In June 2004, Levitan & Associates, Inc. (LAI), a Boston-based management consulting firm specializing in the energy industry, was retained by the County of Westchester (Westchester or the County) and the County of Westchester Public Utility Service Agency (COWPUSA) to evaluate economic, technical, and certain legal issues surrounding the operation and retirement of the Indian Point Energy Center (IP). Since 9/11, IP has been a lightning rod for safety and security concerns. In response to these concerns, the County has expressed an interest in assessing the feasibility of alternative options to facilitate IP’s retirement. In conducting this analysis, LAI has been assisted by WPI, a nuclear advisory firm specializing in plant decommissioning, safety, and spent nuclear fuel (SNF) advisory services.
LAI has identified and evaluated two options for the County to facilitate IP’s retirement: acquire the plant by condemnation or reach a consensual agreement to voluntarily retire the plant with IP’s owner, Entergy Corporation (Entergy). LAI assessed IP’s current and expected performance, estimated the economic impacts of retirement, identified the likely sources of replacement generation and impact on customer rates, calculated the compensation due Entergy, and described the requisite decommissioning and SNF activities. LAI’s scope of work did not include the breadth of safety and homeland security issues associated with ongoing operation of IP, or the potential for alternative energy technologies to replace it.
When the New York power market was deregulated in the late 1990s, utilities divested their power plant assets. Some power plants have power purchase agreements (PPAs) with utilities and other load-serving entities that establish power quantities and prices. The majority of power plants in New York State are merchant plants that do not hold PPAs and compete to sell their output at market prices administered by the New York Independent System Operator (NYISO). Since wholesale power markets became competitive, Entergy has acquired various nuclear power plants in New York and New England, including IP.
There are three nuclear units at the IP site. Indian Point 1 (IP1) and Indian Point 2 (IP2) were sold by Consolidated Edison Company of New York, Inc. (Con Edison) to Entergy in September 2001. IP1 was deactivated in 1974, and will be decommissioned at a later date in conjunction with the decommissioning of IP2 and Indian Point 3 (IP3). Entergy purchased IP3 along with the FitzPatrick station from the New York Power Authority (NYPA) in November 2000. The nominal generation capacity of each IP unit is about 1,000 megawatts (MW). IP therefore represents about 5% of the total installed generation capacity throughout New York State. In terms of energy output, IP2&3 collectively account for about 10% of New York’s electricity requirements. IP2&3’s Nuclear Regulatory Commission (NRC) operating licenses are scheduled to expire in 2013 and 2015, respectively. In accord with industry trends, Entergy could apply for license extensions for up to an additional twenty years, provided certain operating, environmental, and safety conditions are met.
Entergy is a Louisiana-based integrated energy holding company with both utility and non-utility business segments. Entergy owns and operates five utility-owned and five non-utility nuclear power plants; the non-utility plants are located in New York and New England. Since Entergy acquired IP from Con Edison and NYPA, the units have operated at relatively high capacity factors. After Entergy completed the acquisitions, skyrocketing natural gas and oil prices have materially increased the market value of IP’s output. Average market energy prices in Westchester increased 26% from 2001 to 2004. Moreover, the outlook on premium fossil fuel prices, coupled with regulatory changes in New York promulgated by NYISO, portend continued pressure on market energy and capacity prices for the foreseeable future.
Thus the value of IP has improved since Entergy’s acquisition. Against this backdrop, the County and COWPUSA have a limited number of strategic options to shut down IP.
There are two principal options to retire IP early – acquisition through condemnation or a consensual agreement with Entergy for a voluntary shutdown. Either option will require compensating Entergy for lost profits net of avoided costs and capital expenditures (CapEx). Condemnation would also involve the assumption of decommissioning and SNF responsibilities, as well as financial risks. Entergy would retain those responsibilities and risks under a consensual agreement.
A condemnation process is likely to take several years, depending on how quickly the condemnation was sought and whether Entergy contests the original compensation offer. If the condemnation was successful, Entergy would be entitled to just and reasonable compensation. For example, if the process started now and was completed by January 1, 2008, we estimate that Entergy would have to be paid $1.4 - $1.8 billion in compensation for lost profits through the current license terms, plus $0.3 - $1.0 billion for the twenty year license extension period. While the decommissioning funds should be sufficient to cover decommissioning activities, the condemnor would become responsible for SNF costs that we estimate at approximately $241 million over the following six years.
Under a consensual agreement in which Entergy would voluntarily retire IP, Entergy would retain the responsibilities and risks of nuclear plant ownership. Entergy may be receptive, given the high cost (estimated at $1 billion), uncertain financial return, and likely political quagmire associated with operating beyond the current NRC license terms. Assuming a January 1, 2010 agreement / payment date and a 2013/15 retirement date, i.e. at the end of the existing license terms, we estimate the value of Entergy’s lost profits to be $0.5 - $1.4 billion for the twenty year license extension period. These values do not account for any risk that the NRC could deny Entergy’s request for license extension, which would lower our compensation estimates.
