oversight

Nuclear Regulation: Better Oversight Needed to Ensure Accumulation of Funds to Decommission Nuclear Power Plants

Published by the Government Accountability Office on 1999-05-03.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to Congressional Requesters




May 1999
                 NUCLEAR
                 REGULATION
                 Better Oversight
                 Needed to Ensure
                 Accumulation of Funds
                 to Decommission
                 Nuclear Power Plants




GAO/RCED-99-75
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-281946

      May 3, 1999

      The Honorable John D. Dingell
      The Honorable Ralph M. Hall
      The Honorable Edward J. Markey
      House of Representatives

      This report responds to your request that we review the adequacy of electric utilities’ efforts to
      accumulate funds to eventually decommission their nuclear power plants after the plants have
      been permanently shut down.

      Unless you publicly announce its contents earlier, we plan no further distribution of this report
      until 20 days after the date of this letter. At that time, we will send copies to the appropriate
      congressional committees; the Honorable Shirley Ann Jackson, Chairman, Nuclear Regulatory
      Commission; and the Honorable Jacob J. Lew, Director, Office of Management and Budget. We
      will make copies available to others upon request. Please contact me at (202) 512-8021 if you or
      your staff have any questions. Major contributors to this report are listed in appendix III.




      (Ms.) Gary L. Jones
      Associate Director, Energy, Resources,
        and Science Issues
Executive Summary


             The estimated cost to dismantle all of the commercial nuclear power
             plants in this country, dispose of the resulting radioactive waste, and clean
             up the plant sites is about $30 billion dollars (in 1997 present-value costs),
             of which, about $14 billion is currently unfunded. This process, called
             decommissioning, is necessary because, following the retirement of a
             nuclear power plant and the removal of the plant’s spent (used) fuel, a
             significant radiation hazard remains. Utilities licensed by the Nuclear
             Regulatory Commission (NRC) to own and operate nuclear power plants
             collect money from their electricity customers to be used for
             decommissioning. In recent years, the Federal Energy Regulatory
             Commission and at least 18 states have enacted legislation or issued
             regulations promoting competition within their electricity industries.
             Competition, according to NRC, could result in economic pressures to cut
             costs or electricity rates, thus affecting the availability of funds for
             decommissioning.

             Concerned about the potential cost to decommission nuclear power plants
             and the implications of competition within the electricity industry, the
             congressional requesters of this report asked GAO to determine if (1) there
             is adequate assurance that NRC’s licensees are accumulating sufficient
             funds for decommissioning and (2) NRC is adequately addressing the
             effects of electricity deregulation on the funds that will eventually be
             needed for decommissioning.

             To address the first issue, GAO compared, for 76 licensees owning 118
             nuclear plants, the amount of decommissioning funds that each licensee
             actually accumulated through 1997 with the expected amount. Making
             these comparisons required GAO to assume future economic and plant
             operating conditions. GAO made baseline, or most likely, assumptions and
             then, using more pessimistic and more optimistic assumptions, tested the
             effects of changes in these assumptions on the results.


             From 1959 through March 1999, a total of 125 nuclear power plants were
Background   licensed to operate. Currently, there are 104 plants with operating licenses.
             While NRC has the authority to require its licensees to assure that they will
             have sufficient funds for the eventual decommissioning of their nuclear
             power plants, it does not have the authority to directly regulate the
             economic affairs of its licensees. Most of these licensees are
             investor-owned utilities who generate electricity from a variety of sources,
             including coal, gas, and hydropower and whose economic activities have
             traditionally been regulated by state utility commissions and the Federal



             Page 2                                         GAO/RCED-99-75 Nuclear Regulation
                   Executive Summary




                   Energy Regulatory Commission. Thus, licensees’ financial plans for
                   decommissioning are subject to the review of and approval by state utility
                   commissions as a part of the economic regulation of licensees’ electricity
                   generating and delivery systems. Traditionally, through the regulation of
                   electricity rates, the utility commissions allowed the licensees to include
                   charges for eventual decommissioning. Portions of the charges that
                   licensees’ customers pay for their electricity are earmarked for deposit
                   into funds that may be used only to pay decommissioning costs. Until
                   decommissioning occurs, the money in these funds is invested to earn
                   income.

                   By July 1988, when NRC began requiring licensees to provide specific
                   assurances that funds would be available to decommission their plants,
                   114 plants were already licensed to operate. At that time, NRC required
                   licensees to provide “reasonable assurance” that sufficient funds would be
                   available to decommission their nuclear power plants. Licensees must use
                   a formula contained in NRC’s regulation to calculate the minimum amounts
                   of funds to be accumulated over the operating life of each of their plants.
                   To provide this assurance, practically all licensees agreed to establish
                   externally-managed sinking funds to accumulate funds for
                   decommissioning.1 Money collected from customers for decommissioning
                   would be deposited in these funds, invested to earn income, and then
                   made available when needed to pay decommissioning costs.


                   Although the estimated cost to decommission a nuclear power plant is on
Results in Brief   the order of $300 million to $400 million in today’s dollars, NRC does not
                   know if licensees are accumulating sufficient funds for this future
                   expense. GAO’s analysis showed that, under likely assumptions, 36 of 76
                   licensees had not accumulated sufficient decommissioning funds through
                   1997. However, all but 15 of these 36 licensees appeared to be making up
                   their funding shortfalls with recent increases in the rates that they are
                   accumulating decommissioning funds. Using more pessimistic and
                   optimistic assumptions would increase or decrease the number of
                   underfunded licensees, respectively. For example, some experts anticipate
                   that the deregulation of the electricity industry will result in the retirement
                   of some nuclear power plants before sufficient funds to decommission the
                   plants have been accumulated. Although utility commissions have
                   permitted licensees to continue charging their customers for the costs of


                   1
                    The Tennessee Valley Authority elected to provide, as permitted by NRC’s regulations, a statement of
                   intent to fulfill its financial obligations to decommission its six nuclear power plants. However, in
                   December 1998, the Authority notified NRC that it had begun to use external sinking funds.



                   Page 3                                                       GAO/RCED-99-75 Nuclear Regulation
                            Executive Summary




                            decommissioning prematurely retired plants, this financial safeguard
                            could be affected by states’ efforts to deregulate the electricity industry.

                            To address the movement toward deregulating the electricity industry, in
                            November 1998 NRC began requiring its licensees to provide additional
                            financial assurances if the Federal Energy Regulatory Commission and/or
                            state utility commissions will no longer guarantee, through the regulation
                            of electricity rates, the collection of sufficient funds for decommissioning.
                            However, one additional form of financial assurance—the early payment of
                            decommissioning costs—may not be practicable or affordable. Also, NRC
                            considered requiring licensees to accelerate decommissioning funding as a
                            hedge against the premature retirement of plants but rejected the concept
                            because of possible adverse effects on licensees’ finances. On the other
                            hand, NRC’s alternative methods to the collection of decommissioning
                            funds earlier essentially rely on the continued financial health of the
                            licensee or its parent company. Thus, the effectiveness of NRC’s 1998
                            regulatory changes will likely depend on how vigorously NRC monitors the
                            financial health of its licensees. In this regard, licensees must now provide
                            financial reports every 2 years to NRC so it can monitor financial
                            assurances for decommissioning. However, NRC did not establish
                            thresholds for clearly identifying acceptable levels of financial assurances
                            or establish criteria for identifying and responding to unacceptable levels
                            of assurances.



Principal Findings

Regulatory System Did Not   Under its 1988 regulations, NRC did not require licensees to periodically
Ensure Adequate Funding     report balances in their decommissioning funds and the rates at which
                            they were accumulating additional funds. GAO’s comparison between
                            actual and expected fund balances at the end of 1997 showed that, under
                            baseline assumptions, 36 of 76 licensees had not yet accumulated the
                            expected level of funds. These assumptions addressed such factors as the
                            initial decommissioning costs, cost-escalation rates, net earnings on the
                            investments of licensees’ decommissioning funds, and the operating life of
                            plants. Under pessimistic and optimistic assumptions, 72 and 8 licensees,
                            respectively, have not accumulated the expected levels of funds.

                            Although a licensee might have collected less than the expected funds for
                            decommissioning through 1997, increasing the annual amounts collected




                            Page 4                                         GAO/RCED-99-75 Nuclear Regulation
                        Executive Summary




                        in 1998 and subsequent years may enable the licensee to accumulate
                        sufficient funds by the time the licensee retires its plants. GAO compared
                        the amounts that licensees collected in 1997 with the annual average of the
                        present value of the amounts that they would have to accumulate each
                        year over the remaining life of their nuclear plants to have sufficient funds
                        to decommission their plants. GAO’s results suggest that, under the baseline
                        assumptions, most licensees have recently increased funding to make up
                        earlier funding shortfalls. For example, only 17 licensees, including 15 that
                        had not collected sufficient funds through 1997, are not yet collecting the
                        amounts that they will need to collect each year to meet their
                        decommissioning obligations. Under pessimistic and optimistic
                        assumptions, 66 and 4 licensees, respectively, are not collecting funds at
                        sufficient rates. Currently, 21 nuclear power plants have been retired
                        prematurely, and the deregulation of the electricity industry is expected to
                        increase this number. Moreover, 19 of 26 plants that one investment house
                        considers as candidates for early retirement are owned by licensees that
                        have not accumulated decommissioning funds at the expected levels. To
                        date, utility commissions have permitted licensees to continue collecting
                        decommissioning funds from their customers even if their plants have
                        been retired early. Also, bankruptcy courts have allowed licensees to
                        continue accumulating decommissioning funds after they filed for
                        bankruptcy.


Adequacy of Assurance   In anticipation of the electricity industry’s deregulation, in November 1998,
Depends on Financial    NRC began requiring that, when the collection of decommissioning funds is

Reviews                 no longer guaranteed by the regulation of electricity rates, licensees must
                        provide added assurance through a variety of means that they will meet
                        their decommissioning obligations. The prepayment of expected
                        decommissioning costs, the purchase of surety instruments, and/or the
                        purchase of insurance are methods acceptable to NRC for providing added
                        financial assurance. Licensees owning nuclear power plants have not used
                        these methods; however, and both NRC and industry representatives said
                        that these types of up-front payments might not be available or might be
                        prohibitively expensive.2 Other methods are self guarantees and
                        guarantees by parent companies. Guarantees must be backed by specified
                        financial tests, such as a parent company’s having net working capital,
                        tangible net worth, and assets located in the United States worth at least
                        six times the amount of decommissioning funds that would be needed.


                        2
                         According to NRC, the terms of three recent sales of nuclear power plants have included the
                        prepayment of all estimated decommissioning costs and, in its view, will likely be the preferred means
                        of assuring that decommissioning funds are available for future sales transactions.



                        Page 5                                                       GAO/RCED-99-75 Nuclear Regulation
                  Executive Summary




                  NRC elected not to address the likelihood of premature plant retirements
                  because, in its view, a few premature closures do not justify requiring all
                  licensees to accelerate the collection of their decommissioning funds. NRC
                  intends to continue its practice of addressing early plant retirements on a
                  case-by-case basis. Also, at NRC’s request, the administration included a
                  provision in its 1999 proposed bill on the deregulation of the electricity
                  industry that would give priority to funding decommissioning in
                  bankruptcy proceedings.

                  NRC  also began requiring licensees to report financial information on
                  decommissioning funds every 2 years beginning by the end of March 1999.
                  Each licensee must report the amounts of decommissioning funds
                  accumulated, expected to be needed at a plant’s retirement, and remaining
                  to be collected each year. The reports must state the licensee’s
                  assumptions for escalating decommissioning costs, estimating the fund’s
                  earnings, and discounting projections for the fund. After reviewing the
                  initial reports from licensees, NRC intends to consider the need for further
                  rulemaking in this area.

                  The new financial-reporting requirements should provide NRC with the
                  information to address such issues as the rates at which licensees are
                  accumulating decommissioning funds, the effect of the electricity
                  industry’s deregulation on financial assurances for decommissioning, and
                  the possibility of the additional early retirements of uneconomical plants.
                  However, NRC has not explained how it intends to act on the reported
                  financial information. For example, NRC has not established criteria for
                  requiring a licensee to change how it accumulates funds or to provide
                  additional assurance that funds will be available. Instead, NRC stated that it
                  will consider issuing additional guidance after licensees have submitted
                  their initial reports.


                  To provide for the logical, coherent, and predictable oversight of licensees’
Recommendations   financial assurances for decommissioning their nuclear power plants, GAO
                  recommends that the Chairman, NRC, provide licensees and the public with
                  information on the (1) objectives of, scope of, and methods used in NRC’s
                  reviews of licensees’ financial reports; (2) thresholds for identifying, on
                  the basis of these reviews, acceptable, questionable, and unacceptable
                  indications of financial assurances; and (3) criteria for actions to be taken
                  on the results of these reviews.




                  Page 6                                         GAO/RCED-99-75 Nuclear Regulation
                       Executive Summary




                       GAO  provided NRC with a draft of this report for review and comment. NRC
Agency Comments        said that GAO’s recommendations merit serious consideration but
and GAO’s Evaluation   disagreed on the timing of their implementation. NRC’s position is that it
                       should not act unless it determines, on the basis of licensees’ initial status
                       reports, that problems exist with licensees’ financial assurances for
                       decommissioning. However, GAO believes that a more proactive approach
                       is needed to inform licensees and the public about NRC’s expectations
                       about financial assurance. As a result, GAO made no changes to the
                       recommendations.

                       NRC  also made several comments on the complex changes that are
                       occurring in the electric utility industry and the interactions among NRC,
                       utility commissions, and the nuclear power industry. Where appropriate,
                       GAO incorporated these comments into the text of the report. NRC’s
                       comments and GAO’s response are discussed at the end of chapter 3 and in
                       appendix II.




                       Page 7                                         GAO/RCED-99-75 Nuclear Regulation
Contents



Executive Summary                                                                                2


Chapter 1                                                                                       10
                       Regulatory Challenges to Decommissioning Nuclear Power                   10
Introduction             Plants
                       Deregulation of the Electricity Industry                                 13
                       Objectives, Scope, and Methodology                                       14


Chapter 2                                                                                       16
                       Rates at Which Decommissioning Funds Are Being Accumulated               17
NRC’s System Did Not   Plant Operating Life’s Effect on Decommissioning Funding                 19
Ensure That            Effects of Cost Uncertainties on Rate of Fund’s Accumulation             24
Licensees Were
Accumulating
Adequate
Decommissioning
Funds
Chapter 3                                                                                       28
                       NRC Amends Decommissioning Financial Assurance Regulations               28
Effectiveness of       NRC Did Not Address Early Plant Retirements or Bankruptcy in             32
Amendments to            Its Amended Regulations
                       Conclusions                                                              34
Financial Assurance    Recommendation                                                           34
System Will Depend     Agency Comments and Our Evaluation                                       34
Upon Financial
Reviews by NRC
Appendixes             Appendix I: Scope, Methodology, and Results of Analyses of               36
                         Licensees’ Decommissioning Funds
                       Appendix II: Comments From the Nuclear Regulatory                        55
                         Commission
                       Appendix III: Major Contributors to This Report                          62


Related Products                                                                                64


Tables                 Table 2.1: Retired Commercial Nuclear Power Plants                       20




                       Page 8                                     GAO/RCED-99-75 Nuclear Regulation
Contents




Table 2.2: Nuclear Power Plants Identified by Standard & Poor’s         22
  as Candidates for Early Retirement
Table I.1: Licensees With More Than or Less Than Expected               45
  Fund Balances (by Percentage Above or Below), as of
  December 31, 1997
Table I.2: Licensees That Accumulated More or Less Funds (by            51
  Percentage Above or Below) in 1997 Than the Annual-Average of
  the Present Value of the Future Amounts Required




Abbreviations

DOE        Department of Energy
EIA        Energy Information Agency
EPA        Environmental Protection Agency
FERC       Federal Energy Regulatory Commission
GAO        General Accounting Office
GDP        gross domestic product
NRC        Nuclear Regulatory Commission


Page 9                                    GAO/RCED-99-75 Nuclear Regulation
Chapter 1

Introduction


                        The electricity industry is the largest industry in the United States.
                        According to the Department of Energy’s (DOE) Energy Information
                        Administration (EIA), the industry had total assets worth about $700 billion
                        in 1993 and has revenues of about $200 billion annually.

