Arguably, Progress Energy has a gambling problem.
For years, it has made high-stakes, high-risk bets on its Levy County nuclear power project — and steadily lost.
Unfortunately for its customers, the utility has been playing with their money.
In charge of safeguarding those dollars is the state Public Service Commission. And in 2009, and every year since, it has had a chance to pull Progress away from the gambling table.
Instead, it has rejected warnings from businessmen, scientists and academics that the utility's plan for the Levy project has little chance of success.
Had the PSC heeded the warnings, it might have limited customer losses to about $150 million. Instead, the PSC rejected the warnings and has allowed Progress to double down on Levy.
Now, customers must pay off a debt of $1.1 billion — for a plant that keeps getting delayed and may never get built.
For customers, the question now is: Why has the utility kept betting on Levy County? And why did the PSC allow it?
Risk management expert Russell Walker of the Kellogg School of Management at Northwestern University has an answer.
"When the stakes get higher, it gets harder for organizations to walk away," Walker said. "This happens a lot. It's the same problem a gambler has: If I play a little longer, it'll come around."
Cindy Muir, a spokeswoman for the PSC, defends the process and the commission's rulings.
"Commission decisions are based on sworn testimony, exhibits, studies and reports provided by industry experts during weeks of formal … hearings," Muir said.
Progress continues to review the economic feasibility of the project, which now has a price tag of up to $24 billion. The utility insists that nuclear power remains an "integral part of our current and future plans for meeting the region's energy needs safely and reliably," said Suzanne Grant, a spokeswoman for Progress.
"Conditions change continuously," she said. "We will continue to evaluate the project and its potential schedule in light of changes in customer demand, the general economy, energy policy and numerous other factors."
• • •
Progress applied for a nuclear license to operate the Levy plant in 2008. Over the next 15 months, the financial landscape drastically shifted.
• The stock market collapsed, which erased any immediate possibility of attracting investors or co-owners.
• The Nuclear Regulatory Commission denied Progress' request to begin work on the Levy site before the operating license was approved, a decision that slowed the project and increased costs.
• The utility failed to win a federal loan guarantee — a powerful tool to gain lenders and investors for risky projects — and decided not to continue pursuing one.
• Natural gas prices began a historic decline that basically eliminated nuclear's presumptive long-term cost advantage.
As all of this happened, Progress was busy spending. By the fall of 2009, its wager on Levy had reached $150 million.
At hearings before the commission in late September and early October 2009, experts warned the PSC to stop Progress from spending more.
It was not just the expected antinuclear activists that lined up against the plant. Buttoned-down business types told the PSC that Levy would be an expensive failure. They urged the PSC to stop Progress from continuing to bet its customers' money on the project.
Failing to "seriously examine the economics of moving forward in this economy, with the uncertainty now associated with the Levy project," James Brew, a lawyer for PCS Phosphate, told the commission in fall 2009, "would defy common sense."
Peter Bradford, a former member of the U.S. Nuclear Regulatory Commission, warned that because of the changed landscape "the economic feasibility of the project may now be nonexistent."
"Whether the Levy project is to become a major burden on the economy in the (Progress Energy) service area depends on decisions the commission will make in this proceeding," he said.
• • •
Arguably, what became a high-stakes game of nuclear roulette began as a prudent attempt at protecting Florida's energy future.
Florida relies on natural gas to create more than 60 percent of its electricity.
"Overdependence on any one fuel source can expose customers to potential fuel-cost spikes and supply disruptions," Grant, the Progress spokeswoman, told the Tampa Bay Times in response to questions for this story.
Progress and the state wanted more nuclear reactors for Florida's energy mix. They acted during economic boom times, when electricity demand was rising rapidly and strict greenhouse-gas rules seemed imminent, two things a new nuclear plant could help alleviate.
The same happened around the country, and the Bush and Obama administrations backed loan guarantees to speed up construction. Investors, focused strictly on the bottom line, did not share the enthusiasm.
In July 2009, Moody's, the financial rating service, threatened to downgrade utilities planning atomic power plants.