LAI estimated the ranges of compensation values under each option by forecasting IP revenues, expenses, and cash flow, then applying high and low discount rates that reflect the risks of a merchant nuclear plant. The wide range in compensation values is due to the high and low discount rates as well as the effect of compounding over time. Any change in the payment dates assumed in the retirement options identified above would change our compensation estimates.
Condemnation of IP by the County is legally difficult and financially risky. On the other hand, a consensual agreement should be achievable and could involve other stakeholders such as the State of New York, NYPA, New York City, and other utility and government stakeholders. The challenge for a consensual agreement would be to convince Entergy to retire IP voluntarily and, ideally, develop replacement generation on the IP site.
Retirement of IP presents economic and rate impacts beyond compensation costs. These impacts will inevitably occur whenever IP ceases operation, so the question is not whether there will be impacts from IP retirement; the question is when these impacts will occur. Many of these impacts could be avoided or mitigated by development of on-site replacement generation. Local impacts would include loss of payments in lieu of tax (PILOT), the bulk of which go to the Hendrick Hudson School District. Local employment and spending benefits would disappear about ten years after retirement, once the site is decommissioned and SNF is in dry storage. Local community support activities would cease, and power plant emissions would increase.
The largest quantifiable positive impact of retiring IP would be the improved health of the Hudson River fisheries, which would benefit residents beyond the local communities. These fisheries would also benefit if IP is converted to closed-cycle cooling, although Hudson River water may still be required for emergency cooling. While retiring IP would result in public safety and security benefits, we have not tried to quantify those benefits. A minor benefit of retiring IP would be that the County could avoid emergency service costs.
The greatest negative impact of retiring IP before its license expires in 2013/15 would be a rise in market energy prices, even with the timely addition of replacement generation. We estimate that a minimum of three-to-four years is required from the time IP’s retirement is announced to develop and construct new power plants. Retirement through a consensual agreement with Entergy, or if Entergy was unable to extend the NRC licenses, should provide sufficient lead time to develop replacement generation on the IP site or elsewhere in the downstate region. In practice, lenders and investors are unlikely to rely on uncertain market prices to justify new merchant projects. Therefore downstate utilities might decide to offer PPAs to assure their customers of sufficient resources. It is not known how the New York Public Service Commission (NYPSC) would react to a new PPA commitment. If necessary, the NYISO or NYPA could make short-term arrangements to assure bulk power security.
Since Entergy has not yet filed an application with the NRC to renew IP’s licenses, our working assumption has been that IP will be retired at the end of the existing license terms. Therefore a voluntary retirement on the same dates would impose virtually identical economic and electric rate impacts on County and New York residents – retirement in 2013/15 would not impose any additional economic or rate impacts.
Extending the NRC licenses will likely cost Entergy over $1 billion, principally to convert from a once-through cooling system using the Hudson River to a closed-cycle system using cooling towers. Constructing the towers will require a local zoning variance, each IP unit would have to be shut down for roughly nine months for the conversion, and future plant performance would suffer. In spite of these hurdles, the economics of license extension appear favorable from Entergy’s perspective, unless gas prices decline materially (thus lowering the value of IP output) or conversion costs are higher than expected. However, the significant costs and risks provide the County, State, NYPA, and other interested stakeholders a window of negotiating opportunity through about 2010, after which cooling tower construction would probably need to commence. We believe that the cooling towers would require considerable space on the IP site and preclude any chance for on-site replacement generation.
Converting the IP units to gas-fired generation is not feasible. However, the existing site is well-suited for new replacement gas-fired generation, particularly with the existing high-voltage transmission infrastructure and the Algonquin Gas Transmission (Algonquin) interstate natural gas pipeline adjacent to the site, provided that cooling towers for the nuclear units are not installed. It is not the County’s legal responsibility to replace the generation capacity to maintain adequate reserve margins if IP were to retire. Nevertheless, on-site replacement generation has the potential to avoid or mitigate the costs and impacts of a voluntary retirement.
The development of on-site replacement generation could be facilitated through a variety of mechanisms. For example, surplus property on the site could be leased to a generation developer if Entergy itself did not want to develop a replacement plant. Alternatively, the market risks of on-site replacement generation could be avoided through a PPA with a credit-worthy purchaser such as NYPA or others who can re-sell the power to retail customers. While COWPUSA has the authority to enter into a long-term PPA and provide retail service to Westchester residents, it does not have a large customer base and may not be able to effectively compete with Con Edison. A third mechanism, providing tax-exempt financing for an on-site replacement plant, may not be possible under current federal tax provisions, although Congress could adopt legislation that would make such an option possible.