                        Nuclear power plants have provided about 20 percent of the nation’s
                        electricity in recent years. Most nuclear power plants are owned and
                        operated by investor-owned utilities. Investor-owned utilities comprise
                        only about 8 percent of the nation’s 3,200 electric utilities but generate and
                        sell over 75 percent of the electricity. One such utility—the
                        Commonwealth Edison Company—received the former Atomic Energy
                        Commission’s first license to operate a civilian nuclear power plant almost
                        40 years ago. Since then, the Atomic Energy Commission and its successor
                        regulatory agency—the Nuclear Regulatory Commission (NRC)—have
                        issued operating licenses for a total of 125 plants. Twenty-one of the plants
                        licensed to operate have been permanently retired, leaving 104 with
                        operating licenses.

                        The Atomic Energy Act of 1954, as amended, and the Energy
                        Reorganization Act of 1974, as amended, require NRC to, among other
                        things, protect the radiological health and safety of the public. Under this
                        mandate, NRC licenses nuclear power plants to operate for up to 40 years
                        and continually regulates the utility-licensees’ operation of these plants. In
                        addition, NRC permits utilities to seek license extensions of up to 20 years.


                        Decommissioning a nuclear power plant involves dismantling the
Regulatory Challenges   structures and equipment at the plant, properly disposing of the resulting
to Decommissioning      radioactive and other wastes, and then ensuring that the plant site
Nuclear Power Plants    complies with applicable environmental standards. Decommissioning
                        involves a combination of technical, financial, and regulatory challenges.
                        For example, the nuclear reactor vessel, other plant components, and
                        concrete surfaces of various rooms in the plant are radioactive or
                        contaminated with radioactive material. Therefore, the processes of
                        maintaining the plant in a safe condition prior to dismantling it and
                        disposing of the resulting radioactive wastes requires constant attention to
                        protecting workers and the public from exposure to radiation.

                        The interval of time between the initial operation of a plant and its
                        eventual dismantling also presents challenges to licensees and NRC. This
                        interval can be as short as a few years if a plant is retired earlier than
                        expected and dismantled shortly thereafter or as long as 40 to 60 years if a



                        Page 10                                        GAO/RCED-99-75 Nuclear Regulation
Chapter 1
Introduction




plant operates for an extended license period.1 In lieu of dismantling a
plant immediately after its retirement, a utility may instead elect to
decommission a plant by placing the plant in safe storage before
dismantling it, as long as the entire decommissioning process is completed
within 60 years. This feature of NRC’s regulation allows utilities to defer
dismantling a retired plant if they (1) are awaiting the retirement of a
colocated plant, (2) need to give DOE time to remove all of the spent (used)
fuel from the plant, and (3) need to allow the radioactivity in the plant to
decay before dismantling the plant, among other things.

Finally, the financial aspects of decommissioning also present challenges
to utility-licensees. For example, although actual decommissioning
experience is limited, decommissioning a single plant is expected to cost
hundreds of millions of dollars. NRC does not have the authority to regulate
the manner in which licensees recover from their customers the costs of
constructing, operating, and decommissioning nuclear power plants. Most
licensees are investor-owned utilities that traditionally have been provided
a monopoly within their service areas. In return, these utilities built
generating plants, including nuclear, coal, gas, and hydro power plants,
and transmission and distribution facilities to provide electricity for all of
the existing and future customers within their service areas. Under this
traditional “cost-of-service” regulation, state public utility commissions
approved electricity rates that reflected the utilities’ costs of building and
operating their electricity systems and approved the financial returns on
these investments. Similarly, the interstate aspects of the electric utility
industry, including financial transactions, wholesale rates, and
interconnection and transmission arrangements, are regulated by the
Federal Energy Regulatory Commission (FERC). In this context, utilities’
proposed arrangements to finance the decommissioning of their nuclear
plants are a part of their financial operations that are subject to review and
approval by their respective state public utility commissions and FERC.2

NRC’s authority to require utilities to accumulate funds to decommission
their nuclear power plants is derived from its responsibilities under the
Atomic Energy Act of 1954, as amended, to regulate the safety of nuclear
power. Until 1988, NRC required licensees to certify that sufficient financial
resources would be available when needed to decommission their nuclear

1
 NRC’s regulations permit a licensee to complete decommissioning beyond 60 years if other factors
affect the licensee’s capability to carry out decommissioning, such as the unavailability of capacity to
dispose of radioactive waste.
2
 Other utilities, such as the Tennessee Valley Authority, are publicly owned, rather than
investor-owned. These utilities are either economically self-regulating or subject to other constraints
on their financial affairs.



Page 11                                                        GAO/RCED-99-75 Nuclear Regulation
    Chapter 1
    Introduction




    power plants but did not require these licensees to make specific financial
    provisions for decommissioning. On July 26, 1988, NRC’s original
    regulations on the technical and financial aspects of decommissioning
    became effective. By then, NRC had licensed 114 plants to operate.

    NRC’s1988 regulations provided utilities with the following options for
    providing decomissioning financial assurance:

•   The prepayment of cash or liquid assets into an account segregated from
    the licensee’s assets and outside the licensee’s administrative control.
    Prepayment may be made in the form of a trust, escrow account,
    government fund, certificate of deposit, or deposit of government
    securities.
•   External sinking funds. These types of funds are established and
    maintained through the periodic setting aside of funds in an account
    segregated from the licensee’s assets and outside the licensee’s
    administrative control. An external sinking fund may be in the same forms
    permitted for prepayment.
•   A surety method or insurance. A surety method may be in the form of a
    surety bond, letter of credit, or line of credit payable to a trust established
    for decommissioning costs.
•   For “federal licensees,” such as the Tennessee Valley Authority, a
    statement of intent that decommissioning funds will be obtained when
    necessary.

    NRC recognized both the uncertainty over decommissioning costs and the
    authority of public utility commissions and FERC to regulate the economic
    affairs of utilities. Therefore, NRC approached the regulation of the
    financial aspects of decommissioning by requiring utilities to provide
    “reasonable assurance” that sufficient funds would be available to
    decommission their nuclear power plants when the plants are permanently
    shut down. Among other things, NRC required, by July 27, 1990, each holder
    of an operating license to (1) certify that the licensee would provide the
    required financial assurance for decommissioning; (2) calculate, using a
    formula contained in NRC’s regulations, the minimum amount (expressed
    in current-year dollars) that utilities would accumulate for
    decommissioning their plants by the time they expect to retire them;3 and
    (3) provide a copy of the financial instrument(s) executed to provide the
    required financial assurance. Essentially all utilities have elected the
    option of establishing external sinking funds to finance future

    3
     The amount stated in the certification may also be based on a site-specific cost estimate for
    decommissioning the plant as long as the site-specific amount exceeds the amount calculated using
    NRC’s formula.



    Page 12                                                     GAO/RCED-99-75 Nuclear Regulation
                       Chapter 1
                       Introduction




                       decommissioning costs.4 A portion of the charge that utilities’ customers
                       pay for their electricity is earmarked for deposit in these funds, and the
                       funds are invested to earn income.

                       In its regulations, NRC deferred to utilities and their rate regulators the
                       details of collecting the required decommissioning funds. NRC requires only
                       that the amount actually accumulated by the end of a plant’s operating life
                       equals the projected cost to decommission the plant. About 5 years before
                       the projected end of plant operations, NRC requires a utility to submit a
                       preliminary decommissioning cost estimate that includes an up-to-date
                       assessment of the major factors that could affect the cost to
                       decommission its plant. Also, if necessary, the cost estimate shall include
                       plans for adjusting needed funds for decommissioning to demonstrate that
                       a reasonable level of assurance will be provided so that funds will be
                       available when needed to cover the cost of decommissioning. Finally, not
                       later than 2 years after a plant has been permanently shut down, the utility
                       must submit to NRC a decommissioning report that includes, among other
                       things, a site-specific decommissioning cost estimate.


                       After about 10 years of experience with NRC’s 1988 decommissioning
Deregulation of the    regulations, the electricity industry has begun to change in ways that have
Electricity Industry   prompted NRC to reassess the adequacy of its regulations governing
                       nuclear power plants, including financial assurances for decommissioning
                       retired plants. Over the next 10 years or so, many states are expected to
                       replace their traditional systems of economic regulation of monopolistic
                       electric utilities with more-competitive, less-regulated environments
                       mainly for the generation of electricity but, to a lesser degree, for the
                       transmission and distribution of electricity as well. Competition, according
                       to NRC, could result in economic pressures that will affect the availability
                       of adequate funds for decommissioning and how utilities address
                       maintenance and safety in nuclear power plant operations.

                       Currently, the Congress is considering a number of bills to restructure the
                       retail electricity industry to promote a more efficient and market-driven
                       industry. Also, as of September 1997, 49 states had considered reforming
                       their retail electricity markets. As of June 1, 1998, FERC and at least 18
                       states had either enacted legislation or issued comprehensive regulatory


                       4
                        The principal exception is the Tennessee Valley Authority, which elected to use the statement of
                       intent available to federal licensees for its six nuclear power plants that have been licensed to operate.
                       In December 1998, the Authority told NRC that it had begun to use external sinking funds because it
                       was no longer eligible to use a statement of intent.



                       Page 13                                                         GAO/RCED-99-75 Nuclear Regulation
                         Chapter 1
                         Introduction




                         orders implementing plans to restructure the industry.5 In California, for
                         example, a plan to produce competitive electricity markets and allow
                         consumers to choose their electricity supplier went into effect in
                         March 1998. Also, some of these initiatives would encourage or require the
                         restructuring of the affected electricity industry. Specifically, utilities that
                         have traditionally generated, transmitted, and distributed electricity would
                         be encouraged or required to separate the operation of electricity
                         generation systems from the operation of transmission and distribution
                         systems.


                         Concerned about the potential costs to decommission nuclear plants and
Objectives, Scope,       the implications of a competitive electricity environment on the ability of
and Methodology          plant owners to finance decommissioning projects, the congressional
                         requesters of this report asked us to determine if (1) there is adequate
                         assurance that NRC’s licensees are accumulating enough funds to
                         decommission their nuclear power plants when the plants are retired and
                         (2) NRC is adequately addressing the effects of electricity deregulation on
                         the funds that will eventually be needed for decommissioning.

                         To address both of our objectives we met with, and obtained
                         documentation from, officials of the following organizations:

                     •   NRC, Rockville, Maryland.
                     •   Nuclear Energy Institute, Washington, D.C. (The Institute represents the
                         nuclear industry, including utilities that operate nuclear power plants.)
                     •   National Association of Regulatory Utility Commissioners. (The
                         Association represents public utility commissions and other state-level
                         rate-setting entities.)
                     •   National Nuclear Safety Network (a public interest organization).
                     •   public utility commissions of Oregon (Salem), Maryland (Baltimore), and
                         New Hampshire (Concord).
                     •   Portland General Electric (Portland, Oregon); Commonwealth Edison
                         (Chicago, Ill.); Office of Consumer Advocate (Concord, NH.); and Moody’s
                         Investors Service (New York, N.Y.).

                         To address the adequacy of assurance that NRC’s licensees are
                         accumulating enough decommissioning funds, we also met with, and
                         obtained documentation from, TLG Services, Inc., which prepares
                         decommissioning cost estimates for owners/licensees of nuclear power

                         5
                          The 18 states are Arizona, California, Connecticut, Illinois, Maine, Maryland, Massachusetts, Michigan,
                         Montana, Nevada, New Hampshire, New Jersey, New York, Oklahoma, Pennsylvania, Rhode Island,
                         Vermont, and Virginia.



                         Page 14                                                       GAO/RCED-99-75 Nuclear Regulation
Chapter 1
Introduction




plants and Dr. Bruce Biewald, a consultant to groups that participate in
state public proceedings on setting electricity rates, including charges for
decommissioning. We also analyzed whether licensees or their parent
companies have (1) accumulated decommissioning funds at a rate
consistent with the percentages of their reactors’ operating life already
used up (i.e., the fund for each reactor should equal this percentage times
the present value of its future decommissioning cost) and are (2) currently
(viz., 1997) adding enough money to their decommissioning funds (i.e.,
assuming that contributions in future years will increase at the funds’
after-tax rate of return) to accumulate sufficient funds to decommission
their plants when they are retired. The scope and methodology that we
used in these two analyses are discussed in appendix I. To address
whether NRC is adequately considering the effects of electricity
deregulation on the funds that will eventually be needed for
decommissioning, we also obtained and reviewed public comments on
NRC’s advance notice of proposed rulemaking for decommissioning
financial assurances and on the subsequent proposed rule.

We conducted our review from October 1997 through March 1999 in
accordance with generally accepted government auditing standards.




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              We analyzed the status of decommissioning funding as of December 31,
              1997, (the year of the most recent data available) for 76 licensees that own
              all or part of 118 operating and retired nuclear power plants. We
              performed this analysis because NRC had not, for its own regulatory
              purposes, systematically collected and analyzed information on its
              licensees’ decommissioning funds. Our analysis showed that, under likely
              assumptions about future rates of cost escalation, net earnings on the
              investments of funds, and other factors, 36 of the licensees had not
              accumulated funds at a rate that is sufficient for eventual
              decommissioning.1 Under these conditions, these licensees will have to
              increase the rates at which they accumulate funds to meet their future
              decommissioning financial obligations. Under more pessimistic
              (unfavorable) and more optimistic (favorable) assumptions, 72 and 8
              licensees, respectively, had not accumulated funds at a sufficient rate.

              We also analyzed whether licensees had recently increased the amount of
              funds that they had collected to make up for under-collections in earlier
              years. For this analysis, we compared the amounts collected in 1997 with
              the annual average of the present value of the amount of funds needed to
              meet licensees’ funding obligations when their plants’ licenses expire. We
              found that, under likely assumptions, 17 companies collected less funds in
              1997 than they need to collect each year over their plants’ remaining
              operating life. The 17 companies included 15 companies that had not
              collected sufficient funds through 1997. Under more pessimistic and
              optimistic assumptions, 66 and 4 licensees, respectively, need to increase
              the amount of funds that they collect in future years.

              Our funding analysis generally assumes that nuclear power plants would
              operate for their current licensed operating period—usually 40 years—and
              that the licensees will remain financially solvent. No plant, however, has
              yet operated for the full period of its operating license, and electricity
              deregulation is expected to cause or contribute to more premature plant
              retirements. Furthermore, 19 of 26 plants that one Wall Street firm
              considers at risk for early retirement are owned, in whole or in part, by
              companies that have been slow to accumulate funds to decommission
              their plants. So far, however, neither early plant retirements nor licensee
              bankruptcies have adversely affected decommissioning. Economic


              1
               Other factors that we considered in our analysis included initial decommissioning cost estimates,
              plants’ operating periods, and the use of decommissioning funds for cleanup activities related and
              unrelated to radiation. (NRC requires licensees to accumulate funds to pay designated
              radiation-related costs only, but licensees may need to incur other costs, such as the costs to manage
              spent fuel, dismantle nonradioactive structures, and restore the site to “green field” condition, in the
              process of decommissioning their plants.)



