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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Construction on two new units at the Alvin W. Vogtle Nuclear Power Station is about 60% complete, and the operator and principal owner, Georgia Power Company (Atlanta, Georgia), a unit of the Southern Company (NYSE:SO) (Atlanta), has agreed to forego several hundred million dollars in scheduled customer price increases over 2017-2020 because of construction delays, according to a settlement unanimously approved by the Georgia Public Service Commission (GPSC) (Atlanta) on December 20.
The settlement lowers the return on equity (ROE) for Georgia Power by 95 basis points, or nearly one full percentage point, to 10% from 10.95%, starting January 1, 2017. Lowering the utility's ROE shields its customers from paying an estimated $355 million in automatic cost increases between 2017 and 2020.
That settlement also holds Georgia Power's feet to the fire regarding the in-service date of the two nuclear units under construction. Currently, Unit 3 is scheduled to begin operating in mid-2019 and Unit 4 is scheduled to begin generating electricity one year later. If both units are not generating electricity by the end of 2020, the settlement would lower Georgia Power's ROE by an additional 300 basis points (three percentage points), from 10% to 7%--an extraordinarily heavy financial penalty.
In a December 20 statement, Georgia PSC Chairman Chuck Eaton praised the utility and the commission's staff in reaching the agreement: "It's never an easy process, and the nature of stipulations is that both parties give up a lot. But we are able to front load a lot of the $325 million in savings to give ratepayers immediate relief. I think the Staff and Company has done a great job."
Construction of Units 3 and 4 is about 39 months behind schedule: Unit 3 originally was scheduled to begin operating in early 2016, and Unit 4 a year later, in early 2017. The utility said most of the delays were incurred early in the construction phase, and the early-2016 change of engineering, procurement and construction (EPC) firms should allow construction to be finished so that the units can begin operating in mid-2019 and mid-2020.
The project's original EPC firm, Chicago Bridge & Iron Company NV (NYSE:CBI) (CB&I) (The Hague, Netherlands), was acquired by Westinghouse Electric Company (Pittsburgh, Pennsylvania) in early 2016. Westinghouse then subcontracted Vogtle work to Fluor Corporation (NYSE:FLR) (Irving, Texas). For more on that transaction, see January 5, 2016, article - Westinghouse Completes CB&I Nuclear Business Acquisition, Picks Fluor to Manage Vogtle, Summer Power Plant Unit Additions.
Commenting on the December 20 commission decision, Georgia Power said: "We are pleased with today's decision by the Georgia Public Service Commission (PSC), as it illustrates the importance and effectiveness of Georgia's regulatory structure in both protecting customers while securing Georgia's energy future. The agreement approved today fairly balances the company's contribution with customer benefits, and delivers approximately $325 million in expected savings to customers during the construction period, while keeping the project's overall projected rate impact to customers at 6% to 8%."
The December 20 regulatory decision also found none of the project costs incurred through the end of 2015 were imprudent--an important win for the utility. The GPSC also "adjusted" Georgia Power's share of the forecast capital cost to construct Vogtle 3 and 4 to $5.68 billion, which includes a contingency of $240 million. Thirdly, the settlement presumed all capital spending by Georgia Power up to $5.68 billion was reasonable and prudent. That sum includes $350 million in settling litigation with the project's previous contractors.
Georgia Power's $5.68 billion forecast capital construction cost represents a $1.262 billion increase over the previous forecast capital cost of $4.418 billion to build the two units. And that sum does not include financing costs, which have risen due to the delays.
Additional details on the estimated construction and financing costs are contained in the 15th Semi-Annual Construction Monitoring Report for Vogtle Units 3 and 4, prepared by Georgia Power and released August 31, 2016. That report shows Georgia Power, the 45.7% owner of Vogtle 3 and 4, is expected to incur costs of $5.44 billion to build the two new units, an increase of $1.022 billion over its certified costs. Financing costs have increased $727 million over the certified cost estimate, to $2.442 billion from $1.695 billion.