SNF will be stored in specially-designed dry casks on-site starting next year. It is anticipated that the SNF will eventually be shipped to Yucca Mountain, the nation’s planned SNF repository in Nevada. Entergy will have to bear the on-site SNF storage costs until then, and remove any non-radioactive materials. We estimate that it will take ten years after retirement until all SNF and radioactive materials could be removed, provided Yucca Mountain is opened in 2010 as planned. This date may slip due to recent licensing delays, which will require additional quantities of SNF to be stored on-site over a longer period of time.
Other radioactive materials will be stored on-site until a disposal site is licensed. The IP decommissioning funds should be adequate to cover decommissioning costs, assuming that the three IP units will be decommissioned in an integrated program.
Acquiring IP through condemnation is not recommended because it would require assuming nuclear decommissioning and SNF management responsibilities, and is fraught with financial costs and risks that have the potential to impose material economic hardships.A consensual agreement is the better option, in which the County, together with other stakeholders such as the State, NYPA, and New York City, can muster political pressure to discourage re-licensing and can negotiate and fund a financial compensation and replacement generation package. The high CapEx associated with license extension, coupled with the potential uncertainties surrounding the NRC approval and local zoning process, offers a window of opportunity to negotiate a retirement date, perhaps at the end of the current NRC license terms. Reaching a consensual agreement no later than year-end 2010, with the support of the State and its Congressional delegation, would allow sufficient time for replacement generation to be developed, including on the IP site, by 2013/15. Other strategies to induce Entergy to retire IP early through State or federal action appear unprecedented, but are possible with State and Congressional support.
A consensual agreement to voluntarily retire IP would provide sufficient time to structure the best possible solution for Westchester residents. We recommend that a consensual agreement include on-site replacement generation to avoid or mitigate the costs and impacts of IP retirement. An on-site gas-fired combined cycle replacement plant, for example, would provide benefits to Entergy and the State as well. Entergy would have an attractive investment opportunity in New York, and State residents (outside of Westchester) would enjoy the bulk of the benefits from improving the health of the Hudson River fisheries. The State should participate in a consensual agreement and be part of the IP solution.
Acquisition by Condemnation
The ability to acquire IP through a condemnation proceeding is based on principles of eminent domain. Our evaluation of applicable regulations indicates that this option is feasible but risky. In brief, the condemnor would have to conduct a public hearing, make a public determination to condemn and acquire the plant, offer a price based on a property appraisal, and then file a petition that is accepted by the Westchester Supreme Court. This option has some significant drawbacks and entails difficult ownership responsibilities:
If IP were immediately deactivated upon acquisition, the condemnor would have to obtain management expertise that satisfies stringent NRC standards to decommission the units and handle radioactive materials. SNF would remain on the site at least a decade, obligating the condemnor to provide appropriate security measures. The availability and cost of obtaining this nuclear expertise are highly uncertain.
The existing decommissioning funds, designed to cover the costs to decommission the radioactive materials, should be adequate. However, there is no guarantee, and any shortfall would impose significant decommissioning costs on the condemnor. The funds do not cover the cost to store the SNF, or to remove non-radioactive materials.
Under New York law, Entergy would be entitled to just and reasonable compensation for the condemnation of IP. The compensation amount would be set by a court-ordered appraisal and reflect then-prevailing market, operating, and regulatory conditions, and therefore could be higher than our estimate.
The County or New York State could be the condemning authority, thereby assuming all attendant responsibilities and risks. Since retiring IP benefits State residents beyond Westchester County, it may make sense for NYPA to be responsible for decommissioning and SNF activities.
Present Value Summary – Acquisition in 2008 versus Retirement in 2013/15
(2008 $ millions; excludes indirect impacts; assumes no replacement generation)
Costs Shared by Stakeholders
Original License Term $1,465 - $1,831
Renewal Option $ 289 - $ 913
Sub-Total $1,754 - $2,744
Spent Nuclear Fuel $ 241
Total $1,995 - $2,985
Rate / Economic Impacts County New York State
Electric Market Impact $ 216 $ 1,742
Economic Impacts(benefits in parenthesis)
Property Taxes $ 143 $ 143
Employment $ 123 $ 820
Local Spending $ 89 $ 341
Community Support $ 6 $ 6
County Emergency Planning ($ 35) ($ 35)
Corporate Income Tax $ 8 $ 167
Hudson River Fisheries ($ 220) ($ 2,198)
Air Emissions $ 2 $ 41
Sub-Total $ 116 ($ 715)
Total $ 332 $ 1,027
For purposes of this analysis, we have assumed that condemnation proceedings would commence immediately, and IP would be acquired and shut down on January 1, 2008. Two types of costs arise under the acquisition option: (i) compensation due Entergy and taking on the SNF responsibilities, and (ii) electric rate and economic impacts. We estimate compensation due Entergy at $1.75 - $2.74 billion, plus the condemnor would become responsible for $241 million of SNF costs. We estimate the State-wide rate and economic impacts at $1.03 billion, of which the County would shoulder 21%. All of these costs and impacts are expressed in present value terms as of January 1, 2008, as itemized in the summary tables above, and are relative to our base case assumption of IP retirement in 2013/15 at the end of the existing license terms.
