Friday, January 19, 2018
News Roundup

Progress Energy customers on hook for $1.1B for nuclear plant that may never be built

Imagine a company that profits from getting a billion-dollar project wrong.

It makes money despite grossly underestimating the costs. It collects more for failing to get work done on time. It pushes a law that forces customers to pay for its miscalculations.

That company exists right here in Tampa Bay.

For the past six years, Progress Energy Florida has benefited from a world in which faster means slower and cheaper is a synonym for more expensive.

Trapped in this alternate universe are Progress customers, already afflicted by the highest power rates charged by any major Florida utility. Now Progress' plan to build a nuclear power complex in Levy County will drive up the average bill by almost $50 a month — before the plant opens.

Even if Progress cancels the project right now, it will pocket about $150 million of customers' money, according to a Tampa Bay Times investigation. No refund required.

Whom to blame? Progress drew up the game plan, but the buck stops with state lawmakers.

Progress helped convince them that an innovative strategy to finance nuclear power plant construction would save customers money.

Florida pioneered a groundbreaking law that added fuel to what the industry called a U.S. "nuclear renaissance.''

Despite soaring costs, some powerful legislators still think the plan works.

• • •

The idea was to get nuclear plants built more cheaply and more quickly.

Before the new law, a utility and its shareholders bore the financial risk. If a utility spent billions and then failed to bring a plant on line, it could be saddled with a big chunk of the bill. Failure brought on by delay, cost overrun or bad management could result in financial ruin.

The new law let utilities shift risk to customers. They would pay in advance for some of the plant's design and engineering costs and for some financing costs that otherwise would accumulate over many years.

To get nuclear projects started quickly, legislators threw in an incentive. Utilities got to pocket a percentage of whatever they spent on the project.

The new law flipped the whole risk-reward relationship for building nuclear power plants. Critics say the law stemmed from the utilities' cozy relationship with the Legislature.

"It's the perfect story of crony capitalism," said Mark Cooper, a senior fellow at the Institute for Energy and the Environment at Vermont Law School.

Crony capitalism or not, the Legislature could have claimed success for the advance fee if the cost of the Levy project had remained close to the original $5 billion estimate.

It did not.

The projected cost has shot up to $22.4 billion, and the completion date went from 2016 until sometime after 2021. Under the new law, the more Progress spends, the more customers have to pay in advance, and the more money ends up in the utility's pocket.

Cooper called the advance fee a "waste of money." He said legislators and state regulators who think it helps customers are intellectually dishonest.

"These people are fools, let's be clear," Cooper said. "They're fools because they're saying things that simply make no sense."

Cooper, among others, predicts Progress will never build the Levy plant.

In fact, Progress recently persuaded the state not to stand in the way if it decides to cancel the engineering, procurement and construction contract for Levy.

Progress Energy offered no comment for this story.

• • •

In 2006, when the new Florida law was born, energy supply was a big concern.

The economy was booming. Projections showed huge increases in demand for electricity, which would require more power plants dependent on costly and potentially unreliable foreign sources of fuel. At the same time, concerns about greenhouse gases made more expensive pollution controls seem inevitable.

Nuclear power could address those concerns.

But the United States had not approved a new nuclear plant in 30 years. The industry had a track record of construction delays and huge cost overruns. Wall Street had lost interest in financing such risky, expensive ventures. There was also the memory of the reactor meltdown at Three Mile Island in 1979.

Despite the obstacles, Progress (and its South Florida counterpart, Florida Power & Light) sensed an opportunity.

The utilities billed the advance fee as a way to avoid "rate shock" — a big increase in customers' bills — when the plant started churning out energy.

With the advance fee, the typical savings to customers on a two-reactor nuclear power plant such as Levy would be at least $300 million, and much more than that over the decades-long life of the plant, said Jerry Paul, a nuclear engineer and a lawyer who was a member of the state House back then.

"It's the difference between putting it on a credit card vs. … paying those costs as you go," Paul said.

The plan had another purpose.

It let lenders and investors know that any money they put in would be backed by a state law requiring customers to pay a lot of the bills — neutralizing risk, even if the project failed.

"It's showing the financial community that the company has an orderly plan to finance the project and customers are participating," said Stan Garnett, a former chief financial officer of Allegheny Power System. He worked for Florida Power before it became Progress Energy.

Cheaper and faster made sense to the Legislature. It passed the advance fee 39-0 in the Senate and 119-1 in the House. Florida became the first state in the nation to pass such a law, according to the National Conference of State Legislatures.

Supporters called it "pay as you go." Critics labeled it "pay in advance." Either way, it shifted a huge financial risk onto customers. They are on the hook for $1.1 billion already and have to pay it even if the plant does not get built.