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                  regulators have allowed utilities to charge their customers rates that
                  included amounts for decommissioning plants that were retired early, and
                  courts have permitted the continued accumulation of decommissioning
                  funds during bankruptcy proceedings.

                  From 1990 through 1997, most licensees’ estimates of the costs to
                  decommission their plants have increased rapidly. Likewise, the utilities’
                  periodic calculations, using a formula contained in NRC’s regulations, of the
                  minimum amount that they must accumulate in their decommissioning
                  funds generally have been escalating more rapidly (particularly in recent
                  years) than the site-specific cost estimates. Also, there are uncertainties
                  over what the actual decommissioning costs might be. For example, the
                  eventual resolution of a protracted dispute between NRC and the
                  Environmental Protection Agency (EPA) over appropriate radiation
                  standards for decommissioned sites could affect final decommissioning
                  costs.


                  NRC requires licensees using external sinking funds for decommissioning
Rates at Which    financial assurance to deposit funds collected for decommissioning into
Decommissioning   their funds each year. For two reasons, however, NRC does not know if
Funds Are Being   licensees are accumulating decommissioning funds at rates that will
                  provide enough funds to decommission their plants when the plants have
Accumulated       been retired. First, NRC leaves the amounts to be put aside up to licensees
                  and their public utility commissions. Second, until recently, NRC has not
                  required that licensees report on the status of their decommissioning
                  funds.2

                  We analyzed the status of decommissioning funds, as of the end of 1997,
                  for 118 operating and retired nuclear plants owned by 76 licensees (or the
                  parent companies of subsidiaries that are the legal owners of the plants).
                  In our first analysis, we compared the total amount of each licensee’s
                  decommissioning funds with the expected amount of funds that should
                  have been accumulated by that date. To determine the expected amount,
                  we assumed that licensees would accumulate increasing (but constant
                  present-value) amounts annually. Once in the fund, each yearly
                  contribution would continue to grow at the fund’s after-tax rate of return.
                  The sum of these annual amounts, plus the income earned on the
                  investments of the funds, would equal the total estimated
                  decommissioning costs when the licensees’ plants’ operating license

                  2
                   In November, 1998, NRC began requiring each licensee to report financial information, including the
                  status of its decommissioning funds, every 2 years. The first licensee reports were due by the end of
                  March 1999.



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expires. For example, at the end of 1997, a licensee’s decommissioning
fund for a plant that had operated half of a 40-year license period (begun
in 1977) should equal one-half of the present value of the estimated cost to
decommission the plant beginning after 2017. This expected level of
funding is not the only funding stream that could accrue to equal future
decommissioning costs but provides us with both a common standard for
comparisons among licensees and, from an equity perspective among
ratepayers in different years, a financially reasonable growing
current-dollar funding stream over time. Appendix I describes our
methodology, assumptions, and results for each of the 76 licensees.

Performing this analysis required that we make assumptions about future
economic and plant-operating conditions. Key assumptions included initial
decommissioning cost estimates, rates of cost escalation, net earnings on
the investments of funds (discount rate), plant-operating periods,3 and the
use of decommissioning funds for both radiation- and
non-radiation-related decommissioning activities.4 Because of the inherent
uncertainty associated with assuming future conditions over many years,
we used assumptions of the most likely future conditions to develop a
baseline scenario. And, to bound the results of the baseline scenario, we
developed pessimistic and optimistic scenarios using unfavorable and
favorable economic and plant-operating conditions, respectively.

For our baseline scenario, 36 of the 76 licensees (47 percent) had not
accumulated funds at a rate that is sufficient for eventual
decommissioning. Under these conditions, these licensees will have to
increase the rates at which they accumulate funds to meet their future
decommissioning financial obligations. Changing assumptions to reflect
the pessimistic and optimistic scenarios, greatly affects the adequacy of
the licensees’ funding. Under pessimistic and optimistic assumptions, 72
(95 percent) and 8 (11 percent) licensees, respectively, had not
accumulated funds at a sufficient rate for eventual decommissioning.

The fact that a licensee might have collected funds for decommissioning at
a lesser rate than the expected rate does not, by itself, mean that the
licensee will not meet its financial obligations by the time it retires its

3
 Specifically, for the baseline scenario, only six currently-operating nuclear power plants are assumed
to be retired early (from 1998 to 2001). In the optimistic scenario, no currently operating plants close
early. In the pessimistic scenario, however, these 6 plants plus 20 other plants are assumed to close
early (in 2002).
4
 In the baseline scenario, we assumed that 86 percent of each licensee’s decommissioning fund was
available to pay decommissioning costs as defined by NRC. In the pessimistic scenario, 82 percent and,
in the optimistic scenario, 100 percent of the fund was assumed to be available.



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                         plants. By increasing their rates of collection, these licensees can still
                         accumulate the funds that are necessary. Therefore, to obtain insights on
                         whether licensees are now collecting funds at adequate rates, we
                         undertook a second analysis. We compared the available amounts that
                         each licensee collected in 1997 with the average yearly present value of the
                         amounts that the licensees would have to accumulate each year over the
                         remaining life of their plants to have enough decommissioning funds upon
                         the retirement of the plants. This analysis assumes that the licensees will
                         increase their yearly future funding at the after-tax rate of return on the
                         investments of their funds. And, once in the fund, these yearly
                         contributions will grow at this same rate. Our analysis shows these results
                         for the baseline (most likely), pessimistic, and optimistic scenarios.

                         For the baseline, the results show that only 17 of 76 licensees (22 percent)
                         were not yet collecting the amounts that they will need to meet their
                         decommissioning obligations. Thus, while 47 percent of the licensees had
                         less than expected levels of funds at the end of 1997, only 22 percent did
                         not appear to be currently on track, as represented by the funds that they
                         collected in 1997, to eventually meet their decommissioning financial
                         obligations. In other words, while licensees might not have funded
                         sufficiently in the early years of their plants’ operating life, our results
                         suggest that most licensees have recently increased funding to make up
                         the funding shortfalls from earlier years. But if conditions deteriorate from
                         those assumed in our baseline scenario, as represented by the pessimistic
                         scenario, 66 licensees (87 percent) under-collected funds in 1997.
                         Conversely, under the optimistic scenario, only 4 licensees (5 percent) are
                         currently accumulating funds too slowly.


                         If a nuclear power plant is retired prematurely, sufficient funds may not
Plant Operating Life’s   have been collected by the retirement date to pay all decommissioning
Effect on                costs. To date, 21 plants have been retired before their licenses expired. So
Decommissioning          far, however, public utility commissions have permitted licensees to
                         continue collecting the funds for decommissioning from the licensees’
Funding                  electricity customers after these plants were retired.


Twenty-One Plants Were   To date, no plant has operated for its full licensed operating life, and 21
Retired Early            plants have been retired before their operating license would have




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                                        expired.5 (See table 2.1.) Two of the 20 plants operated for as long as 25
                                        years. Fifty-two of the 104 plants that are currently licensed to operate
                                        have operated from 20 to 30 years.

Table 2.1: Retired Commercial Nuclear
Power Plants                            Plant’s name                     State                   Retirement date             Years operated
                                        GE VBWR                          Calif.                  Dec. 1963                                        6
                                        Pathfinder                       S.D.                    Sept. 1967                                       4
                                        Fermi 1                          Mich.                   Sept. 1972                                       9
                                        Indian Point 1                   N.Y.                    Oct. 1974                                   13
                                        Peach Bottom 1                   Pa.                     Oct. 1974                                        9
                                        Humboldt Bay 3                   Calif.                  July 1976                                   14
                                        Dresden 1                        Ill.                    Oct. 1978                                   19
                                              a
                                        TMI-2                            Pa.                     Mar. 1979                                        1
                                        La Crosse                        Wis.                    Apr. 1987                                   20
                                        Fort St. Vrain                   Colo.                   Aug. 1989                                   16
                                        Shorehamb                        N.Y.                    June 1989                                        0
                                        Rancho Seco                      Calif.                  June 1989                                   15
                                        Yankee Rowe                      Mass.                   Oct. 1991                                   28
                                        San Onofre 1                     Calif.                  Nov. 1992                                   26
                                        Trojan                           Oreg.                   Nov. 1992                                   17
                                        Haddam Neck                      Conn.                   Dec. 1996                                   30
                                        Big Rock Point                   Mich.                   Aug. 1997                                   34
                                        Maine Yankee                     Maine                   Aug. 1997                                   25
                                        Zion 1                           Ill.                    Jan. 1998                                   24
                                        Zion 2                           Ill.                    Jan. 1998                                   24
                                        Millstone 1                      Conn .                  July 1998                                   27
                                        a
                                         TMI-2 (Three Mile Island Unit 2) operated just over 1 year before incurring an accident that
                                        resulted in the plant’s retirement.
                                        b
                                         Over a calendar period of approximately 2 months, the Shoreham plant was operated for the
                                        equivalent of 2 full-power days. The plant was only operated for low-power testing purposes and
                                        was then permanently shut down.



                                        Nine commercial nuclear power plants were permanently shut down
                                        before NRC issued its original decommissioning regulations. Eight of these
                                        retired plants are in safe storage. The ninth plant (Pathfinder), which was
                                        a small demonstration plant, has been decommissioned. Twelve


                                        5
                                         NRC generally licenses nuclear power plants to operate for a maximum of 40 years. It also permits
                                        utilities to seek license extensions of up to 20 years. In 1998, Baltimore Gas and Electric and Duke
                                        Power became the first licensees to file applications for license extensions. The extensions were filed
                                        for the former’s Calvert Cliffs units 1 and 2 and the latter’s Oconee units 1, 2, and 3.



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                            commercial nuclear power plants have been retired since NRC issued its
                            decommissioning financial assurance regulations. Four of these plants are
                            in safe storage. Two plants—Fort St. Vrain and Shoreham—have been
                            decommissioned. Five plants are currently being dismantled, and the
                            owner of one plant has not yet decided whether to dismantle the plant
                            soon or put it in safe storage.

                            The five plants that are now being dismantled—Big Rock Point, Haddam
                            Neck, Maine Yankee, Trojan, and Yankee Rowe—were retired before their
                            owners had accumulated sufficient funds to decommission them. For
                            example, the Trojan plant was retired in 1992 after 17 years of operation.
                            At that time, the plant’s licensees estimated that decommissioning the
                            plant would cost $198 million (in 1993 dollars). However, the licensees had
                            accumulated only $43 million, or 22 percent, of that amount. The Maine
                            Yankee plant was permanently shut down in 1997 after 24 years of
                            operation. When the plant was retired, the licensee had accumulated
                            $188 million for decommissioning. That amount was only 53 percent of the
                            $357 million (in 1997 dollars) that the licensee estimated would be needed
                            to decommission the plant. In both of these cases, as well as in other
                            states where retired nuclear plants are located, public utility commissions
                            are permitting the licensees to continue collecting decommissioning funds
                            from their customers even if their plants were retired early.


Experts Expect More Early   Industry experts, such as major financial institutions, and DOE’s Energy
Plant Retirements           Information Administration anticipate that the deregulation and
                            restructuring of the electricity industry could result in the early retirement
                            of from 9 to 40 percent of the nation’s nuclear power plants because these
                            plants may not be competitive with other sources of electricity. In
                            April 1998, Standard & Poor’s predicted that poor economics would cause
                            the early retirements of six plants by 2001.6 (See table 2.2.) The company
                            also concluded that another 20 units are “at risk” through 2020 for early
                            retirement on the basis of expected poor operating and economic
                            performance over the remainder of the plants’ license. According to the
                            company, in a competitive market, plant owners will attempt to improve
                            profitability; however, the vulnerability of these plants to unscheduled
                            outages may squeeze operating margins and cause the plants to lose their
                            long-term value.



                            6
                             “World Energy Service: U.S. Outlook,” DRI, Standard & Poor’s/DRI (Apr. 1998). Standard &
                            Poor’s/DRI provides historical analysis and forecasts of energy balances for over 60 countries around
                            the world.



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Table 2.2: Nuclear Power Plants
Identified by Standard & Poor’s as   Predicted                                At-risk
Candidates for Early Retirement      Millstone 1,a Conn.                      Beaver Valley 1, Pa.
                                     Millstone 2, Conn.                       Crystal River 3, Fla.
                                     Dresden 2, Ill.                          Duane Arnold, Iowa
                                     Dresden 3, Ill.                          Fermi 2, Mich.
                                     Oyster Creek, N.J.                       Fitzpatrick, N.Y.
                                     River Bend, La.                          Fort Calhoun, Nebr.
                                                                              Ginna, N.Y.
                                                                              Indian Point 3, N.Y.
                                                                              Nine Mile Point 1, N.Y.
                                                                              Palisades, Mich.
                                                                              Perry, Ohio
                                                                              Pilgrim, Mass.
                                                                              Point Beach 1, Wis.
                                                                              Point Beach 2, Wis.
                                                                              Quad Cities 1, Ill.
                                                                              Quad Cities 2, Ill.
                                                                              Robinson 2, S.C.
                                                                              Salem 1, N.J.
                                                                              Salem 2, N.J.
                                                                              Sequoyah 1, Tenn.
                                     a
                                     The plant was retired in 1998.



                                     In commenting on our report, NRC pointed out that one plant that Standard
                                     & Poor’s listed as “at risk” for premature retirement—Pilgrim—is in the
                                     process of being sold. The prospective buyer, NRC added, intends to
                                     operate the plant for its full license term and will consider seeking a
                                     license extension for the plant. This example, NRC said, serves to illustrate
                                     both the speculative and controversial nature of projecting the premature
                                     retirements of nuclear power plants.

                                     Other experts, however, have reached conclusions that are similar to
                                     Standard & Poor’s. For example, in January 1999, Synapse Energy
                                     Consultants, Inc., a firm that often testifies in electricity rate proceedings
                                     conducted by state public utility commissions, concluded in a report that,
                                     depending upon the assumptions used, from 20 to 90 nuclear power plants
                                     may be retired early. The most likely case, according to the authors of the
                                     report, is that 34 plants will be retired early. Nineteen of the 26 plants that




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                       Standard & Poor’s predicts may be retired early are also included in
                       Synapse’s list of 34 plants that it believes may be retired early.

                       Compounding the risk that more nuclear power plants may be retired
                       prematurely is the possibility that the licensees that own these plants may
                       have, so far, under-accumulated funds to decommission these plants. For
                       example, 19 of the 26 plants that may be retired early, according to
                       Standard and Poor’s predictions, are owned, in whole or in part, by 14
                       licensees that have not accumulated sufficient decommissioning funds,
                       according to our analysis. Additional predictions of more early plant
                       retirements have also been made. For example, in December 1997, EIA
                       projected that 24 nuclear plants would retire as early as 10 years before
                       their license expires.7 In 1995, Moody’s concluded that at least 10 nuclear
                       plants may be closed for economic reasons if the generation of electric
                       power is completely deregulated.8 One year later, Moody’s downgraded
                       the bond ratings of 24 electric utilities that operate nuclear plants. Again,
                       in 1997, Moody’s said that the frequency that certain nuclear plants tend to
                       require expensive capital additions to comply with their operating license
                       increases the likelihood of even more early plant retirements.