The largest cost component is compensation due Entergy. LAI provided a low and high range of compensation values due to uncertainty about a key valuation assumption, the appropriate discount rate for Entergy’s future revenues from IP2&3.
The low end of the compensation range, $1.75 billion, is associated with a high discount rate of 20%, the high end of our estimate of Entergy’s cost of funds (combined debt and equity) for a merchant nuclear power facility. The high end of the compensation range, $2.74 billion, is associated with a low discount rate of 14%, the low end of our estimate of Entergy’s cost of funds. We assumed that Entergy would receive full credit for lost earnings over the license extension period. Any risk that the NRC would not approve license extension would lower the estimated value for the license extension period. Ideally, the County could participate jointly with the State, NYPA, New York City, and other stakeholders, in the acquisition and compensation arrangement.
The condemnor would incur SNF costs, estimated at $241 million. The existing decommissioning funds should be adequate to cover all decommissioning costs.
The present value of the electric market impact on the County is estimated at $216 million, and $1.74 billion for the entire State. Estimated rate impacts reflect our assumption that long-term utility PPAs provide a 50% hedge against higher market energy prices. Typical residential bills in Westchester would increase $1.55/month if IP retires before 2013/15, and by about $0.73/month in New York City.
Total direct economic impacts (excluding electricity prices) are estimated to have a negative present value of $116 million for the County and a positive present value of $715 million for the entire State as follows:
– Lost PILOT revenues from 2008 through 2015 would total $143 million for the County; the rest of the State would not be directly affected.
– Significant manpower would be required at the site for decommissioning and SNF activities, so that reduced employment and local spending would not affect the County for five-to-ten years. The present value of lost wages would total $123 million in the County and $820 million in the entire State.
– Reduced local spending on goods and services would total $89 million in the County and $341 million in the entire State.
– Reduced local community support, e.g. monetary contributions and employee volunteer efforts, would total $6 million in the County and would not affect the rest of the State.
– Reduced County emergency planning expenses would save the County $35 million and would not affect the rest of the State.
– Lost corporate income taxes would total $167 million in the State, and $8 million to the County, assuming a 5% allocation (consistent with County / State population ratio).
– The health of Hudson River fisheries would improve and provide significant benefits estimated at $2.2 billion for the State. Lacking a good basis for assigning this benefit, we assumed that a nominal 10% would accrue to County residents.
– Emissions of air pollutants from power plants across New York State would increase. We estimate the impact to be $41 million for the State, of which $2 million would be allocable to the County based simply on population.
Westchester, in conjunction with the State, NYPA, New York City, and other stakeholders could negotiate a consensual agreement for Entergy to retire IP. A voluntary retirement would avoid the costs and risks of an acquisition, keep in place Entergy’s operation and management resources, and provide significant flexibility to arrange a compensation package and develop replacement generation on site:
A voluntary retirement could be agreed upon with an actual shutdown date at some date in the future to allow sufficient time for market participants to replace IP’s capacity in an orderly fashion. In our view, the announced retirement of IP would encourage market participants to replace substantially all of the generation capacity in the downstate region, possibly supported by long-term PPAs offered by downstate utilities. A minimum of three-to-four years would be adequate to develop replacement generation to assure system reliability. While there are many power plant sites that could be developed, on-site replacement generation is preferred as it could avoid or mitigate the local economic impacts of retiring IP.
Entergy would request substantial compensation in exchange for agreeing to retire IP and to not pursue license extension. However, retiring IP at the end of the current license terms would allow Entergy to avoid the costs and risks associated with the license extension process, including NRC approval and the requisite zoning variance. LAI’s estimate of the CapEx for license extension is over $1 billion for cooling towers and other plant repairs / improvements. The NRC has not rejected any license extension applications to date, but approval of Entergy’s application is not certain given IP‘s unique siting and cooling system challenges.
If Entergy retires IP by 2013/15 and does not construct the cooling towers, there would be sufficient acreage for a gas-fired power plant. Three years ago, Entergy proposed the addition of an on-site gas-fired plant, but subsequently withdrew its application. COWPUSA has the authority to purchase power from an on-site replacement plant through a PPA, but currently sells power only for economic development purposes. Providing retail service would be a major step for COWPUSA and would impose associated administrative and operational costs. LAI considered a strategy for COWPUSA to buy power directly from the on-site generator to avoid transmission charges, but that strategy was not effective. In addition, the Monthly Adjustment Charge (MAC) component levied by Con Edison for Westchester residents will be equalized, removing a potential cost advantage for COWPUSA.