All told Georgia Power's 45.7% share to build and finance units 3 and 4 will amount to an estimated $7.862 billion, roughly $1.749 billion over its certified cost. Vogtle 3 and 4's other owners include Oglethorpe Power Corporation (Tucker, Georgia), Municipal Electric Authority of Georgia (Atlanta), and the City of Dalton, Georgia. Grossing up the cost of the project based on the proportion to be borne by Georgia Power brings Vogtle 3 and 4's overall price tag to about $17.2 billion, significantly higher than its original estimated cost of between $12 billion and $14 billion.
The delay in the two units' in-service dates has not financially harmed the customers to be served by Vogtle 3 and 4, the semi-annual construction report found, because the delays deferred about $40 million of scheduled operating costs. Roughly $30.3 million of planned benefits have not taken place because of the delays, leaving customers better off by about $9.7 million on a net basis.
Despite the cost overruns and the delays, the semi-annual construction report, which reviewed actual and projected costs for the first half of 2016, said building two new nuclear units is still a better economic deal than adding gas-fired generation. "The weighted average expected value of the relative savings for completion of the (Vogtle) facility as compared to the gas-fired combined cycle alternative is $3.1 billion," the report found. That average covered nine different future scenarios that involved different high, medium and low prices for fuel and carbon dioxide (CO2). The estimated savings ranged from $32 million in the low fuel/CO2 cost scenario to $5.967 billion in the high fuel/CO2 cost scenario.
Those who have opposed building Vogtle 3 and 4 sharply criticized the regulators' December 20 decision. Sara Barczak, director of the Southern Alliance for Clean Energy's High Risk Energy Choices Program, said: "Approval of the Vogtle settlement creates the largest rate impact for Georgia Power customers based on the least public review in PSC history. With today's decision, the Georgia Public Service Commissioners have wrongly rewarded Georgia Power, its partners and shareholders and lead contractor Westinghouse for years of mistakes that will cost utility customers billions of additional dollars."
"The still under-construction nuclear reactors at Plant Vogtle are now a confirmed boondoggle, and it's likely to get even worse as more schedule delays are highly likely, which will add even more to the price tag," she added.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com/.
The settlement lowers the return on equity (ROE) for Georgia Power by 95 basis points, or nearly one full percentage point, to 10% from 10.95%, starting January 1, 2017. Lowering the utility's ROE shields its customers from paying an estimated $355 million in automatic cost increases between 2017 and 2020.
That settlement also holds Georgia Power's feet to the fire regarding the in-service date of the two nuclear units under construction. Currently, Unit 3 is scheduled to begin operating in mid-2019 and Unit 4 is scheduled to begin generating electricity one year later. If both units are not generating electricity by the end of 2020, the settlement would lower Georgia Power's ROE by an additional 300 basis points (three percentage points), from 10% to 7%--an extraordinarily heavy financial penalty.
In a December 20 statement, Georgia PSC Chairman Chuck Eaton praised the utility and the commission's staff in reaching the agreement: "It's never an easy process, and the nature of stipulations is that both parties give up a lot. But we are able to front load a lot of the $325 million in savings to give ratepayers immediate relief. I think the Staff and Company has done a great job."
Construction of Units 3 and 4 is about 39 months behind schedule: Unit 3 originally was scheduled to begin operating in early 2016, and Unit 4 a year later, in early 2017. The utility said most of the delays were incurred early in the construction phase, and the early-2016 change of engineering, procurement and construction (EPC) firms should allow construction to be finished so that the units can begin operating in mid-2019 and mid-2020.
The project's original EPC firm, Chicago Bridge & Iron Company NV (NYSE:CBI) (CB&I) (The Hague, Netherlands), was acquired by Westinghouse Electric Company (Pittsburgh, Pennsylvania) in early 2016. Westinghouse then subcontracted Vogtle work to Fluor Corporation (NYSE:FLR) (Irving, Texas). For more on that transaction, see January 5, 2016, article - Westinghouse Completes CB&I Nuclear Business Acquisition, Picks Fluor to Manage Vogtle, Summer Power Plant Unit Additions.
