Executive Summary

Introduction

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.

Background

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.

Findings

Recommendation

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:

Present Value Summary – Acquisition in 2008 versus Retirement in 2013/15

(2008 $ millions; excludes indirect impacts; assumes no replacement generation)

Costs Shared by Stakeholders

Entergy Compensation

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.

– 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.

Voluntary Retirement

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:

Present Value Summary – Voluntary Retirement in 2013/15

(2011 $ millions; excludes indirect impacts; assumes no replacement generation)

Costs Shared by Stakeholders

Entergy Compensation

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 the twenty 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.

License Extension

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 a typical 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.

Replacement Generation

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.

Valuation

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. 

Tax-Exempt Financing

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.

Economic Impacts

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.

Electric Rate Impacts

Action Plan

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.