Were the cracks in the containment building an "act of God" or was there some culpability on the part of the utility?

"Was the damage sudden or is it something akin to a homeowner's policy that there are exclusions if you were negligent?" McChristian said. "You have to take some responsibility when you own property."

Arnie Gundersen, a nuclear engineer and consultant with Fairewinds Associates, said it increasingly appears that Progress might have difficulty getting any money from NEIL.

"When the first (crack) happened and there wasn't a lot of knowledge about the decisionmaking, it could have been seen as the 'act of God scenario,' " Gundersen said. "A lot of additional information has come out since then.

"It wouldn't surprise me at the end of the day that the insurer says, 'No, we're not going to pay this claim.' "

Gundersen and Lochbaum, of the Union of Concerned Scientists, said NEIL may be delaying its decision so it can negotiate with Progress on a settlement for less than the full amount of the claim.

At one point, NEIL was paying both for repair work at Crystal River and for some of the costs of buying replacement power.

But in November, Progress told the state Public Service Commission that NEIL had stopped making repair payments in December 2010. The utility later told its investors that NEIL also ceased paying for replacement power in the second quarter of 2011.

NEIL has appointed a special committee of its board to review the claim and hired its own engineer to assist, Progress said.

NEIL is "in uncharted territory at the moment," Lochbaum said.

• • •

If NEIL does not cover any more of the $2.5 billion in repairs and related costs, Progress would have to turn to its customers and investors or possibly close the plant — an alternative the utility continues to weigh even as it works to repair it.

"Although retiring the unit is one of a number of options, we remain committed to our previously outlined plan to repair (Crystal River) and return the plant to service," Leljedal said.

Since the plant broke, Progress has had to purchase alternative — and more expensive — electricity at about $300 million a year. The utility got the PSC to approve putting some of the burden of that cost on Progress' 1.6 million Florida customers.

So far, Progress customers have paid $110 million for alternative electricity in 2011 and will pay another $140 million this year. (That money could be refunded if the PSC determines that Progress' actions were not "prudent.")

For customers, the more ominous possibility is what happens if NEIL does not pay for the rest of the repair costs, which approach $2 billion?

Progress could ask the PSC to force its customers to make up all or part of the difference. At Progress' behest, the PSC is already forcing those customers to pay for a $20 billion nuclear plant the utility wants to build in Levy County.

If the Crystal River plant is not repaired, the utility would have to decommission it. Progress maintains a mandatory account with about $593 million to decommission Crystal River, but it is unclear whether that will be enough.

"Progress is stuck between a rock and a hard place here," Gundersen said. "They don't want their shareholders to pay … and Floridians have a right to be upset: 'Why are we paying for your mistake?'

"I think a lot of attorneys on both sides of this are going to be rich."

Ivan Penn can be reached at ipenn@tampabay.com or (727) 892-2332. Follow him on Twitter at twitter.com/Consumers_Edge.

Progress Energy customers could be on hook as insurer hesitates on $2.5B payout 01/13/12 [Last modified: Saturday, January 14, 2012 10:21pm]

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