Ignoring PSC directives to encourage retail choice and competition among generators, it would be preferable for a utility with a large retail customer base, such as NYPA or Con Edison, to enter into a long-term PPA for on-site replacement generation, perhaps in conjunction with COWPUSA. A PPA with credit-worthy counterparty such as NYPA or Con Edison would also assure project financeability.
There would be no electric market and economic impacts because IP would be retired on the same date as in our base case assumption, 2013/15.
Present Value Summary – Voluntary Retirement in 2013/15
(2011 $ millions; excludes indirect impacts; assumes no replacement generation)
Costs Shared by Stakeholders
Original License Term n/a
Renewal Option $ 495 - $1,376
Sub-Total $495 - $1,376
Spent Nuclear Fuel n/a
Total $495 - $1,376
We have assumed that a consensual agreement with Entergy would be reached by January 1, 2011, to retire IP at the end of the existing license terms. In this case, the only cost that would be incurred is the compensation cost due Entergy. Entergy would remain responsible for SNF and decommissioning. In effect, Entergy’s option to extend IP’s licenses would be bought out. We estimate compensation due Entergy at $0.5 - $1.4 billion in present value terms as of January 1, 2011, the assumed payment date. As before, the compensation range is due to the uncertainty of the discount rate that would be developed in the negotiations. Entergy would continue to be responsible for SNF costs, and the rate and economic impacts would be no different than if IP were shut down on its “natural” retirement dates at the end of the existing license terms.
As with the acquisition option, the compensation amounts that we estimated represent an upper limit, because we ascribed full value to the cash flows Entergy would earn during thetwenty year license extension period. We effectively assumed that Entergy faces no risk of the NRC rejecting the application for license extension. While there is some uncertainty surrounding the relicensing effort, we have not tried to calculate either the likelihood of NRC rejection of Entergy’s application for IP license extension or the resulting change in the compensation value.
State and Federal Action
Any action by the state or federal government to require Entergy to retire IP prior to the expiration of the current operating licenses would be unprecedented. In such an event, the State or federal government would likely provide the compensation due Entergy. The State would be bound by similar eminent domain regulations as the County, but the regulatory basis and condemnation process for federal action was not part of LAI’s scope of work. However, State and congressional support for County actions could greatly improve the chances of a successful negotiating outcome and reduce the County’s compensation burden.
Congressional action would likely be needed to obtain tax law changes that would make tax-exempt financing possible for replacement generation on the IP site.
The NRC licenses for IP2&3 expire on September 28, 2013 and December 12, 2015, respectively. In light of the high value of energy and capacity in downstate New York and pressures on oil and gas producers throughout North America, we believe that the forward economics would support Entergy’s decision to apply for a twenty year license extension. In order to receive NRC approval, Entergy will have to demonstrate that all of the systems, structures, and components that are critical to IP’s safe operation can continue to function for the term of the license extension. IP’s proximity to New York City and the efficacy of its Emergency Evacuation Plan would not be considered in atypical license extension process under existing NRC regulations. Given the strong public and political attitudes about IP, the NRC may not view an application from Entergy for license extension as typical.
In order to continue operating beyond the term of the initial licenses, the New York Department of Environmental Conservation (DEC) has required Entergy to convert from the existing once-through cooling system that utilizes Hudson River water to a closed system with cooling towers. We estimate that the future cost of converting to cooling towers plus other repairs and improvements that would likely be undertaken will be $1 billion. Conversion would require that each unit be shut down for roughly nine months, plant output would be reduced by roughly 4% due to pumping requirements and other internal loads, and plant operation and maintenance costs would increase due to age-related problems. The closed-cycle cooling design will likely be scrutinized by the NRC in any application for license extension, and cooling towers will require a zoning variance from the Village of Buchanan.
The NRC has approved extension requests for 30 nuclear plants at 17 sites to date, and has not denied any requests. However, Entergy does face some risk that IP’s application for license extension will not be approved, particularly verifying that the plant design, including conversion to the closed cooling cycle, meets current safety standards. The effectiveness of opposition from New York State interveners before the NRC is unknown. If the NRC denied Entergy’s application for license extension, the County and other stakeholders would not have to fund compensation costs. However, we do not recommend relying on such a strategy.
From an economic perspective, we calculate that license extension would be cost-effective in relation to the value of capacity and energy from the units over the anticipated twenty years of extended plant life. However, if the CapEx requirement is higher than our $1 billion estimate, if the NRC approval is for less than twenty years, or if power prices are lower than our forecast, Entergy may be less inclined to pursue license extension, and our compensation estimates would be lower.