Commenting on the December 20 commission decision, Georgia Power said: "We are pleased with today's decision by the Georgia Public Service Commission (PSC), as it illustrates the importance and effectiveness of Georgia's regulatory structure in both protecting customers while securing Georgia's energy future. The agreement approved today fairly balances the company's contribution with customer benefits, and delivers approximately $325 million in expected savings to customers during the construction period, while keeping the project's overall projected rate impact to customers at 6% to 8%."
The December 20 regulatory decision also found none of the project costs incurred through the end of 2015 were imprudent--an important win for the utility. The GPSC also "adjusted" Georgia Power's share of the forecast capital cost to construct Vogtle 3 and 4 to $5.68 billion, which includes a contingency of $240 million. Thirdly, the settlement presumed all capital spending by Georgia Power up to $5.68 billion was reasonable and prudent. That sum includes $350 million in settling litigation with the project's previous contractors.
Georgia Power's $5.68 billion forecast capital construction cost represents a $1.262 billion increase over the previous forecast capital cost of $4.418 billion to build the two units. And that sum does not include financing costs, which have risen due to the delays.
Additional details on the estimated construction and financing costs are contained in the 15th Semi-Annual Construction Monitoring Report for Vogtle Units 3 and 4, prepared by Georgia Power and released August 31, 2016. That report shows Georgia Power, the 45.7% owner of Vogtle 3 and 4, is expected to incur costs of $5.44 billion to build the two new units, an increase of $1.022 billion over its certified costs. Financing costs have increased $727 million over the certified cost estimate, to $2.442 billion from $1.695 billion.
All told Georgia Power's 45.7% share to build and finance units 3 and 4 will amount to an estimated $7.862 billion, roughly $1.749 billion over its certified cost. Vogtle 3 and 4's other owners include Oglethorpe Power Corporation (Tucker, Georgia), Municipal Electric Authority of Georgia (Atlanta), and the City of Dalton, Georgia. Grossing up the cost of the project based on the proportion to be borne by Georgia Power brings Vogtle 3 and 4's overall price tag to about $17.2 billion, significantly higher than its original estimated cost of between $12 billion and $14 billion.
The delay in the two units' in-service dates has not financially harmed the customers to be served by Vogtle 3 and 4, the semi-annual construction report found, because the delays deferred about $40 million of scheduled operating costs. Roughly $30.3 million of planned benefits have not taken place because of the delays, leaving customers better off by about $9.7 million on a net basis.
Despite the cost overruns and the delays, the semi-annual construction report, which reviewed actual and projected costs for the first half of 2016, said building two new nuclear units is still a better economic deal than adding gas-fired generation. "The weighted average expected value of the relative savings for completion of the (Vogtle) facility as compared to the gas-fired combined cycle alternative is $3.1 billion," the report found. That average covered nine different future scenarios that involved different high, medium and low prices for fuel and carbon dioxide (CO2). The estimated savings ranged from $32 million in the low fuel/CO2 cost scenario to $5.967 billion in the high fuel/CO2 cost scenario.
Those who have opposed building Vogtle 3 and 4 sharply criticized the regulators' December 20 decision. Sara Barczak, director of the Southern Alliance for Clean Energy's High Risk Energy Choices Program, said: "Approval of the Vogtle settlement creates the largest rate impact for Georgia Power customers based on the least public review in PSC history. With today's decision, the Georgia Public Service Commissioners have wrongly rewarded Georgia Power, its partners and shareholders and lead contractor Westinghouse for years of mistakes that will cost utility customers billions of additional dollars."
"The still under-construction nuclear reactors at Plant Vogtle are now a confirmed boondoggle, and it's likely to get even worse as more schedule delays are highly likely, which will add even more to the price tag," she added.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com/.