                       The premature retirement of the Zion-1 and Zion-2 nuclear power plants in
                       January 1998 illustrates the effect of deregulation on power plant
                       economics. The Commonwealth Edison Company determined that the
                       plants could not generate electricity at competitive prices in the
                       deregulated environment. Therefore, the utility decided to retire both
                       plants after about 24 years, or 60 percent, of their licensed operating life.
                       When the plants were permanently shut down, the utility had put aside
                       $362 million, or less than 43 percent of the $834 million estimated to be
                       needed to decommission the two units. According to officials of
                       Commonwealth Edison, however, under Illinois law the utility is
                       authorized and directed to include in the rates that it charges its electricity
                       customers amounts for the necessary and prudent decommissioning costs
                       for these plants.


A Few Licensees Have   In addition to early plant retirements, licensees of nuclear power plants
Declared Bankruptcy    have declared bankruptcy in a few cases. So far, the continuing availability
                       of decommissioning funding has been protected in these cases. For
                       example, the Cajun Electric Cooperative owned 30 percent of the River

                       7
                        See Annual Energy Outlook 1998 With Projections to 2020, (EIA).
                       8
                        Special Comment: “Stranded Cost Will Threaten Credit Quality of U.S. Electrics,” (Moody’s Investors
                       Service).



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                        Bend, Louisiana, plant. The Cooperative went bankrupt in 1994, and a
                        bankruptcy settlement was approved on August 26, 1996. The settlement
                        provided for the transfer of $125 million to an external trust to satisfy
                        Cajun’s share of River Bend’s estimated decommissioning cost of
                        $419 million (in 1996 dollars). But the settlement left the successor to
                        Cajun’s share of the plant open. The court order provided that the
                        bankruptcy trustee and parties to the settlement were to take all necessary
                        and appropriate actions to consummate the settlement by June 1, 1997,
                        including finding a buyer for Cajun’s share of River Bend. On
                        November 28, 1997, NRC’s staff approved the transfer of Cajun’s portion of
                        River Bend’s license to Entergy Gulf States, Inc., which is now the sole
                        owner of this plant. NRC’s staff concluded that Entergy Gulf States was
                        financially qualified to contribute appropriately to the plant’s
                        decommissioning.

                        Another bankruptcy case involved the El Paso Electric Company, which
                        owns 16 percent of the three-unit Palo Verde Nuclear Generating Station in
                        Arizona. The company filed for bankruptcy protection in 1992, primarily
                        because of excess generating capacity and insufficient rates to cover the
                        costs of power. The settlement of the bankruptcy filing became effective in
                        1996, at which time, the company emerged with reduced debt and a
                        stronger financial position. During the bankruptcy proceeding, according
                        to an NRC official, the company continued to make its required
                        decommissioning payments.


                        For our funding analyses, we assumed, among other things, that current
Effects of Cost         estimates of decommissioning costs are accurate. Because actual
Uncertainties on Rate   decommissioning experience is limited, however, actual costs could be
of Fund’s               lower or higher. From 1990 through 1997, cost estimates increased rapidly
                        for both site-specific studies by licensees and calculations using NRC’s
Accumulation            cost-estimating formula. Moreover, uncertainties about the actual scope of
                        decommissioning affects costs. Utilities, for example, sometimes consider
                        the cost to empty a spent fuel storage pool (to permit dismantling a retired
                        plant) as a decommissioning cost. NRC, however, excludes the cost of
                        emptying the storage pool from the scope of its formula for estimating
                        decommissioning costs. The storage of spent fuel in facilities outside of
                        the plant’s storage pool, and the cost of such storage, are addressed in
                        parts of NRC’s regulations that are not directly related to decommissioning.
                        In addition, the eventual resolution of a protracted dispute between NRC
                        and EPA over appropriate radiation standards for decommissioned sites




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                           could affect the scope of decommissioning and, therefore, total
                           decommissioning costs.


Decommissioning Cost       Cost estimates since 1990, developed through both NRC’s formula and
Estimates Are Increasing   licensees’ site-specific cost estimates, show that both estimates have
                           increased. Although NRC has not routinely monitored the amounts of
                           decommissioning funds that its licensees have been accumulating, its 1988
                           regulations required licensees to annually calculate the minimum amount
                           of funds that must be accumulated to pay future decommissioning costs.
                           For each plant using NRC’s mathematical formula, the utility must make an
                           initial calculation in 1986 dollars that is based on the size and type of plant.
                           Then, the utility must escalate the initial calculated value to that of the
                           current year on the basis of prescribed escalation factors. Also, to support
                           proposed charges to electricity customers, plant owners periodically
                           develop detailed estimates of the cost to decommission their specific
                           plants and submit the estimates to their public utility commission
                           regulators. In the absence of significant actual experience, site-specific
                           estimates of decommissioning costs provide the best check on the
                           reasonableness of NRC’s formula for calculating potential decommissioning
                           costs.

                           Since 1990, decommissioning cost estimates prepared on a site-specific
                           basis and calculated using through NRC’s formula have increased
                           substantially. For example, site-specific cost estimates (excluding costs
                           that licensees may incur during decommissioning, such as spent fuel
                           storage costs, that NRC does not consider to be decommissioning costs)
                           have increased, on average, at a rate of about 6.6 percent per year. One
                           reason for this increase is the expansion of the scope of decommissioning.
                           The estimates made through NRC’s formula are now, on the average, about
                           one-third higher than the site-specific estimates for the same plants. The
                           main reason for this condition is that the waste disposal part of NRC’s
                           formula was not designed to reflect licensees’ efforts to reduce the volume
                           of waste from decommissioning in response to increasing prices for
                           disposal that have traditionally been based on waste volume. In
                           December 1998, NRC corrected this weakness, which brought calculations
                           through its formula more in line with licensees’ site-specific cost
                           estimates.


Uncertainty Related to     Largely because DOE is not taking spent fuel from licensees’ nuclear power
Spent Fuel Management      plants, licensees that intend to immediately dismantle their retired plants
Costs                      must store their spent fuel outside of their plants. For the purpose of


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                         estimating and accounting for decommissioning costs, some licensees
                         treat storage costs related to the retirement of their plants as
                         decommissioning costs. The inclusion by licensees of these storage costs
                         in their decommissioning costs is a major reason why licensees’ cost
                         estimates have increased in recent years. A second reason is that licensees
                         may include the cost to dismantle nonradioactive structures, such as
                         administrative buildings, in their estimates of decommissioning costs.

                         In contrast, NRC excludes both spent fuel management costs and
                         non-radioactive-related cleanup costs from its formula for calculating the
                         funds that licensees must accumulate to decommission their nuclear
                         power plants. NRC’s reasons for excluding these types of costs are that it
                         (1) regulates independent spent fuel storage facilities (facilities that are
                         separate from the spent fuel pool, which is an integral part of a nuclear
                         power plant) under regulations that are separate from those applicable to
                         the construction, operation, and decommissioning of nuclear power plants
                         and (2) only regulates the possession, use, and disposal of radioactive
                         materials. Nevertheless, spent fuel management costs have been and will
                         continue to be a real cost for utilities that choose to immediately dismantle
                         their retired plants. For example, in 1995 the licensee for the retired
                         Trojan plant in Oregon estimated that spent fuel management costs to
                         construct, operate, and maintain a dry storage facility at that plant would
                         cost about $102 million (in 1993 dollars).


Uncertainty Related to   Uncertainty over the standards for residual radiation that utilities will have
Standards for Residual   to meet in cleaning up the sites of their retired nuclear power plants
Radiation                affects the accuracy of the current estimates of future decommissioning
                         costs.

                         EPA is responsible for setting acceptable radiation limits outside of the
                         boundaries of nuclear facilities and for developing residual radiation
                         standards to protect the health and safety of the public and to protect the
                         environment. EPA has been responsible since 1970 for establishing
                         radiation standards for all aspects of decommissioning, including
                         acceptable levels of residual contamination. To date, however, EPA has not
                         issued such standards.

                         In the absence of EPA standards, NRC, which is responsible for regulating
                         the level of radiation within plant boundaries, issued, on July 21, 1997, its
                         final radiological standard for license termination. The standard states
                         that:



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“A site will be considered acceptable for unrestricted use if the residual radioactivity that
is distinguishable from background radiation does not exceed 25 [millirem9 ] per year,
including that from groundwater sources of drinking water, and that the residual
radioactivity has been reduced to levels that are as low as reasonably achievable.”


EPA does not agree with NRC’s standard. In fact, the disagreement between
the two agencies has been characterized by both its length and its
acrimony. EPA started to develop residual radiation standards in 1984 but
has not yet finalized these standards. Nevertheless, EPA’s position is that
NRC’s licensees should be required to decontaminate nuclear plant sites to
a residual radioactivity level of 15 millirems per year and to limit the
exposure to an individual from his/her consumption of groundwater to 4
millirems per year. Most recently, EPA’s administrator stated that the
agency would apply the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 to sites that are being
decommissioned if NRC and EPA do not reach an agreement on applicable
standards. Also, in April 1998, one of NRC’s commissioners publicly
commented that the impasse between EPA and NRC over appropriate
radiation protection standards may have to be resolved by the Congress.
In fact, to resolve this disagreement, NRC has sought legislation that would
eliminate the overlap in the standard-setting authority of NRC and EPA.

Currently, NRC’s licensees are using NRC’s regulations and related guidance
on decommissioning the sites of retired nuclear facilities to plan and/or
implement the decommissioning of their nuclear power plants and related
nuclear fuel facilities. If, however, EPA’s residual radiation standards are
ultimately used in lieu of NRC’s standards, licensees may have to perform
additional cleanup when decommissioning their nuclear plant sites. If this
occurred, it would increase decommissioning costs, but by how much is
uncertain. According to both NRC and EPA officials, retroactively applying
more stringent EPA standards to nuclear plant sites that have already been
decommissioned according to NRC’s standards could be very costly.




9
 The level is small when compared to the average level of natural background radiation in the United
States, which is about 300 millirem/year.



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                        Late in 1998, NRC amended its decommissioning regulations in anticipation
                        of the deregulation and restructuring of the electricity industry. The
                        amended regulations do not allow licensees to rely exclusively on their
                        external sinking funds to ensure that funds are available for
                        decommissioning if its regulators no longer guarantee that moneys can be
                        collected from the licensees’ customers through electricity rates. In such a
                        case, NRC now requires a licensee to provide additional financial assurance
                        for the portion of the licensee’s estimated decommissioning cost that
                        would not be guaranteed. There is, however, uncertainty over the
                        availability and affordability of some of these additional options for
                        providing financial assurance. NRC will also now require licensees to
                        periodically report financial information on decommissioning; however,
                        NRC did not specify how it would use this information.



                        Effective November 23, 1998, NRC amended its decommissioning financial
NRC Amends              assurance regulations out of concern that the deregulation and
Decommissioning         restructuring of the electricity industry could reduce confidence that the
Financial Assurance     owners of nuclear power plants will be able to accumulate sufficient funds
                        to decommission their plants. The new regulations provide that, to the
Regulations             extent that the collection of estimated decommissioning costs from
                        customers is no longer guaranteed, a licensee may not exclusively rely on
                        external sinking funds to provide adequate financial assurance of
                        decommissioning. For any portions of decommissioning costs for which
                        the collection of funds is not guaranteed, licensees will have to provide
                        one or more additional types of financial assurance.


Additional Methods of   Electric utilities have almost exclusively relied on the collection of fees
Financial Assurance     from their electricity customers, deposited into externally managed
                        sinking funds, to provide decommissioning financial assurance. In
                        anticipation of electricity deregulation initiatives, NRC, in September 1998,
                        amended its regulations (effective in Nov. 1998) to address situations in
                        which a licensee’s continued collection of decommissioning fees from its
                        electricity customers may no longer be guaranteed by the economic
                        regulation of electricity rates. To the extent that the collection of
                        decommissioning funds is no longer guaranteed, a licensee may provide
                        up-front financial assurance. The options available to licensees include the
                        prepayment of the estimated decommissioning cost or purchase of surety
                        bonds or insurance to cover decommissioning costs. The assurances may
                        also be in the form of guarantees of payments by the licensees or, as
                        appropriate, their parent company, provided that such guarantees are



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accompanied by the passing of specified financial tests. Both NRC and the
nuclear industry have expressed concern about whether these up-front
payment methods would be affordable for licensees. However, in
commenting on our draft report, NRC stated that the terms for the recent
sales of the Three Mile Island Unit 1, Pilgrim, and Seabrook (partial sale)
nuclear power plants have included the prepayment of all estimated
decommissioning costs. NRC added that it believes that the prepayment
option will likely be the preferred means of assuring decommissioning
funds in future sales transactions.

When NRC published its proposed amended regulations for public
comment in September 1997, it expressed concern that surety instruments
and insurance may not be available to some nuclear power plant licensees;
therefore, NRC specifically asked for comments on this issue. In response,
some commenters said they were concerned about the feasibility of the
up-front methods (prepayment, surety instruments, and insurance) for
assuring decommissioning funding. For example, the Edison Electric
Institute, which represents electric utilities, stated that it could be difficult,
if not impossible, for licensees to provide such assurances. Also, seven
licensees jointly stated that these funding methods would bar prospective
new owners from purchasing interests in nuclear power plants. The seven
utilities added that the (then) proposed regulations could impose a
financial burden that would likely prevent the sale of a nuclear plant.
Finally, the utilities stated that (1) it is uncertain if an insurance product or
a surety bond could be procured to secure a nonelectric utility’s share of
decommissioning costs, and (2) the cost of procuring such a bond could
potentially exceed the cost of prepaying decommissioning expenses.

The difficulty in obtaining a surety bond or insurance product is illustrated
by the experience of one of NRC’s licensees. Great Bay Power Corporation,
which owned 12 percent of the Seabrook nuclear power plant in New
Hampshire, was formed out of bankruptcy proceedings involving four
former part-owners of the Seabrook plant. NRC concluded that Great Bay,
as a part owner of the plant, did not appear to meet the definition of an
“electric utility” because its ability to collect funds for decommissioning
from its electricity customers was not guaranteed by the traditional
regulation of electricity prices.1 Therefore, according to NRC’s regulation,
Great Bay could not rely exclusively on external sinking funds to provide
decommissioning financial assurance. Although NRC gave Great Bay until
July 1998 to obtain a surety bond or other financial guarantee to fulfill its

1
 According to Great Bay, it has always believed and continues to believe that it is an “electric utility”
under the definition contained in NRC’s decommissioning regulations.



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                             decommissioning obligations, the company was unable to obtain such a
                             guarantee. Out of concern for the possible bankruptcy of Great Bay if NRC
                             were to mandate that the company prepay its decommissioning obligation,
                             the state of New Hampshire, in June 1998, passed legislation that would
                             make the co-owners of Seabrook proportionately responsible for making
                             Great Bay’s decommissioning payments if the company defaults on this
                             obligation. According to NRC, this approach qualifies as an acceptable
                             “other method” of providing decommissioning financial assurance.

                             In addition to the traditional financial assurance methods discussed above,
                             NRC adopted other methods that licensees may use to provide
                             decommissioning financial assurance.