And Progress gets to keep its cut. That's right, Progress can profit from failure.

• • •

How did Progress' take get so high? In the upside-down world of financing a nuclear plant in Florida, incentives can grow like kudzu.

Since Progress' take is defined in terms of percentages, the more it spends, the more it makes. Higher costs — from miscalculation, rising prices, delay — mean more money for Progress.

According to the state Public Counsel's Office and documents Progress filed with the Public Service Commission:

If Progress cancels the Levy project right now: Of the $1.1 billion customers already owe, Progress will collect about $300 million for its efforts in developing the project. After taxes and payments to its bondholders, it will pocket about $150 million.

• If Progress brings Levy on line in 2021 for $22.4 billion: Progress' $150 million take grows to about $3.5 billion before the plant even comes on line, the documents show. Once the plant is operational, Progress will collect a 10.5 percent annual return on the unpaid construction costs.

• If the cost of Levy goes up even more: Progress makes more.

As it turned out, the advance fee and the incentives got Levy going but did little to get it done. And the longer it takes, the more it costs.

Take what happened in 2009.

As the recession dragged on, Progress requested a delay in making customers pay $274 million it had spent on the project. The state allowed the utility to defer the $274 million, spreading it over several years to soften the blow.

"We recognize the current economic downturn and the circumstances that we're in. We're sensitive to that," former Progress Energy Florida chief executive officer Jeff Lyash said at the time.

The move sounded good. Customers would get a break on their bills.

But by deferring the $274 million, Progress' cut kept growing each year, similar to what happens when you don't pay off your credit card each month and the interest compounds.

As a result of the way the Legislature set up the law, the decision to defer paying the $274 million added $77.5 million to the tab for customers, documents show. Just over half goes into Progress' pocket.

The Florida Public Counsel's Office, which does not take a position on the pay-as-you-go law, said delays and growing pre-construction costs will continue to drive up Progress' take. While the intent of the advance fee was to save money, Deputy Public Counsel Charles Rehwinkel said delay "undermines it."

Cooper, of the University of Vermont, was more blunt. During public testimony in 2009, he presented seven reasons why the advance fee would fail, including overruns in nuclear plant costs. All seven proved true.

He recently referred to any potential savings from the pay-as-you-go approach as "accounting fiction."

• • •

Tallahassee isn't budging. Walk the halls of the Legislature asking about the advance fee and state lawmakers parrot the statements made half a dozen years ago about why it's needed.

It's cheaper. It saves money. It's better for customers.

At the head of the chorus is Sen. Andy Gardiner, R-Orlando, the state Senate majority leader and chairman of the energy committee.

"If we eliminate (the advance fee), consumers' rates will skyrocket when plants are completed and ratepayers are hit with costs plus interest at the same time," he said.

Progress Energy, too, maintains that the advance fee will save customers money and the nuclear plant will result in an annual savings of $1 billion in the cost of fuel compared with the cost of other power sources.

Peter Bradford, a former member of the U.S. Nuclear Regulatory Commission, is not against building nuclear plants — at the right price.

But economic analysis of advance fees, he said, overwhelmingly shows that there is little to no savings to customers.

Bradford called advance fees for nuclear plants "a tax in that the power of government is being used to take money from citizens in a way and for a purpose that a free market economy would not support."

Levy's soaring costs have created a little unease in the corridors of power.

Sen. Mike Fasano, R-New Port Richey, has been trying to get the Legislature to kill the advance fee for three years. In the state House, Rep. Michelle Rehwinkel Vasilinda, D-Tallahassee, is making a similar push.

The five-member Public Service Commission can stop Progress from charging customers if it finds that the Levy project is no longer economically feasible, though it is unlikely to make such a dramatic move any time soon.

In February, PSC commissioner Eduardo Balbis warned that continuing to delay the project "could result in a reduction of the cost effectiveness to the point where the projects are no longer viable."

George Cavros, a lawyer for the Southern Alliance for Clean Energy, which represents consumers before the PSC, said Levy ceased to be cost effective a long time ago. Faster and cheaper are no longer valid arguments in favor of the advance fee, given the huge escalation in costs.

"The experience in this case is that it is neither cheap or reliable," he said. "It's time for the Legislature to reconsider what it did in 2006."

Ivan Penn can be reached at [email protected] or (727) 892-2332.

About this report

For this report, the Tampa Bay Times reviewed thousands of pages of records filed with the state Public Service Commission, including Progress Energy's financial reports for the Levy nuclear project. The Times also interviewed more than 20 utility and economic experts and state officials. The Times contacted Progress Energy Florida several times for comment on this story, including sending questions in writing. Progress had no comment.

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