"We view new nuclear generation plans as a 'bet the farm' endeavor for most companies, due to the size of the investment and length of time needed to build a nuclear power facility," Moody's stated. "As a result, it has become increasingly likely that the pursuit of new nuclear power projects will lead to some near-term rating actions or outlook changes."
• • •
Despite the setbacks, Progress still held a financial trump card: The advance fee it collects from its customers.
The Florida Legislature passed the law in 2006 to allow Florida utilities to charge customers in advance for construction of nuclear plants. The so-called "nuclear cost recovery" fee helped pay development, engineering, preconstruction and some financing costs.
Proponents said the law would help spread the risk, creating a more favorable environment for attracting outside investors to help build nuclear plants.
But Progress has not secured outside funding to build the plant, even though it is spending customers money on preliminaries like engineering reports and plans.
"What the (advance fee) does not do is pay for construction costs," said Charles Rehwinkel, deputy public counsel who represents consumers before the Public Service Commission.
The advance fee law does not change how much a nuclear plant will cost, Brew, the phosphate industry lawyer, warned the commission in 2009.
The advance fee, he said, "promotes nuclear development in Florida by shifting financial risk to Florida consumers."
So far, Progress Energy's 1.6 million Florida customers are on the hook for $1.1 billion even if Levy never gets built. No refund required.
• • •
At the 2009 hearings, the PSC was reviewing Progress' latest expenses related to the Levy project and whether customers would have to pick up more of the tab. By then, the estimated cost for the project had climbed from a high of $6 billion to $17 billion.
The commission had the authority to stop Progress from collecting in advance any more customer money, effectively shutting down the project. That would have capped customer losses at about $150 million.
Progress told the commission it planned to push forward — and spend more on the project.
"The fact that this total project cost number may change and likely will change does not affect our determination that the (project) is still feasible," Garry Miller, Progress Energy's general manager of nuclear plant development, told the PSC.
The commission voted 4-1 to approve Progress' request to collect a second installment on the Levy project, almost $300 million or twice the first payment to keep the utility in the game.
The commissioners stated that denying Progress' request to collect money it had already spent would be an "extreme measure that is not warranted."
"We recognize the unique economic times that are influencing short-term trends," the commissioners stated.
A few months later, analysts at Stanford University's Institute for Economic Policy Research released a score card that looked at the feasibility of 27 proposed reactors nationwide. The scale ranged from a low score of zero to a perfect six, based on the resources available to each nuclear project.
Only Georgia Southern's Vogtle plant received a six. It recently became the first U.S. plant to receive a new operating license in 30 years.
Three other projects scored a four — among them, the Summer nuclear project in South Carolina, which was the second to receive a license. So far, there hasn't been a third license handed out. The two other projects that like Summer received scores of four have been abandoned.
The Levy plant? It scored a two.
• • •
Not much has changed since the 2009 hearings.
Every year since, the commission has okayed more spending on the Levy plant. The estimated cost now stands at $24 billion, with a completion date of 2024 for the first reactor and 18 months later for the second.
Muir, the commission's spokeswoman, says the PSC still believes the Levy project makes financial sense.
"The commission has not decided against the economic viability of Progress Energy Florida's Levy project," Muir said.
Progress continues to seek an operating license for the Levy plant, though work on the project has slowed to a trickle.
"The Levy County nuclear project remains in the long-term best interest of Progress Energy's customers," Progress' Grant said.
Critics wonder whether Progress and the PSC don't know when to fold a bad hand. Natural gas prices remain low and many forecasts keep them low for years to come. And Progress Energy still has not secured financing or outside investors for the Levy nuclear project.
"From a strict dollars-and-cents standpoint, one's got to take note of the changing cost of various sources of electricity," said Dan Reicher, executive director of the Center for Energy Policy and Finance at Stanford University.
Walker, the Northwestern University professor, said managers eventually have to make a decision or risk losing even more money.
"Some executive probably doesn't get a promotion in saying, 'I'm the guy who pulled the plug,' " he said.
Ivan Penn can be reached at [email protected] or (727) 892-2332.