                         •   Other guarantee methods, including parent company guarantees and
                             self-guarantees coupled with financial tests. For parent company
                             guarantees, a licensee’s parent company must, among other things, have
                             net working capital, tangible net worth, and assets located in the United
                             States worth at least six times the amount of decommissioning funds being
                             assured by the parent company for all of its nuclear power plants. Tangible
                             net worth must exclude the net book value of the nuclear unit(s). For
                             self-guarantees, tangible net worth and assets located in the United States
                             must be 10 times the amount of the decommissioning funds being assured.
                         •   Contractual obligations of a licensee’s customers to purchase enough
                             electricity to provide the licensee’s total share of uncollected funds for
                             decommissioning.
                         •   Any other method, or combination of methods, that provides, as
                             determined by NRC upon its evaluation of the specific circumstances,
                             assurance of decommissioning funding equivalent to that provided by the
                             other acceptable methods.

                             These methods are similar to financial assurance methods that NRC
                             permitted in its 1988 decommissioning regulations for other types of
                             licensees, such as operators of nuclear fuel facilities.


NRC Adopts Financial         Prior to November 1998, NRC had reserved the right to inspect licensees’
Reporting Requirements       decommissioning fund arrangements and status. Under the 1998
                             amendments, NRC also explicitly reserved the right to take additional
                             action, either independently or in cooperation with economic regulators.
                             These actions could include modifying a licensee’s schedule for
                             accumulating additional funds. In addition, NRC’s 1998 decommissioning
                             regulations required licensees, beginning by the end of March 1999, to



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report to NRC, every 2 years, certain financial information that would
ensure that licensees are collecting their required decommissioning funds.

Information that must be provided in licensees’ financial reports includes
(1) the amount of decommissioning funds estimated to be required
according to NRC’s formula; (2) the funds accumulated as of the end of the
year prior to the report date; (3) the annual amounts remaining to be
collected; (4) the assumptions used to escalate decommissioning costs,
project rates of earnings on investments of external sinking funds, and
discount funding projections; and (5) modifications to external sinking
fund agreements. Utility representatives have not opposed financial
reporting. For example, the Edison Electric Institute told NRC that periodic
reporting on the status of external sinking funds for decommissioning is
appropriate. In addition, in commenting on the proposed regulations, a
group of seven utilities stated that a comprehensive reporting requirement
is long overdue and is particularly appropriate, given that economic
regulators have not been actively monitoring the status of licensees’
external sinking funds on an ongoing basis.

When NRC published its final regulations, it stated that, after licensees have
submitted their initial reports by the end of March 1999, it would review
the reports and consider whether to issue additional guidance on the
format and content for subsequent licensee reports. Also, in June 1997,
when NRC’s commissioners approved the proposed regulations for public
comment, the commissioners stated that after NRC’s staff has reviewed
licensees’ initial reports, the staff should advise the commissioners on the
need for further rulemaking. When NRC issued the 1998 amendments to its
decommissioning regulations, however, it did not explain when and how it
intends to act on the financial information reported by individual licensees
if that information does not clearly demonstrate that an individual licensee
is accumulating decommissioning funds at a satisfactory rate.

The lack of any criteria for acting on licensees’ decommissioning financial
reports contrasts with the agency’s ongoing efforts to establish a more
objective, understandable, and predictable approach to safety oversight of
nuclear power plants. According to NRC, an independent regulatory
oversight process is based on unbiased assessments of licensees’
performances; logical, coherent, and predictable actions by NRC; clear ties
to NRC’s regulations and goals; and opportunities for public awareness of
process results. The new safety oversight process should, according to
NRC,




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                      •   allow for the integration of various information sources relevant to a
                          licensee’s safety performance,
                      •   make objective conclusions regarding the significance of the integrated
                          performance information,
                      •   take actions based on these conclusions in a predictable manner, and
                      •   effectively communicate these results to the licensees and to the public.

                          Therefore, NRC is in the process of establishing a new oversight approach
                          in which it will, among other things, use indicators of nuclear power
                          plants’ performance to establish thresholds for clearly identifying
                          acceptable levels of performance. In conjunction with this, NRC plans to
                          establish criteria for identifying and responding to unacceptable licensee
                          performance.

                          A similar approach in the area of providing adequate financial assurances
                          for decommissioning would appear to offer the same benefits of
                          objectivity and predictability that NRC seeks in its safety oversight of
                          nuclear power plants.


                          NRC’s  new financial assurance regulations do not address the option of
NRC Did Not Address       accelerating the rate at which licensees must accumulate
Early Plant               decommissioning funds on the basis of the actual longevity of plants. NRC
Retirements or            rejected this option because it believes that some plants will probably
                          continue operating for their licensed operating period of up to 40 years
Bankruptcy in Its         and, with license extensions, beyond 40 years. Therefore, NRC said,
Amended Regulations       requiring all licensees to accelerate their accumulation of
                          decommissioning funds because of some premature plant retirements
                          would be arbitrary and lead to widely varying effects on licensees. Thus,
                          NRC intends to continue its practice of addressing early plant retirements
                          on a case-by-case basis. NRC’s position, as expressed in the supplementary
                          information accompanying the publication of its amended
                          decommissioning regulations, is that accelerated funding is inequitable.
                          NRC believes that accelerated funding places too much of the financial
                          burden on current utility ratepayers and a lesser burden on ratepayers in
                          the later years of a nuclear power plant’s operation. However, when
                          licensees have retired plants before the plants’ operating license expired,
                          the licensees’ electricity customers have had to pay decommissioning
                          costs for plants from which they no longer receive electricity. The Trojan,
                          Maine Yankee, and Zion cases, discussed earlier, demonstrate this fact.
                          During the years that the Trojan and Zion plants operated, the respective
                          licensees’ customers paid for less than half of the costs to decommission



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the plants. The customers of the Maine Yankee plant paid for 53 percent of
the decommissioning cost. Now, although these retired plants no longer
generate electricity, the current and future customers of the licensees will
pay the remaining decommissioning costs without receiving comparable
benefits from the plants.

NRC elaborated on its reasons for opposing accelerated decommissioning
funding in its comments on our draft report. NRC said that requiring
accelerated funding for decommissioning would cause substantial cost
increases to be incurred by either licensees’ stockholders or their
ratepayers. Also, there would be a myriad of difficulties in determining the
appropriate rate of acceleration; for example, at what rate should the
collection of funds be accelerated? These issues, NRC added, were
considered in its evaluation of accelerated funding as part of its process of
amending its decommissioning regulations. NRC concluded that
accelerated funding does not provide sufficiently increased
decommissioning funding assurance commensurate with its potential cost
impacts.

State legislatures, state public utility commissions, and FERC appear to be
addressing assurances for decommissioning funding in their electricity
deregulation initiatives. Utility officials in Illinois, New Hampshire, and
Oregon, for example, pointed out that laws in those states provide for the
collection of necessary and prudent funds for decommissioning nuclear
power plants regardless of whether the plants operate until their current
licenses expire or are retired prematurely. Thus, licensees have continued
collecting from electricity customers the fees earmarked for
decommissioning three prematurely retired plants in Illinois and one in
Oregon. Similar examples are occurring in California and Massachusetts.

With respect to the bankruptcy of licensees, New York’s Public Service
Commission, in commenting on NRC’s proposed amendments to its
decommissioning regulations, urged NRC and states to consider proposing
legislation that would make decommissioning liabilities a first priority in
the event of the bankruptcy of a private nuclear facility owner. Current
bankruptcy law does not make the subject of nuclear decommissioning
costs a priority, but NRC has said it does enter bankruptcy proceedings to
protect the integrity of decommissioning funding. Moreover, at NRC’s
request, the Administration included a provision in its 1999 electricity
deregulation bill that would give priority to funding decommissioning of
nuclear power plants in bankruptcy proceedings involving licensees.




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                     Several factors have come together at this time that make it imperative for
Conclusions          NRC to ensure that its licensees accumulate sufficient funds to
                     decommission their plants regardless of when they are permanently shut
                     down. Specifically, some licensees have not set aside sufficient amounts of
                     funds for decommissioning, and there is uncertainty over the availability
                     and affordability of the up-front payment methods of providing financial
                     assurance. With electricity deregulation emerging, the possibility exists
                     that a licensee may, in the future, prematurely retire a plant and be faced
                     with paying the remaining decommissioning funds from its own resources.
                     The ability of the licensee to do so might then depend upon its overall
                     financial condition. Thus, self-guarantees that decommissioning funds will
                     be available are only as good as the financial condition of the licensee.
                     (We recognize that to date, early plant retirements have not resulted in a
                     shortfall in decommissioning funds because regulators have allowed
                     licensees to continue collecting funds after plants have been retired.)

                     To NRC’s credit, it recognized its need to increase its oversight of
                     decommissioning financial assurance when it modified its
                     decommissioning regulations by requiring licensees to provide financial
                     reports every 2 years. NRC did not, however, explain what it intends to do
                     with these reports. For example, NRC did not establish the thresholds for
                     clearly identifying acceptable levels of financial assurances or establish
                     criteria for identifying and responding to unacceptable levels of
                     assurances. In the absence of such explanations, there is no logical,
                     coherent, and predictable oversight of licensees’ financial assurance for
                     decommissioning their nuclear power plants.


                     After NRC reviews licensees’ initial reports on decommissioning financial
Recommendation       assurances, we recommend that the Chairman, NRC, provide licensees and
                     the interested public with information on the (1) objectives, scope, and
                     methodologies of NRC’s reviews of the reports; (2) thresholds for
                     identifying, on the basis of these reviews, acceptable, questionable, and
                     unacceptable indications of financial assurances; and (3) criteria for the
                     actions to be taken on the results of these reviews.


                     We provided NRC with a draft of our report for review and comment. NRC
Agency Comments      said that our recommendation merits serious consideration with respect to
and Our Evaluation   its future uses of licensees’ biennial reports on decommissioning funds.
                     NRC added, however, that it is premature to expend significant staff
                     resources on establishing thresholds for identifying problems with



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licensees’ financial assurances for decommissioning until NRC knows, on
the basis of its reviews of the initial status reports from licensees, that
such problems exist. Thus, NRC differs with us not on the substance of our
recommendation but on the timing of its implementation. NRC’s position is
that it does not need to establish performance thresholds unless actual
performance problems exist. In our opinion, a proactive, rather than
reactive, approach would more appropriately provide licensees and the
public with a more complete understanding of NRC’s expectations in the
area of financial assurance for decommissioning.

NRC  also stated that our report does not adequately represent the complex
changes that are occurring in the electric utility industry and the
interactions among NRC, state public utility commissions and FERC, and the
nuclear power industry. According to NRC, a host of complex, interrelated
variables must be analyzed before any threshold for determining funding
shortfalls can be established. These variables include, NRC added, (1) the
actual rates that licensees are accumulating for decommissioning funds,
(2) the stated intents of rate regulators (such as state public utility
commissions) on allowing the ultimate collection of decommissioning
funds, (3) the provisions for decommissioning funding in state
deregulation initiatives, and (4) for licensees no longer subject to the
traditional regulation of their electricity rates, the extent to which the
future collection of decommissioning funds may be based on
non-bypassable wire charges. Where appropriate, we have either added
NRC’s comments to, or revised the text of, our report. The full text of NRC’s
written comments and our response appear in appendix II.




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Appendix I

Scope, Methodology, and Results of
Analyses of Licensees’ Decommissioning
Funds
                           This appendix describes the scope, methodology, and results of our
                           analyses of the following two questions:

                       •   When such economic factors as inflation, interest, and others are taken
                           into account, have licensees accumulated decommissioning funds at a rate
                           consistent with the expended portions of the licensed operating life of
                           their nuclear power plants?
                       •   Are licensees currently adding moneys to their decommissioning funds at
                           the rates necessary to have sufficient funds available to decommission
                           their plants when the plants are retired?

                           The answer to the first question provides a backward look at the funding
                           issue; in contrast, the answer to the second question provides a look
                           forward. Together, the answers to these two questions answer the more
                           general question of whether or not the Nuclear Regulatory Commission’s
                           (NRC) licensees are accumulating decommissioning funds at growth rates
                           that, if maintained, should provide sufficient funds to decommission their
                           nuclear power plants when the plants are retired.


                           For each licensee owning one or more nuclear power plants, we
Have Licensees             calculated the respective amount of funds that the licensee would be
Accumulated                expected to have accumulated over the expended portion of each plant’s
Decommissioning            operating life. We then compared the actual funds accumulated by the
                           licensee with the sum of these expected amounts. In a hypothetical case, a
Funds at Rates             licensee might have begun operating a plant on December 31, 1974, with a
Consistent With the        40-year operating license expiring at the end of 2014. By the end of
                           1997—an operating period of 23 years—the licensee would be expected to
Expended Portions of       have collected 23/40ths of the present value of the estimated cost to
the Licensed               decommission the plant upon its retirement. The balance of the
Operating Life of          decommissioning funds would be collected over the remaining 17 years of
                           the plant’s operation.1
Their Plants?
                           In this hypothetical example, the amount of moneys collected from
                           ratepayers each year is typically invested to earn income until the fund is
                           needed to pay decommissioning costs. This rate of interest, or the
                           discount rate, is the assumed annual-average after-tax rate of return on the
                           fund’s financial assets. In effect, each annual contribution to the
                           decommissioning fund would ideally be 1/40th of that year’s present value
                           of the estimated future decommissioning cost (in 2014 current dollars)

                           1
                            How a licensee would be expected to accumulate such moneys in future years constitutes our second
                           analysis, which is discussed later in this appendix.



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Funds




because that sum would be invested and would grow over the remaining
life of the plant to equal 1/40th of that future cost. This future cost is
estimated by “inflating” an initial decommissioning cost estimate by an
assumed annual-average cost-escalation factor from the year of the cost
estimate to the final year of the plant’s operating license.

It was not practicable for us to obtain plant-specific information on the
status of decommissioning funds for use in our analysis. Plant-specific
information was not readily available because NRC has not systematically
collected this type of information. Also, licensees’ published financial
statements do not always contain plant-specific financial information on
decommissioning, and time and resource constraints precluded us from
collecting this information from each licensee.

We were, however, able to collect information on the status of
decommissioning funds at the corporate level. This information enabled us
to analyze the status of each licensee’s efforts to accumulate funds to
decommission all of the nuclear power plants for which it had an
ownership interest. Specifically, the financial firm of Phoenix, Duff &
Phelps had compiled, as of the end of 1997, information on the status of
decommissioning funds on a company-by-company basis for 76 licensees
(or parent companies of licensees) owning all or parts of 118 operating
and retired plants.2 For each licensee, the compilation showed the balance
of decommissioning funds for all of its plants on December 31, 1997, and
the total payments into the funds for 1997.

Because many nuclear power plants are owned by more than one licensee,
we obtained information from NRC on the ownership of each plant and
used this information to apportion the estimated cost to decommission a
plant among the plant’s owners. In addition, licensees’ decommissioning
funds may contain funds to be used for managing spent fuel during the
dismantling of a plant and/or for nonradiological cleanup activities that are
not regulated by NRC. Therefore, it was necessary for us to adjust fund
balances and payments in 1997 into the fund to reflect the inclusion of
funds for cost activities that NRC does not include within the scope of
decommissioning.

In summary, for our first analysis, to determine if licensees have
accumulated decommissioning funds at rates consistent with the



2
 From discussions with officials of Phoenix, Duff & Phelps and subsequent selective verification, we
confirmed that the information on each company was derived from published financial statements.