We believe that announcing IP’s retirement at least three-to-four years in advance will allow sufficient time to develop replacement generation. One scenario we examined contemplates the postulated immediate retirement of IP, an unrealistic assumption that would by definition preclude sufficient time for replacement generation, thereby threatening the reliability of the state’s bulk power system. The immediate retirement of IP would cause energy and capacity prices to soar. To ensure resource adequacy, we would expect NYISO to implement a number of expensive short-term fixes to ensure grid security prior to the commercialization of new generation resources.
If IP were to be retired, LAI believes that the resulting market price signals would be attractive for replacement generators. It may nevertheless be necessary for downstate utilities to backstop the development of replacement capacity through PPAs. While the current financial markets are wary of lending to projects that have merchant risk, projects with PPAs provide credit support that facilitate debt and equity financing. Whether those downstate utilities could be reasonably assured of recovering all PPA costs is outside the scope of this inquiry.
We examined the range of possible replacement generation options and concluded that they would likely be gas-fired and located in the downstate region. This conclusion is consistent with possible replacement generation at the IP site and with proposed combined cycle plants in Orange and Rockland counties over the last few years. Generation additions in upstate
New York would not be economic without expensive transmission upgrades. Assuming utility support through PPAs, the requisite generation capacity would likely be permitted and developed on a timely basis. Other infrastructure improvements, in particular, increasing gas pipeline deliverability, would also be required. Major electric transmission improvements would not be necessary in light of the existing transmission infrastructure from IP southward.
Replacing IP’s capacity may be facilitated, in part, by New York’s Renewable Portfolio Standard that requires utilities to increase their purchases of renewable energy over the next decade. How much new capacity and energy could be derived from renewable technologies in the downstate New York region was outside our scope of work.
It is not feasible to convert any of the existing IP units to gas-fired operation. However, the site is well-situated for new gas-fired combined cycle replacement generation so long as cooling towers are not installed, which would utilize valuable remaining space. Entergy proposed developing 330 MW of new gas-fired simple cycle generation at the IP site three years ago, but later withdrew the application. We believe the remaining on-site acreage is sufficient for more than 330 MW of new generation. Algonquin traverses the site and IP’s retirement would free up electric transmission capacity. Although Algonquin is fully subscribed with virtually no surplus capacity throughout the winter season, planned pipeline projects and expansions should make the IP site attractive for new gas-fired generation.
Expensive pipeline upgrades on Algonquin would be required to provide firm year-round deliveries. The quality of non-firm transportation during the winter is uncertain, particularly in light of complex market dynamics associated with new gas supplies entering the system.
To the extent a new combined cycle plant received an air emissions permit that allowed burning distillate oil up to 30 days per year, non-firm service might still entail interruptions during the heating season.
While it is not Westchester’s legal responsibility to replace IP capacity, facilitating the development of replacement generation at the IP site is one way that the costs and economic impacts of IP’s retirement could be avoided or mitigated. In this regard, COWPUSA may be able to support NYPA’s efforts to execute a PPA and purchase power from the replacement plant. While both utilities have large customer bases, neither party would be obligated to do so. In fact, Con Edison has taken a number of steps to lessen its reliance on PPAs in response to state regulatory initiatives to promote competition. Alternatively, part of the IP site could be purchased and leased to a developer, which would maintain PILOT and local spending as well as provide construction opportunities. We do not recommend that COWPUSA consider plant ownership given the competitive market pressures and operational challenges. The National Academy of Sciences has recently been asked to conduct a study for the U.S. Department of Energy (DOE) to identify and evaluate conventional and alternative energy options to replace IP. For its part, the County may also want to pursue cost-effective conservation, load management, distributed generation, and renewable energy sources in Westchester.
LAI estimated the value of IP using standard appraisal techniques. The preferred technique for an income-producing property, referred to as the Earnings Approach, requires forecasting revenues and expenses, and discounting the resulting cash flows back to a specified date using an appropriate discount rate. LAI forecasted IP revenues using a system dispatch simulation model that reflects the hourly power market operation under existing regulations and expected levels of plant performance. Expenses were forecasted based on a detailed economic study of IP prepared by the Nuclear Energy Institute (NEI), a nuclear industry policy organization, as well as on publicly available data. Other local economic impacts, including property taxes, employment, and local spending, were considered separately.
The derivation of the appropriate discount rate applicable to IP’s cash flows is challenging. In addition to market risk attributable to all merchant generation owners who merchandise output without the benefit of a compensatory PPA, nuclear plant owners face a broad spectrum of discernible risks, such as safety compliance, decommissioning, SNF, mishap repairs, latent technical defects, extended outages, and changes in government regulation. In order to bound the range of reasonable plant values applicable to IP, LAI estimated a high discount rate of 20% and a low of 14%. The higher discount rate provides a lower plant value / compensation payment, and vice versa. We did not include a risk premium for possible NRC rejection on Entergy’s application for life extension, which would depress plant values and compensation estimates. In our valuation estimates, we have assumed that once IP ceases operating, the decommissioning funds can be utilized to recover all costs of removing and storing radioactive materials. Non-decommissioning costs, such as SNF management and disposal of non-radioactive structures, cannot be recovered from the funds and would have to be borne by the owner.
