Last November, Virginia Electric & Power Co. scrapped plans to build the North Anna 3 nuclear power plant--the fourth nuclear generating plant it has abandoned.
As it had in other cancellations, Vepco asked state utility regulators to charge Vepco customers for the cost of the plant and to allow Vepco shareholders a profit on the money spent on it.
In other cases, the State Corporation Commission had allowed Vepco to recover its costs over a period of years but had denied a return on investment to shareholders. But in this case, the SCC hesitated to take even the first step, calling the estimated total cost to customers of $649.1 million "unprecedented in Virginia."
The SCC thus focused attention on what has become a key question in the electric utility industry as large numbers of proposed new plants have been canceled, no longer needed by consumers who have learned to conserve and by industries whose needs have been sharply curtailed by the recession.
The question is: How should the costs of these decisions be allocated among utility customers, utility investors and taxpayers?
Not surprisingly, the utilities--confronted by the difficulties of raising capital in the current environment--have proposed shifting the economic burden to their customers, arguing that to do so is in the long-run interest of the ratepayers.
But critics respond that making ratepayers shoulder the costs leaves management and investors unaccountable for what may be bad management.
So far, decisions about who pays have been mixed, but there is a pattern of sharing costs. In a few cases, state law has been interpreted as prohibiting the utility from recovering costs of abandoned projects.
A recent study by the Federal Energy Information Administration found, in 48 cases involving abandonment of nuclear units costing more than $50 million, that in 22 cases utilities recovered costs but there was no return for shareholders; in 11 cases utilities recovered everything, and in eight cases, nothing. In the remaining cases, regulators allowed varying degrees of cost recovery.
The EIA's most startling finding was the share of the costs borne by taxpayers. "Even in those cases of partial cost recovery . . . where the utility is not allowed to earn a return on the unamortized balance, most of the abandonment costs are borne by ratepayers and a third, less visible group--income taxpayers," the study noted.
The taxpayer share results from a provision that allows utilities to reduce taxable income by writing off the capitalized investment in the plant in the year of cancellation.
The EIA analysis found that in a typical case, where cost recovery was spread over a 10-year period and no return was allowed on investment, utility investors would bear about 28 percent of the costs, compared with approximately 30 percent borne by utility customers and 43 percent by taxpayers.
In one recent case, the Texas Public Utilities Commission found that Houston Lighting & Power should have canceled an abandoned nuclear plant at least 2 1/2 years earlier. It disallowed about $166 million of the $362 million the company sought and stipulated that the savings associated with the tax write-off ultimately be returned to the company's customers. The utility is appealing in the courts.
Taxpayers have not really beencontenders in regulatory cases that have decided these issue. The opposing parties have been the investors and rate payers.
At stake in these cases, according to the Edison Electric Institute, are the long-run ability of power companies to borrow in the capital markets at reasonable rates, and the possibility of energy shortages in some parts of the country because needed capacity is not being built.
"If investors perceive increased risks associated with financing new construction as a result of the regulatory environment, then financing costs--which are ultimately borne by the ratepayer--will increase," the industry group said in a special report on the issue.
On the other side of the debate are such groups as the Environmental Action foundation. "Our basic position is that--in general--utility investors should bear the cost of the cancellations," said Alan Nogee, energy project coordinator. "They are the ones responsible ultimately for management decisions and the ones benefiting from those decisions. They should ultimately bear the cost of management mistakes."
"The grossest of abuses is to allow utilities to profit equally from an abandoned and unnecessary plant as from a used and useful one," he added.
In canceling North Anna 3, as in dropping projects earlier, Vepco sought return on investment for shareholders in addition to recovery of its actual costs. But it contends its arguments on behalf of its investors are even stronger with North Anna 3.
"North Anna 3 was not a cancellation because we do not need the capacity," said Vepco Vice President C. M. Jarvis. "That cancellation was because it was more expensive to continue to build North Anna 3 as a nuclear facility than it would be to obtain that capacity through purchases from neighboring utilities."
Since Vepco customers stood to benefit from the utility's decision to opt for the cheaper power source, "they should share in the costs," including a profit for investors, said Jarvis.
Like others in the industry, Jarvis argues that recovery should be allowed "because a utility such as Vepco first of all has a duty to serve. It doesn't have the liberty to decide how much plant it builds but is compelled to build an adequate amount of plant to meet whatever its customers' demands are."
Decisions to build are made on the best information available about what customer demand will be in the future, he said. "If your forecasts change for some dramatic reason that you can't anticipate and you obviously don't need that plant, the best thing to do is to cancel," he said. "To have it go into service when it is not needed costs more than to cancel."
In canceling, however, the utility still needs to be able to pay "adequate rent on money from investors," he said; otherwise it will not be able to attract the money it needs to meet future needs.
Instead of granting the initial $91 million that Vepco sought to recover, the SCC ruled that the "sheer size of this write-off" demanded longer review. The regulators also called on Vepco to provide more--and better--evidence to support its case.
Vepco "has paid scant attention to at least two critical issues raised by the cancellation," including whether it should have come sooner, the SCC said.
The SCC said it would hear arguments about whether Vepco should recover its costs in December.