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                                  Scope, Methodology, and Results of
                                  Analyses of Licensees’ Decommissioning
                                  Funds




                                  expended portions of the licensed operating life of these plants, we
                                  constructed a spreadsheet simulation model as follows for each licensee:

                              •   We listed the operating license issue and expiration year, and its
                                  ownership share, for each of the licensee’s nuclear power plants
                                  (reactors).
                              •   Using a recent estimate of the cost to decommission each plant, the year
                                  of this estimate, and a selected cost-escalation rate, we escalated this
                                  initial cost to the year that the plant would be retired (usually at the
                                  expiration of its operating license).
                              •   At the end of the current year (1997), for each plant, we calculated the
                                  present value of its future decommissioning cost and multiplied this result
                                  by the fraction of the license period already used up. This calculation
                                  represents the level of funds (for the plant) that ideally should have been
                                  accumulated by the end of 1997 (the expected amount). (As a result of
                                  continuing this process in future years, the fund balance would equal the
                                  estimated decommissioning cost when the plant is retired.)
                              •   For each licensee, we summed these expected fund amounts (as of the
                                  end of 1997) for each of its plants and compared this sum with the total
                                  amount of the licensee’s decommissioning funds at that point in time. If
                                  the funds actually accumulated are less than the expected amount, then
                                  the licensee has been accumulating funds at a rate insufficient to
                                  decommission its plants. Fund balances that exceeded the expected levels
                                  had the opposite effect.


Key Factors in the Analysis       In our first spreadsheet simulation model, our analysis uses five key
                                  factors, or assumptions, whose assigned values can affect the results.
                                  These factors are (1) the initial estimated cost to decommission a nuclear
                                  power plant, (2) the cost-escalation rate, (3) the after-tax rate of return on
                                  the fund’s assets (discount rate), (4) the expected operating life of each
                                  plant, and (5) the portion of a licensee’s decommissioning fund that is
                                  available to pay decommissioning costs as defined in NRC’s regulations. An
                                  analysis of possible conditions tens of years into the future is inherently
                                  uncertain. Therefore, we assigned likely future values to the five key
                                  factors (assumptions) to develop a baseline (most likely) scenario.3 Then,
                                  to reflect the range of unfavorable and favorable conditions that licensees


                                  3
                                   We also performed simulation sensitivity analysis on these five factors using this baseline scenario.
                                  Changing the values of each of these factors, one at a time, changes the results of the analysis. For
                                  example, the cost-escalation rate was increased and decreased by 1 percentage point, the after-tax rate
                                  of return was increased and decreased by 1 percentage point, the life of plants was decreased and
                                  increased by 2 years, and so on. These sensitivity results yielded values that we had expected, but
                                  these results are not presented in this report.



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                               Funds




                               might face, we bounded the baseline values with pessimistic and
                               optimistic values for each of the five factors. (The specific values we used
                               for our baseline, pessimistic, and optimistic assumptions are discussed
                               below.) Our pessimistic scenario reflects these pessimistic values, such as
                               a low after-tax rate of return and a high rate of cost escalation, and would
                               negatively affect the accumulation and measured sufficiency of
                               decommissioning funds. Our optimistic scenario, reflecting optimistic
                               values, would have the opposite effect. Because all of the assumptions are
                               pessimistic for the pessimistic scenario and optimistic for the optimistic
                               scenario, our model’s results for each of these two scenarios can be
                               considered as extreme in both the pessimistic and optimistic directions,
                               respectively.

Initial Decommissioning Cost   In our baseline and optimistic scenarios, we used, where available,
Estimates                      licensees’ most recent site-specific estimates of the costs to decommission
                               each of their nuclear power plants. We used the site-specific estimates for
                               91 of the 118 plants that were prepared for the licensees by TLG Services,
                               Inc.. According to senior officials of this firm, these cost estimates
                               typically include the costs that NRC does not include within the scope of
                               decommissioning. These types of costs include costs to manage spent fuel
                               at retired plants and the costs to dismantle structures that are not
                               contaminated with radioactivity. At our request, TLG Services, Inc.,
                               separated out, where possible, these two portions of the cost estimate for
                               each plant. We used only the NRC-qualified portions of the site-specific cost
                               estimates for these 91 plants. Also, using TLG Services’ cost estimates
                               across all 91 plants and all years for which the firm made cost estimates
                               for these plants, we estimated for an average plant, the percentages of the
                               total decommissioning cost estimate represented by (1) decommissioning
                               costs, as defined by NRC; (2) spent fuel management costs; and (3) the
                               costs to dismantle nonradioactive structures and restore the site.
                               NRC-qualified decommissioning costs represented about 82 percent of TLG
                               Services’ total site-specific decommissioning cost estimates. Spent fuel
                               management costs were about 5 percent, and non-radiation-related costs
                               about 13 percent of these total cost estimates. However, the officials of
                               TLG Services said that these cost data and, therefore, our percentage
                               estimates from these data should be considered as approximations.

                               For each of the remaining 27 plants, we calculated, using NRC’s generic
                               cost-escalation formula, the estimated decommissioning cost (in
                               1997) that determines the minimum level of funds that NRC requires the
                               plant’s licensee to have accumulated by the time the plant’s license
                               expires. NRC’s formula overstated low-level waste disposal costs, but NRC



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                       recently corrected this problem for 1998. Therefore, we also used NRC’s
                       recent waste burial correction for 1998 in calculating the estimated
                       decommissioning cost for each of the 27 plants in 1997. For both the
                       site-specific and generic-formula procedures, the costs are estimates of
                       what it would cost to decommission a plant in the year that the estimate
                       was prepared. Thus, these estimates represent “initial” decommissioning
                       cost estimates that we escalated to the years that the plants’ licenses
                       expire.

                       In our pessimistic scenario, we used NRC’s generic cost-escalation formula
                       to calculate, for each of the 118 plants, the decommissioning cost
                       estimates in 1997 and then escalated these cost estimates to the year of the
                       license’s expiration for each plant. (Here, we did not use NRC’s waste burial
                       correction for 1998 for these 1997 estimates.) We selected this approach
                       because before NRC corrected the weakness in its formula for this
                       calculation, calculations that were used in the formula generally produced
                       results that were, on average, about one-third higher than TLG Services,
                       Inc.’s, site-specific cost estimates for the same year.

Annual Average         Our analysis required that we estimate the costs to decommission nuclear
Cost-Escalation Rate   power plants at the end of their license expiration year. Therefore, we
                       escalated the “initial” cost estimates from their values when they were
                       prepared to forecast what the current-dollar cost might be at the end of
                       each plant’s life span. (For all plants that are already retired but not yet
                       decommissioned, the “future” decommissioning costs are for the current
                       year [1997].)

                       Our estimate of an annual average cost-escalation rate reflects two
                       conditions: price inflation and changes in the scope and/or technology of
                       decommissioning. The effect of price inflation on increasing future
                       current-dollar costs is self-evident. Changes in the scope and/or
                       technology of decommissioning could either increase or decrease future
                       decommissioning costs. For example, future costs will decrease if more
                       efficient technologies are used in the decommissioning process but will
                       increase if experience shows that more activities must be performed.

                       In the site-specific cost information for the 91 nuclear power plants that
                       TLG Services, Inc., provided us with, the company had prepared more than
                       one site-specific cost estimate for 43 plants. Therefore, for each of the 43
                       plants, we calculated the annual average cost-escalation rate from the year
                       of the earliest cost estimate to the year of the most recent cost estimate.
                       We used only the costs identified by TLG Services as being within the



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                           scope of NRC’s decommissioning regulations. We then calculated the
                           simple average of the 43 annual-average cost (estimation) increases. The
                           calculated average was 6.6 percent.

                           For our annual-average cost-escalation rate assumption, we used the
                           following methodology to estimate an upper-bound, middle, and
                           lower-bound rate for the pessimistic, baseline (most likely), and optimistic
                           scenarios, respectively. For the 1990 through 1997 period of the
                           site-specific estimates, we calculated a broad-based measure of inflation
                           during the period using the Gross Domestic Product (GDP) Implicit Price
                           Deflator data contained in the February 1998 Economic Report of the
                           President. Inflation over this period was at an annual-average rate of about
                           2.5 percent. Thus, over the period, TLG Services’ cost estimates escalated,
                           on average, at a rate about 4 percentage points (6.6 percent minus
                           2.5 percent) above the rate of inflation. By averaging forecast data from
                           Standard & Poor’s/DRI and WEFA Group for the 1997 through 2018 period,
                           we estimated that the GDP price deflator would grow over this period (the
                           approximate average life expectancy of a nuclear plant) at an
                           annual-average rate of 2.5 percent.

                           We assumed that this historical 4-percentage-point margin in the rate of
                           increase in estimated decommissioning costs above the forecast rate of
                           inflation would represent our worst case in cost escalation. This is
                           because many experts believe that increased decommissioning experience
                           will help to reduce substantially the future growth in decommissioning
                           costs. Therefore, for our pessimistic scenario, we assumed a
                           cost-escalation rate of 6.5 percent—the 2.5-percent forecast inflation rate
                           plus the full 4-percent margin. For the baseline scenario, we assumed a
                           mid-point rate and reduced this margin to 2.5 percent, for a 5-percent
                           annual average cost-escalation rate. For the optimistic scenario, we
                           assumed a 1-percent margin, for a 3.5-percent annual average
                           cost-escalation rate. For our optimistic case, we believe that this
                           3.5-percent rate-assumption represents a reasonable lower bound because
                           decommissioning costs include a large portion of services, and services
                           generally have higher inflation rates than those of the GDP deflator.

After-Tax Rate of Return   Traditionally, regulated utilities were required to invest their funds
(Discount Rate)            conservatively in federal, state, and local securities. In recent years,
                           however, utilities have been permitted to invest some of their funds in
                           higher-risk, but potentially more profitable, financial instruments. From a
                           review of eight licensees’ recent financial statements, we determined that
                           the after-tax rate of earnings from investments of decommissioning funds



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                                 varied from 5.5 to 7.3 percent. About 6 percent or slightly above was
                                 typical. Therefore, we assumed an after-tax rate of return on fund assets of
                                 6.25 percent for our baseline scenario and rates of 5.5 and 7 percent,
                                 respectively, for our pessimistic and optimistic scenarios. In the baseline,
                                 the licensees’ effective (with respect to their own decommissioning costs)
                                 real after-tax rate of return is, therefore, 1.25 percent (6.25 percent minus a
                                 5.0-percent cost-escalation rate) and in the optimistic scenario, the real
                                 rate of return is 3.5 percent. In the pessimistic scenario, this real rate is
                                 negative, (–1 percent).4 For a given plant’s license expiration year, the
                                 larger the real after-tax rate of return, the better will be our measures of
                                 funding sufficiency for the licensee of this plant.

Nuclear Plant’s Operating Life   Various experts believe that some nuclear power plants will not operate
                                 for the full length of their operating licenses because of, for example, the
                                 expected introduction of competition into the electricity markets.
                                 Conversely, two licensees have filed applications with NRC to extend the
                                 operating life of five plants, and other licensees may also seek license
                                 extensions. Because of this uncertainty, we included in our analysis the
                                 ability to reduce (or increase) each plant’s life. A decrease in the expected
                                 life of a plant would require the licensee to increase the rate that it
                                 accumulated funds over the shortened life of the plant, and, conversely, an
                                 increase in the operating life would reduce the amount of funds needed to
                                 be put aside each year.5

                                 Our baseline scenario assumes that all plants operate for their licensed
                                 periods except for six plants that Standard & Poor’s/DRI6 projects will be
                                 retired early.7 For our pessimistic scenario, we assume that these six
                                 plants plus each of 20 other plants characterized by Standard & Poor’s/DRI
                                 as “at risk” of early retirement will permanently shut down in 2002.8 For
                                 our optimistic scenario, we assume that each plant will operate for its



                                 4
                                  A negative real rate means that a licensee’s plant decommissioning costs will increase faster than the
                                 licensee’s after-tax fund earnings.
                                 5
                                  Strictly speaking, a decrease in the expected life of a plant would increase the present value of that
                                 plant’s future decommissioning cost only when the licensee’s after-tax real rate of return is positive. If
                                 it is negative, as in our pessimistic scenario, this total present-value cost is actually decreased when
                                 the expected license expiration year is made earlier. However, even with this lower present-value cost,
                                 that cost must be paid for over fewer years. Thus, the present-value cost per year would still be higher
                                 over these fewer years.
                                 6
                                  World Energy Service: U.S. Outlook, Standard & Poor’s/DRI (Apr. 1998), p. 25, tables 5 and 6.
                                 7
                                  One of the six plants—Millstone 1 in Connecticut—was retired in 1998.
                                 8
                                  These extra 20 “at-risk” plants are listed in chapter 2 (table 2.2).



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                                 licensed operating life. (We implicitly assume that any increases in a
                                 plants’s life will be offset by decreases in the life of other plants.)

Portion of Funds Available for   As discussed above, licensees’ decommissioning costs can encompass not
NRC-Defined Costs                only costs that are within the scope of NRC’s definition of decommissioning
                                 but also spent-fuel management costs and nonradiological costs.
                                 Licensees, however, may accumulate funds for all of these types of costs
                                 in their decommissioning funds because, from the licensees’ point of view,
                                 all of these types of costs may be essential to decommissioning their
                                 plants. Our analysis included only those costs that are within the scope of
                                 decommissioning as defined by NRC. Therefore, in our three scenarios, we
                                 varied the percentage of each licensee’s decommissioning fund that would
                                 be available to pay for NRC-defined decommissioning costs.

                                 For our optimistic scenario, we assumed that all of each licensee’s
                                 decommissioning fund is available to pay NRC-defined decommissioning
                                 costs. The expenditures for spent-fuel management and other
                                 nonradiological decommissioning costs must therefore come from other
                                 sources. For our baseline scenario, we assumed that all of the licensee’s
                                 decommissioning fund would be used to pay for decommissioning costs as
                                 defined by NRC and for nonradiation costs. As discussed earlier, these
                                 types of costs represent 82 and 13 percent, respectively, of the total
                                 estimated cost to decommission an average plant. We assumed that
                                 spent-fuel management costs, which make up the remaining 5 percent of
                                 the average plant’s decommissioning cost, would be paid from some other
                                 source of funds. Under these assumptions, 86 percent (82 percent divided
                                 by 95 percent) of the decommissioning fund would be used to pay
                                 decommissioning costs as defined by NRC and the remaining 14 percent
                                 (13 percent divided by 95 percent) of the fund would be used for
                                 non-radiation-related costs.

                                 For our pessimistic scenario, we assumed that each licensee would pay for
                                 all three of these types of costs from its decommissioning fund. Thus, we
                                 assumed that the percentage of a licensee’s fund available to pay for
                                 NRC-definition costs would equal the percentage of NRC-definition costs
                                 that we estimated for total decommissioning costs, or about 82 percent. To
                                 compute each of our above estimated percentages, we used the
                                 decommissioning cost data derived from TLG Services’ breakdown of
                                 site-specific cost estimates into the NRC-related, spent fuel management,
                                 and nonradiological portions. Finally, for 15 of the 76 licensees, the
                                 information we obtained from Phoenix Duff & Phelps disclosed that the
                                 balances in the licensees’ decommissioning funds at the end of 1997



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                        included amounts actually held in internal reserve accounts rather than in
                        externally managed funds restricted for eventual use in decommissioning
                        their plants. For our analysis, we included these internal reserves in our
                        totals for the decommissioning funds for each of these licensees.