LAI utilized a different discount rate to calculate the present value of rate and economic impacts. Evaluating these impacts from the County’s point of view, we estimate that the County’s financing cost is approximately 4.0% based on the cost of issuing tax-exempt debt.
If IP were acquired through condemnation or if Entergy agreed to a voluntary shutdown, we believe that compensation could be funded by issuing tax-exempt general obligation (GO) bonds. If the County were the acquiring entity, it would have to acquire an ownership interest, or else develop a business structure with the assistance of legal counsel that satisfies the State’s municipal finance regulations without being exposing to nuclear plant ownership-type risks. However, acquisition by the County would be problematic as a large GO issuance would stretch the County’s debt capacity and probably lower the County’s AAA credit rating.
A lower rating would increase the cost of debt to compensate Entergy as well as the cost of any future County debt issuances. For these reasons, it might be better to have the State or NYPA, which has the experience to manage the IP asset, issue the bonds. It may be possible for Entergy to remain responsible for decommissioning and SNF management through an easement or sale and lease-back transaction, provided the NRC accepted this arrangement.
We do not believe COWPUSA or the Westchester County Industrial Development Agency (WIDA) could have a role in funding Entergy’s compensation. COWPUSA does not have statutory authority to either issue bonds or to own power generating facilities. WIDA issues Revenue bonds that must be supported by a pledge of revenues from the ultimate borrower.
However, WIDA or another issuing authority might be able to facilitate on-site replacement generation by issuing tax-exempt debt if Congress supported changes to federal tax law.
Decommissioning and Spent Fuel Management
Decommissioning,i.e. the removal of all radioactive materials that are controlled under the NRC licenses, does not include SNF and non-radioactive material. The removal and long-term storage of SNF is the responsibility of the DOE. It is expected that SNF will be stored on-site and eventually shipped to Yucca Mountain starting no earlier than 2010, although that date is uncertain. Non-radioactive material, such as cooling towers, water inlet structures, and buildings, would be removed by Entergy or successor site owners using conventional methods. The IP site will be decommissioned by placing highly radioactive materials, including the reactor vessel and other structural materials, in special containers that will likely have to be stored on site for the foreseeable future. Currently, no licensed disposal site exists for IP’s highly radioactive materials, although Yucca Mountain may be able to accept such waste if its license is amended.
After removal from the reactor vessels, SNF is stored in on-site storage pools for five years to allow the fuel to cool down. Since Yucca Mountain will not open until at least 2010 and IP is running out of storage pool space, Entergy has received approval for, and is constructing an Independent Spent Fuel Storage Installation (ISFSI) on-site. SNF that has cooled sufficiently will be removed from the storage pools, placed in dry storage casks, and stored at the ISFSI until they can be shipped to Yucca Mountain. Upon retirement, we estimate that it will take ten years to remove all of the SNF from the IP site.
There are separate decommissioning funds for each of the three IP units. The IP1&2 funds and liabilities were transferred to Entergy. NYPA retained the fund and liability for IP3 but has the right to require Entergy to assume the liability provided that it is assigned the decommissioning fund. A report by the U.S. Government Accountability Office (GAO) indicates that IP1 was under-funded, and funding for IP2&3 was adequate. However, it is reasonable to assume that Entergy will be able to conduct an integrated decommissioning effort for all three units that will reduce costs, in which case we believe that the combined decommissioning funds will be sufficient.
Retiring IP, without simultaneous development of on-site replacement generation, would result in the loss of PILOT, jobs, and local spending, higher emissions of certain air pollutants, and higher electricity bills. On the other hand, the County’s emergency planning costs would decline and the health of the Hudson River fisheries would improve. These impacts will result whenever IP is retired, but could be avoided or mitigated if replacement generation is developed at the site. Consistent with standard socio-economic analysis, we used economic multipliers to estimate the secondary, or indirect, economic impacts in Westchester and throughout the State.
Entergy executed agreements that established a PILOT schedule of $18.8 million in 2005, escalating to $26.8 million by 2014. The Hendrick Hudson School District receives over 80% of these payments and would be most affected by the loss of PILOT, which accounts for one-third of its revenues. Remaining PILOT is shared among the town of Cortlandt, the Verplanck Fire District, and the County. A PILOT schedule for on-site replacement generation would have to be negotiated among Entergy and these parties. We believe that the ISFSI currently being installed on-site will not alter the existing PILOT schedule.