Fund Balance Adequacy   Table I.1 shows the results of our first spreadsheet analysis of each of the
Analysis: Results       76 licensee’s decommissioning fund balances as of the end of 1997. The
                        table shows whether these fund balances are more or less than the
                        amounts that the licensees would have been expected to accumulate by
                        then—namely, for each plant, the percentage of life used multiplied by the
                        present value of the plant’s future decommissioning cost. The table shows,
                        for our three scenarios, the percentage that each licensee is above or
                        below its expected fund level. As the table shows, there is a wide range of
                        results for each individual licensee among the baseline, pessimistic, and
                        optimistic scenarios and among all licensees within each scenario. The
                        results for the baseline scenario should be viewed as the most likely
                        outcomes, and the results in the pessimistic and optimistic scenarios
                        should be viewed as lower and upper bounds, respectively. Not all of the
                        five key factors would likely be simultaneously pessimistic, and not all
                        likely simultaneously optimistic. Therefore, the most likely results will lie
                        much closer to our baseline results than to those of either of our two
                        extreme scenarios.

                        Given the inherent uncertainty embodied in this analysis and the various
                        assumptions employed, the results are best used as a general guide to the
                        relative positions of the 76 licensees in accumulating decommissioning
                        fund balances by December 31, 1997. In the baseline scenario, 36 of the 76
                        licensees had not accumulated funds at a rate that is sufficient for eventual
                        decommissioning. In addition, in table I.1, the eight licensees showing
                        available fund balances at less than their expected levels even under the
                        optimistic scenario are a cause for concern because future conditions will
                        likely be worse than those assumed in the optimistic scenario. Conversely,
                        the four licensees showing fund balances above their expected levels, even
                        in the pessimistic scenario, suggest that these licensees may be able to
                        reduce their funding in the future because conditions are likely to be
                        better than those assumed in the pessimistic scenario.

                        For all 76 licensees combined, licensees have accumulated, on average,
                        only 3 percent less than their expected amounts in our baseline (most
                        likely) scenario. The present value of the total future decommissioning
                        costs for all licensee plants is $30 billion. Because all of the five key



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                                         factors, or assumptions, are pessimistic in the pessimistic scenario and all
                                         are optimistic in the optimistic scenario, the results are much worse and
                                         better, respectively, in these other two scenarios. In the pessimistic
                                         scenario, licensees, on average, have balances that are 57-percent below
                                         their expected levels and have a present value of total future
                                         decommissioning costs of $67 billion. In the optimistic scenario, licensees,
                                         on average, have balances that are 63-percent above their expected levels
                                         and have total present-value costs of $20 billion.

Table I.1: Licensees With More Than or
Less Than Expected Fund Balances                                                               Scenario
(by Percentage Above or Below), as of    Licensee                                   Baseline   Pessimistic    Optimistic
December 31, 1997
                                         American Electric Power                         ++            ••          ++++
                                         Atlantic Energy                                   +           ••          ++++
                                         Baltimore Gas & Electric                        ••          •••               +
                                         Boston Edison                                     •         •••               +
                                         Carolina Power & Light                            •         •••            +++
                                         Central and Southwest                           ++            ••          ++++
                                         Central Hudson Gas & Electric                  +++            ••          ++++
                                         Central Iowa Power Corporation                 •••          •••              ••
                                         City of Austin                                 +++            ••          ++++
                                         City of San Antonio                            +++               •        ++++
                                         CMS Energy                                        •         •••               +
                                         Commonwealth Edison                             ••          •••               +
                                         Connecticut Yankee Atomic Power
                                         Corporation                                       •           ••             ++
                                         Consolidated Edison                             ••          •••               •
                                         Corn Belt Power Cooperative                       •         •••              ++
                                         Delmarva Power                                    •         •••            +++
                                         Detroit Edison                                  ••          •••               •
                                         Dominion Resources                           ++++           •••           ++++
                                         DQE, Inc.                                       ••          •••               +
                                         Duke Power Company                                +         •••           ++++
                                         El Paso Electric                                  +           ••          ++++
                                         Entergy                                           •         •••           ++++
                                         First Energy                                      •         •••            +++
                                         Florida Municipal Power Agency                  ++          •••           ++++
                                         Florida Progress                               +++            ••          ++++
                                         FPL Group                                      +++               •        ++++
                                         GPU                                             ••          •••               •
                                         Houston Industries                           ++++                •        ++++
                                                                                                              (continued)


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                                                       Scenario
Licensee                                    Baseline   Pessimistic    Optimistic
IES Utilities                                      •         •••              ++
Illinois Power                                   ••          •••            +++
Kansas City Power & Light                          •         •••           ++++
Long Island Lighting                             ++          •••           ++++
Los Angeles Department of Water and Power     ++++             ++          ++++
Madison Gas & Electric                          +++               •        ++++
Maine Yankee                                     ••          •••              ••
MidAmerican Energy                                 •         •••              ++
Municipal Electric Authority-GA.                  +          •••           ++++
Nebraska Public Power Company                      •         •••              ++
New York Power Authority                        +++            ••          ++++
New York State Electric & Gas                      •         •••           ++++
Niagara Mohawk                                    +          •••            +++
North Carolina Electric Corporation           ++++                •        ++++
North Carolina EMPA                              ••          •••               +
North Carolina Municipal Power                ++++             ++          ++++
Northeast Utilities                              ••          •••               •
Northern States Power                             +          •••            +++
Oglethorpe Power                                   •         •••              ++
Old Dominion Electric Cooperative             ++++             ••          ++++
Omaha Public Power District                       +          •••            +++
Orlando Utilities Commission                     ++            ••          ++++
Pacific Gas & Electric                        ++++                •        ++++
PECO Energy                                     •••          •••              ••
Pennsylvania Power & Light                       ••          •••            +++
Piedmont Municipal Power Agency                  ++          •••           ++++
Pinnacle West                                      •         •••           ++++
PS Enterprise Group                               +          •••           ++++
Public Service of New Mexico                      +          •••           ++++
Rochester Gas & Electric                           •         •••              ++
Salt River Project                              +++               •        ++++
Saluda River Power                            ++++                •        ++++
San Diego Gas & Electric                      ++++            +++          ++++
Scana Corporation                                  •         •••            +++
Seabrook                                         ••          •••              ++
South Carolina Public Power                     +++            ••          ++++
Southern California Edison                      +++               +        ++++
Southern Company                                   •         •••            +++
                                                                      (continued)


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                                                                                                   Scenario
                         Licensee                                                   Baseline      Pessimistic        Optimistic
                         Tennessee Valley Authority                                         ••             •••                   +
                         Texas Utilities                                                ++++                 ••            ++++
                         Union Electric Company                                              +             •••             ++++
                         Vermont Yankee                                                      +             •••                 +++
                         Washington Public Power                                            ••             •••                   +
                         Western Resources                                                  ••             •••                   +
                         Wisconsin Energy                                                   ++             •••             ++++
                         Wisconsin Public Service                                         +++                  •           ++++
                         WPL Holdings                                                       ++                 •           ++++
                         Yankee Atomic                                                    •••              •••                 •••

                         Legend

                         “+” means that fund balance was 1 to 25 percent more than expected.

                         “++” means that fund balance was 26 to 50 percent more than expected.

                         “+++” means that fund balance was 51 to 100 percent more than expected.

                         “++++” means that fund balance was over 100 percent more than expected.

                         “•“ means that fund balance was 1 to 25 percent less than expected.

                         “• •” means that fund balance was 26 to 50 percent less than expected.

                         “• • •” means that fund balance was 51 to 100 percent less than expected.




                         To answer this second question, we performed a second analysis using
Are Licensees Now        another spreadsheet simulation model that is similar to and is linked to
Accumulating Funds       our first model. We applied our second analysis for all three scenarios:
at Sufficient Rates to   pessimistic, baseline, and optimistic. In this second model, we used the
                         same assumptions and the same basic analytic approach that we described
Pay Unfunded             previously for the first model. Unlike the first question and related model,
Decommissioning          which address the adequacy of the accumulation of decommissioning
                         funds by the end of 1997, this question and related model focus on future
Costs?                   performance. Specifically, we compared each licensee’s available
                         contribution9 to its decommissioning fund in 1997 with the annual average



                         9
                           For each licensee, the available contribution—meaning funds available to pay NRC-defined
                         decommissioning costs—is calculated in the same way as in our first analysis. For the optimistic
                         scenario, the available contribution in 1997 is the actual contribution; for the baseline scenario,
                         86 percent of the actual contribution; and for the pessimistic scenario, 82 percent of the actual
                         contribution.



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present-value of the future amounts that the licensee needs to contribute
each year until its last plant has been retired.10

The comparison above is a simplified measure of the adequacy of a
licensee’s 1997 contribution. We compared the available portion of this
contribution with hypothetical future contributions in 1998 through the
final year of the licensee’s last plant to be retired. We assumed that these
expected future contributions will grow at the licensee’s after-tax rate of
return on its decommissioning fund. This measure of funding adequacy for
1997 was simplified so that we could easily list the model results for each
of the 76 licensees. In general, however, the expected future funding
stream for each of the 76 licensees is more complex than is assumed in the
simplified results and follows a different “sawtooth-shaped” pattern for
each licensee.

To undertake this analysis, we first listed the licensee’s plants, beginning
with the first plant to be retired and successively listed plants until the
licensee’s last plant to be retired. For example, if the earliest retirement of
a licensee’s two plants is a plant to be retired in 2007, this plant requires
future funding to pay for the unfunded portion of its future
decommissioning cost. The algorithm in our second simulation model
accounts for this unfunded amount over the next 10 years, starting with
1998. As with the analysis in our first model, the expected contribution
each year for this plant should equal 1/10th of that year’s present value of
the unfunded portion of the future decommissioning cost for this plant.
These yearly contributions will increase in current dollars at the fund’s
after-tax rate of return. Once in the fund, each of these expected future
amounts will continue to grow in current dollars at that same rate until the
expiration of the plant’s license. At the end of 2007, these 10 payments will
have grown in sum to exactly equal the unfunded portion; the licensee’s
future payments for this plant then drop to zero.

Furthermore, if this licensee’s second plant is to be retired in 2017, similar
future funding for it will proceed over 20 years—from 1998 through 2017.
Because we assumed in our example that the licensee’s fund balance in
1997 could pay for only part of the future decommissioning cost for the
first plant—hence, our “unfunded portion” for this first plant—the future
funding for this second plant must pay for all of its future


10
 For those licensees whose contribution to their fund was less in 1997 than in 1996, the results of our
second analysis are somewhat too negative, since these licensees did contribute more in 1996.
However, for most licensees, the contributions in 1997 were either greater than or equal to the
contributions in 1996.



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decommissioning costs from 1998 through 2017.11 Thus, this licensee’s
combined expected future payment stream in current dollars for both
plants grows at the after-tax rate of return until 2007. The stream then
drops in 2008 because the first plant will have been fully funded but will
then grow at the after-tax rate of return until 2017. In 2018, the unfunded
balance will decline to zero, and funding will cease.

Because of the volume of these calculations for 76 licensees, for our
baseline, pessimistic, and optimistic scenarios, respectively, we present,
for each licensee, simplified results for this second analysis. For each
licensee, we compared the available portion of its 1997 contribution to its
fund with the annual average of the present value of its total unfunded
future decommissioning cost. This total present-value cost equals the total
present value of the licensee’s required future payments to fund
decommissioning for all of its plants. For example, in the hypothetical
case discussed above, if the present value of the unfunded future cost
were $200 million, then the annual-average future payment in
present-value over 20 years would be $10 million.12 And if this licensee had
funded $10 million in 1997, it would be on track to meeting its
decommissioning obligations by 2017. If its 1997 payment were below
$10 million, it would have to increase its future yearly funding amounts by
more than the fund’s after-tax rate of return. Conversely, if its 1997
payment were above $10 million, it could increase its future payments by
less than the after-tax rate of return to achieve the funds needed to
decommission its plants.

For licensees owning only one plant having an unfunded portion of its
decommissioning cost or owning multiple plants with unfunded portions
that are to be retired in the same year, our simplified analysis yields results
exactly the same as our algorithm results. In these cases, the
sawtooth-shaped future funding pattern does not result, and the expected
future funding should grow steadily at the fund’s after-tax rate of return
over the life of its last plant to be retired. But, for licensees with the more
typical sawtooth-shaped expected funding patterns, as in our example, our

11
  Simply put, for each licensee, to compute the expected future funding stream, the algorithm looks at
the first plant to be retired and calculates whether the licensee has accumulated enough money to pay
for decommissioning this plant. In our example, it did not, so there was an unfunded portion. The
algorithm then funds this unfunded portion over the remaining 10 years for this plant. Because the first
plant had an unfunded portion, the algorithm then “knows” that the second plant will require full
funding; that is, no fund balances are remaining for funding this second plant. This second plant is then
fully funded over its remaining 20 years. For licensees with more than two plants, the algorithm
proceeds and asks these same questions for each successive plant and funds each plant accordingly
until there are no more plants remaining for the licensee.
12
 The total future decommissioning cost in 2017 current dollars would be the future cost of
$200 million in 20 years or $672 million at our baseline-assumed after-tax rate of return of 6.25 percent.



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                            simplified analysis effectively “transforms” such multiplant licensees into
                            one-plant companies. The present values of unfunded costs for these
                            multi-plant licensees are the same as for this single-plant licensee;
                            however, this “transformed” company with multiple plants has effectively
                            “postponed” accumulating enough money to pay its decommissioning
                            costs until the last plant owned by the licensee has been retired. In such
                            cases, the algorithm’s expected future funding will be higher in the early
                            years but lower in the later years than the funding implied by our
                            simplified analysis. In the early funding years, our simplified results for
                            these licensees will therefore be better than is warranted by their
                            algorithm results.


Current (1997) and Future   Table I.2 shows, for our baseline, pessimistic, and optimistic scenarios, the
Funding Adequacy            results of our analysis of whether each of the 76 licensees is currently on
Analysis: Results           track to accumulate sufficient funds in the future to decommission its
                            nuclear power plants. The table shows, for each licensee, whether its
                            funding in 1997 for NRC-defined decommissioning costs was more or less
                            than the annual-average present value of its total unfunded future
                            decommissioning costs for all of its plants.

                            Our analysis of the second question shows a wide range of results among
                            the three scenarios for each individual licensee and among all licensees
                            within each scenario. As with the first analysis, the results for the
                            pessimistic and optimistic scenarios should be viewed as extreme lower
                            and upper bounds, whereas the baseline scenario indicates the most likely
                            results.

                            For all 76 licensees combined, in 1997 licensees contributed, on average,
                            46 percent above the expected level of funds in the baseline scenario. This
                            percentage is associated with a $14 billion present value of unfunded
                            future decommissioning costs. Recall that the average available fund
                            balance for all licensees at the end of 1997 was about 3 percent less than
                            the expected balance. Therefore, these two results suggest that licensees
                            have currently increased the rates at which they are accumulating funds to




                            Page 50                                       GAO/RCED-99-75 Nuclear Regulation
                                        Appendix I
                                        Scope, Methodology, and Results of
                                        Analyses of Licensees’ Decommissioning
                                        Funds




                                        offset previous underfunding.13 Viewed as a lower bound, in the
                                        pessimistic scenario, licensees, on average, contributed funds in 1997 at 60
                                        percent below the expected amount (with a $51 billion present value of
                                        unfunded cost). Viewed as an upper bound, in the optimistic scenario, the
                                        licensees contributed funds in 1997 at 262 percent above the expected
                                        amount (with a $1 billion present value of unfunded cost).

                                        For all three scenarios, most licensees’ funding in 1997, relative to their
                                        expected levels, was better than their respective funding up until the end
                                        of 1997. In the baseline scenario, only 17 of the 76 licensees had not added
                                        sufficient funds in 1997 for eventual decommissioning. Nonetheless, the
                                        fact that four licensees contributed funds in 1997 below their expected
                                        levels in our optimistic scenario (see table I.2) may be cause for concern.
                                        Conditions may be worse than those assumed in that scenario. This is
                                        particularly so if retail competition in the electricity markets lowers
                                        electricity rates and profits. Conversely, the fact that 10 licensees
                                        contributed funds above their expected amounts in 1997 in the pessimistic
                                        scenario suggests that these licensees may be able to reduce their funding
                                        in the future because future conditions will likely be better than those
                                        assumed under this scenario.

Table I.2: Licensees That Accumulated
More or Less Funds (by Percentage                                                                                 Scenario
Above or Below) in 1997 Than the        Licensee                                                   Baseline       Pessimistic        Optimistic
Annual-Average of the Present Value
                                        American Electric Power                                        ++++                  ••            ++++
of the Future Amounts Required
                                        Atlantic Energy                                                ++++                   +            ++++
                                        Baltimore Gas & Electric                                         +++               •••             ++++
                                        Boston Edison                                                        +             •••             ++++
                                        Carolina Power & Light                                           +++               •••             ++++
                                        Central and Southwest                                                +             •••             ++++
                                        Central Hudson Gas & Electric                                    +++               •••             ++++
                                        Central Iowa Power Corporation                                   •••               •••                ••
                                        City of Austin                                                 ++++                  ••            ++++
                                                                                                                                    (continued)

                                        13
                                          As stated earlier, for many licensees our simplified results from the second analysis will be better
                                        than are warranted by our algorithm results. However, this simplification improves the results
                                        substantially for only a few of the 76 licensees. For example, for only three licensees in the baseline
                                        scenario do their 1997 contributions (1) fall short of the present value of their 1998 ideal contributions
                                        but (2) exceed the annual-average present-value of their future contributions. Thus, our results listed
                                        in table I.2 for the adequacy of future funding may be too favorable for Commonwealth Edison, Detroit
                                        Edison, and Northeast Utilities. These types of licensees have plants with unfunded future
                                        decommissioning costs whose licenses will expire early in the future but have other unfunded plants
                                        whose licenses will expire much further in the future. The percentage that the 1997 contribution falls
                                        short of the algorithm’s 1998 contribution reflects this need for an early accumulation of funds to pay
                                        for those plants to be retired relatively early.



                                        Page 51                                                        GAO/RCED-99-75 Nuclear Regulation
Appendix I
Scope, Methodology, and Results of
Analyses of Licensees’ Decommissioning
Funds




                                                       Scenario
Licensee                                    Baseline   Pessimistic    Optimistic
City of San Antonio                           ++++             ••          ++++
CMS Energy                                    ++++           •••           ++++
Commonwealth Edison                              ++          •••           ++++
Connecticut Yankee Atomic Power
Corporation                                   ++++             ••          ++++
Consolidated Edison                              ++          •••           ++++
Corn Belt Power Cooperative                       +          •••           ++++
Delmarva Power                                  +++          •••           ++++
Detroit Edison                                ++++           •••           ++++
Dominion Resources                            ++++           •••           ++++
DQE, Inc.                                       +++            ••          ++++
Duke Power Company                            ++++             ••          ++++
El Paso Electric                                +++            ••          ++++
Entergy                                       ++++             ••          ++++
First Energy                                     ++          •••           ++++
Florida Municipal Power Agency                     •         •••           ++++
Florida Progress                              ++++           •••           ++++
FPL Group                                     ++++             ++          ++++
GPU                                                •           ••          ++++
Houston Industries                            ++++                +        ++++
IES Utilities                                      •         •••           ++++
Illinois Power                                   ••          •••            +++
Kansas City Power & Light                          •         •••           ++++
Long Island Lighting                            +++          •••           ++++
Los Angeles Department of Water and Power     ++++          ++++           ++++
Madison Gas & Electric                        ++++            +++          ++++
Maine Yankee                                    •••          •••            •••
MidAmerican Energy                              +++          •••           ++++
Municipal Electric Authority-GA.                 ++          •••           ++++
Nebraska Public Power Company                 ++++             ••          ++++
New York Power Authority                      ++++           •••           ++++
New York State Electric & Gas                    ++          •••           ++++
Niagara Mohawk                                ++++                •        ++++
North Carolina Electric Corporation           ++++             ••          ++++
North Carolina EMPA                             •••          •••               +
North Carolina Municipal Power                ++++             ••          ++++
Northeast Utilities                           ++++                +        ++++
Northern States Power                         ++++           •••           ++++
                                                                      (continued)


Page 52                                       GAO/RCED-99-75 Nuclear Regulation
Appendix I
Scope, Methodology, and Results of
Analyses of Licensees’ Decommissioning
Funds




                                                    Scenario
Licensee                                 Baseline   Pessimistic     Optimistic
Oglethorpe Power                             •••          •••                 •
Old Dominion Electric Cooperative          ++++           •••            ++++
Omaha Public Power District                ++++           •••            ++++
Orlando Utilities Commission               ++++                •         ++++
Pacific Gas & Electric                     ++++                •         ++++
PECO Energy                                   ••          •••                 +
Pennsylvania Power & Light                    ••          •••            ++++
Piedmont Municipal Power Agency               ++          •••            ++++
Pinnacle West                                +++            ••           ++++
PS Enterprise Group                          +++            ••           ++++
Public Service of New Mexico                 +++            ••           ++++
Rochester Gas & Electric                   ++++                •         ++++
Salt River Project                            ++          •••            ++++
Saluda River Power                         ++++                •         ++++
San Diego Gas & Electric                   ++++          ++++            ++++
Scana Corporation                               •         •••            ++++
Seabrook                                   ++++             ••           ++++
South Carolina Public Power                ++++           •••            ++++
Southern California Edison                 ++++          ++++            ++++
Southern Company                             +++            ••           ++++
Tennessee Valley Authority                   •••          •••               ++
Texas Utilities                            ++++           •••            ++++
Union Electric Company                          •         •••            ++++
Vermont Yankee                             ++++           •••            ++++
Washington Public Power                         •         •••            ++++
Western Resources                            •••          •••                 +
Wisconsin Energy                           ++++           •••            ++++
Wisconsin Public Service                   ++++          ++++            ++++
WPL Holdings                               ++++            +++           ++++
Yankee Atomic                                •••          •••              •••

                                                      (Table notes on next page)




Page 53                                    GAO/RCED-99-75 Nuclear Regulation
Appendix I
Scope, Methodology, and Results of
Analyses of Licensees’ Decommissioning
Funds




Legend:

“+” means that the licensee accumulated from 1 to 25 percent more funds in 1997 than the
annual average of the present value of the amounts required in 1998 and each subsequent year
until the licensee’s last plant is retired.

“++” means that the licensee accumulated from 26 to 50 percent more funds in 1997 than the
annual average of the present value of the amounts required in 1998 and each subsequent year
until the licensee’s last plant is retired.

“+++” means that the licensee accumulated from 51 to 100 percent more funds in 1997 than the
annual average of the present value of the amounts required in 1998 and each subsequent year
until the licensee’s last plant is retired.

“++++” means that the licensee accumulated over 100 percent more funds in 1997 than the
annual average of the present value of the amounts required in 1998 and each subsequent year
until the licensee’s last plant is retired.

“•“ means that the licensee accumulated from 1 to 25 percent less funds in 1997 than the annual
average of the present value of the amounts required in 1998 and each subsequent year until the
licensee’s last plant is retired.

“• •” means that the licensee accumulated from 26 to 50 percent less funds in 1997 than the
annual average of the present value of the amounts required in 1998 and each subsequent year
until the licensee’s last plant is retired.

“• • •” means that the licensee accumulated from 51 to 100 percent less funds in 1997 than the
annual average of the present value of the amounts required in 1998 and each subsequent year
until the licensee’s last plant is retired.




Page 54                                                    GAO/RCED-99-75 Nuclear Regulation
Appendix II

Comments From the Nuclear Regulatory
Commission

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




                             Page 55   GAO/RCED-99-75 Nuclear Regulation
                 Appendix II
                 Comments From the Nuclear Regulatory
                 Commission




See comment 1.



Now on p. 34.




See comment 2.




                 Page 56                                GAO/RCED-99-75 Nuclear Regulation
                 Appendix II
                 Comments From the Nuclear Regulatory
                 Commission




Now on p. 30.




See comment 3.
Now on p. 5.




See comment 3.
Now on p. 22.




                 Page 57                                GAO/RCED-99-75 Nuclear Regulation
                        Appendix II
                        Comments From the Nuclear Regulatory
                        Commission




See comment 3.



Now on pp. 32 and 33.




See comment 4.




                        Page 58                                GAO/RCED-99-75 Nuclear Regulation
                 Appendix II
                 Comments From the Nuclear Regulatory
                 Commission




Now on p. 41.

See comment 5.




                 Page 59                                GAO/RCED-99-75 Nuclear Regulation
                 Appendix II
                 Comments From the Nuclear Regulatory
                 Commission




                 The following are GAO’s comments on the Nuclear Regulatory
                 Commission’s letter dated March 26, 1999.


                 1. NRC commented that, although our statement that it did not establish
GAO’s Comments   thresholds related to unacceptable levels of financial assurances is true,
                 the statement does not reflect NRC’s stated intent to examine the results of
                 the initial licensee’s financial reports before determining an appropriate
                 course of action. We did, however, recognize NRC’s intention in our report.
                 Moreover, both our draft and final report preface our recommendations
                 with the statement that NRC should act after reviewing licensees’ initial
                 reports. Accordingly, we did not revise this aspect of our report.

                 2. NRC stated that, as long as a rate regulator (such as a state public utility
                 commission) is providing for the ultimate recovery of decommissioning
                 costs from ratepayers, our assertion that under-funding is occurring is
                 incorrect, because the reasonable assurance of future funding has been
                 identified. NRC’s comment is misleading. We recognize in our report that,
                 as a matter of policy, NRC defers the establishment of the details of
                 licensees’ decommissioning funding to rate regulators as long as those
                 details would lead to the accumulation of at least the amounts calculated
                 in NRC’s formula by the time plants’ operating licenses expire. We did not
                 assert, as NRC stated, that any licensee was underfunded in the sense of not
                 being in compliance with the regulatory requirements of NRC or its rate
                 regulators. What we did say was that to have “sufficient” or “expected”
                 amounts of funds, licensees would need to accumulate increasing (but
                 constant present-value) amounts annually and that the sum of these
                 annual amounts, plus earned income, would equal the total estimated
                 decommissioning costs when the licensees’ plants’ operating license
                 expires. Therefore, we did not revise our report.

                 3. We added additional material to our report in response to NRC’s
                 comment.

                 4. NRC characterized as “erroneous” our assertion that of its safety
                 oversight initiative for nuclear power plants reflects NRC’s lack of criteria
                 for acting on licensees’ decommissioning financial reports. NRC said the
                 safety oversight initiative is directed to actual safety requirements and not
                 to the reports that provide NRC with information on how licensees are
                 complying with those requirements. NRC’s comment too narrowly
                 describes the scope of its safety oversight initiative. In particular, the
                 comment is silent on the initiative’s efforts to develop improved



                 Page 60                                        GAO/RCED-99-75 Nuclear Regulation
Appendix II
Comments From the Nuclear Regulatory
Commission




assessment methods, such as integrating data on licensees’ performances
and the results of NRC’s inspections, determining appropriate actions by
NRC on the basis of assessment results, and communicating results to
licensees and the public. Our assertion was intended to illustrate the fact
that, although NRC has begun requiring biennial financial reports, it has not
publicly stated what actions it would expect to take if the information in a
licensee’s report indicates that the licensee may not be meeting NRC’s
financial assurance requirements for decommissioning. Therefore, we did
not revise our report.

5. NRC stated that the “optimistic” after-tax rate of return on investments
of decommissioning funds could be 8 or 9 percent, rather than the
7-percent rate of return that we used, because the historic long-term rate
of return on stocks has been about 10 percent before taxes. Predicting the
rate of return on investments for 20 years or more into the future is
essentially speculative. We chose the 7-percent rate for our optimistic case
because regulated utilities were traditionally required to invest
conservatively in government securities and only recently have been
permitted to invest some of their funds in higher-risk, potentially more
profitable, financial instruments. In this regard, NRC’s guidance for its staff
on evaluating a licensee’s decommissioning funding assurances notes that
“. . .corporate or municipal bonds or preferred stocks should be rated at
least ‘BBB’ by Moody’s or an equivalent rating by another bond rating
agency.” The guidance also states that (1) although NRC does not explicitly
prohibit investments in common stocks, speculative issues should be
avoided and (2) as long as the fund is invested in a diversified portfolio,
losses in any one issue of stocks, bonds, or other investments should not
significantly affect the value of the decommissioning fund. A diversified
portfolio would contain bonds and preferred stocks, as well as common
stocks. Such a portfolio would likely achieve a lower after-tax rate of
return in the long run than the return on a portfolio containing only
common stocks. This portfolio would, however, have the benefit of a
lower market risk. In any case, our assumption of a 7-percent rate of
return is just one of the optimistic assumptions used in our optimistic
scenario. In this scenario, we assume optimistic values for all five of our
key assumptions. Therefore, the results for each licensee should be viewed
as very optimistic upper bounds.

For these reasons, we continue to believe that our use of an after-tax rate
of return of 7 percent for our optimistic scenario is appropriate and
therefore did not revise our report.




Page 61                                        GAO/RCED-99-75 Nuclear Regulation
Appendix III

Major Contributors to This Report


                        Mr. Dwayne E. Weigel, Assistant Director
Resources,              Mr. Philip A. Olson, Evaluator-in-Charge
Community, and          Mr. John E. Bagnulo, Senior Evaluator
Economic                Ms. Mehrzad Nadji, Assistant Director for Economic Analysis
                        Mr. Daniel G. Williams, Senior Economist
Development             Ms. Doreen S. Feldman, Assistant General Counsel
Division, Washington,   Ms. Susan W. Irwin, Senior Attorney
                        Ms. Delores A. Hemsley, Administrative Operations Assistant
D.C.




                        Page 62                                    GAO/RCED-99-75 Nuclear Regulation
Page 63   GAO/RCED-99-75 Nuclear Regulation
Related Products


              Nuclear Regulation: Slow Progress in Identifying and Cleaning Up NRC’s
              Licensees’ Contaminated Sites (GAO/RCED-95-95, Apr. 24, 1995).

              Nuclear R&D: Research Efforts Under Way to Support Nuclear Power
              Plant License Renewal (GAO/RCED-91-207, Sept. 25, 1991).

              Nuclear Research and Development: Shippingport
              Decommissioning—How Applicable Are the Lessons Learned?
              (GAO/RCED-90-208, Sept. 4, 1990).

              Nuclear R&D: Usefulness of Information From Shippingport
              Decommissioning for Rancho Seco (GAO/RCED-90-171, June 7, 1990).

              Nuclear Regulation: NRC’s Decommissioning Procedures and Criteria Need
              to Be Strengthened (GAO/RCED-89-119, May 26, 1989).

              Nuclear Regulation: License Renewal Questions for Nuclear Plants Need
              to Be Resolved (GAO/RCED-89-90, Apr. 3, 1989).

              Nuclear Regulation: NRC’s Decommissioning Cost Estimates Appear Low
              (GAO/RCED-88-184, July 29, 1988).




(141109)      Page 64                                     GAO/RCED-99-75 Nuclear Regulation
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