If IP is retired PILOT would cease unless replacement generation is developed on-site. IP2&3 would be subject to much lower property taxes at then-current rates. While IP’s retirement may increase property values for nearby homeowners, property tax rates may be higher to make up for lost PILOT.
Entergy has announced plans to reduce IP personnel in the next two years, at which point the direct and indirect contribution to Westchester is expected to be $26 million/year. Whenever IP is retired overall staffing levels will be reduced gradually because decommissioning personnel will be required for approximately ten years. Once that work is completed and the SNF is removed for disposal, the site can be reused. Development of on-site replacement generation could provide another source of employment. The number of jobs would actually increase while decommissioning, SNF storage, and construction activities for on-site replacement generation were taking place.
IP spends approximately $12 million/year on goods and services in Westchester, and $55 million on a state-wide basis. These payments will also gradually disappear as decommissioning and SNF work are completed, but development of on-site replacement generation could avoid or mitigate these impacts.
We estimate, on an indicative basis, New York power plant emissions of nitrogen oxides (NOx) will increase by 4.0% and sulfur dioxide (SO2) by 2.6% if IP is retired, as other plants, new and existing, will have to operate additional hours every year. According to statistics from the U.S. Environmental Protection Agency (EPA), power plants are responsible for approximately one-eighth of New York NOx emission and one-half of SO2 emissions. Therefore the overall state-wide increase from retiring IP would be about 0.5% and 1.4%, respectively.
Monetary contributions and IP employee volunteer efforts to the local community, which totaled $0.3 million in 2002 and $1.2 million in 2003, may continue at a lower level once IP retires, until decommissioning was completed and SNF was removed from the site. We estimated 2005 contributions of $0.8 million, escalating with inflation as long the plant continues to operate. However, if Entergy were to develop replacement generation on the IP site it may be expected to continue monetary and volunteer contributions to the local community.
The County would have to continue providing emergency services as long as SNF remains on site. These services cost Westchester $4.2 million in 2002, net of contributions from the State, and could be substantially reduced after IP is retired.
We estimate the value of fish mortality due to using Hudson River water for cooling to be $309 million based on mortality statistics developed by the DEC and standard industry fish values. Retiring IP would eliminate this impact significantly except for a small amount of cooling water that may be required for the SNF storage pools. Since residents throughout the State would benefit from improving the health of fish stocks in the Hudson River, we recommend that the State play a role in fostering a consensual agreement and in compensating Entergy.
Electric Rate Impacts
There are three types of wholesale electricity products: energy that is metered and paid for based on usage, capacity to ensure sufficient energy supplies and paid for regardless of usage, and ancillary services products required to maintain a stable and efficient bulk power system. All customer bills include charges for these wholesale products as well as for local delivery. Energy is the largest component and comprises roughly one-third of a residential bill for a customer consuming 500 kilowatt-hours per month (kWh/month). Utilities purchase energy and capacity for their customers in two ways: from the market at prices that reflect daily and hourly conditions, and through long-term PPAs with generators. PPAs provide retail customers with some insulation from short-term changes in market prices.
IP has a low operating cost and is normally dispatched whenever it is available. If IP retired prior to 2013/15, market energy prices in Westchester and the Hudson River Valley would increase by an average of 8.4%, even with the timely addition of replacement generation. Market energy prices in New York City would likely increase by an average of 3.8%, and slightly less on Long Island. Elsewhere in New York, we expect less than a 1% impact. If IP voluntarily retired in 2013/15, there would not be any market price impact compared to the base case assumption of retirement at the end of the existing license terms. Our expectation of sufficient and timely replacement generation would leave market capacity prices unchanged.
If IP retired in 2008, typical residential bills in Westchester would increase by an average of about $1.55/month though 2015 and about one-half of that amount in New York City. In the unrealistic scenario in which IP was retired immediately without replacement generation, market energy and capacity prices would soar and service reliability would be impaired until short-term generation measures were implemented.
The County’s goals of retiring IP, minimizing economic and rate impacts on County and State residents, and maintaining system reliability are not inherently incompatible. While an immediate shutdown would have serious consequences, the County could pursue its goals through an orderly retirement strategy. We recommend that the County spearhead an agreement with New York State, Entergy, NYPA, and other stakeholders that focuses on twokey initiatives – voluntary retirement in 2013/15 at the end of the current NRC license terms and encouraging on-site gas-fired replacement generation. This would allow Entergy to continue earning profits for the term of the current NRC licenses as originally envisioned, avoid the high cost of license extension, and pursue an on-site investment opportunity that takes advantage of existing infrastructure. Local communities and school districts could preserve some level of PILOT, employment, and local spending on goods and services.
Lastly, an agreement reached by year-end 2010 would allow sufficient time for Entergy and other developers to install sufficient replacement generation.