No. S-97-16
June 26, 1997
"ECONOMIC DEREGULATION OF THE ELECTRIC UTILITY INDUSTRY:
ENSURING NUCLEAR SAFETY IN AN ERA OF
CHANGING OPERATIONAL AND FINANCIAL PERSPECTIVES"
BY
DR. SHIRLEY ANN JACKSON, CHAIRMAN
U.S. NUCLEAR REGULATORY COMMISSION
KEYNOTE ADDRESS TO THE ANNUAL MEETING OF
NUCLEAR ELECTRIC INSURANCE, LTD.
June 17, 1997
Good morning, ladies and gentlemen. I am pleased to be here today to address
this annual meeting of Nuclear Electric Insurance, Limited.
I. INTRODUCTION
I plan to focus today on Electric Utility Restructuring and the Nuclear
Regulatory Commission (NRC). In the past year, I have addressed a number of
audiences on this topic. I find the occasion today particularly meaningful
because your annual meeting brings together the Chief Financial Officers and
Chief Executive Officers from a large number of companies that have NRC
licenses. I believe that, as economic deregulation of the electric utility
industry and the resulting corporate restructuring proceed, the relationship
of the financial decision-maker to safe operation, and to the assurance of
nuclear power plant decommissioning funding, will become more important. As
the basis for your corporate financial results shifts from base rate cost
recovery to market-driven competition, you will be called upon to make
financial decisions of a different--and, in some cases, a more difficult--character.
How does the role of the financial decision-maker--a term which, in my view,
includes both the CFO and the CEO--interact with the issues of greatest
importance to the NRC? To respond to that question, I will discuss today
several critical aspects of electric utility restructuring as they intersect
with the NRC mission and fall within NRC jurisdiction. For each area, I will share with you the actions the NRC is taking to ensure that we understand the
changes being brought about by restructuring, and to ensure that we are
positioned for an appropriate response to those changes.
As you know, the NRC is not an economic or rate regulator. Our mission is to
ensure adequate protection of public health and safety, the common defense and
security, and the environment in the use of nuclear materials in the United
States. However, as the government agency responsible for regulating nuclear
safety at power reactor facilities, the NRC has an important function during
this transition to a competitive market. As organizations restructure
internally, as ownership changes, as mergers occur, and as electric utilities
work to control and reduce costs, the NRC must understand the effects of the
changing business environment on nuclear safety. The NRC will not dictate how
changes occur to the rules or statutory mandates undergirding economic
deregulation, nor will we prescribe how the electric power industry
restructures. It is, however, our responsibility to ensure that, as the
business environment changes, the challenges facing the industry do not
adversely impact nuclear safety. Equally important, it is our responsibility
to ensure that any changes we make to our regulatory approach are well
grounded and balanced. I have grouped the challenges facing the industry
under three general headings: (1) the availability of funds for
decommissioning and stranded costs; (2) electrical grid reliability; and (3)
safe nuclear operations.
II. DECOMMISSIONING FUNDING AND STRANDED COSTS
A. Existing Regulatory Framework
Under Section 161 of the Atomic Energy Act of 1954, as amended, the NRC
has general authority to regulate the decommissioning of the nuclear
facilities and materials that it licenses. When the NRC promulgated its
decommissioning regulations in 1988, the agency had determined that
decommissioning funding assurance requirements were necessary to protect
public health and safety. As a result, the NRC required its power
reactor licensees to set aside funds periodically in external trust fund
accounts (or to provide third party guarantees for estimated
decommissioning costs) in order to accumulate over time an amount at
least equal to the amounts provided by formula in 10 CFR 50.75. As
such, by the time a licensee was expected to permanently cease
operations, the total amount of funds estimated as needed to complete
decommissioning would be available.
Within this framework, which makes up existing decommissioning funding
provisions, the NRC does not specify the percentages or schedules of
funds collection. In 10 CFR 50.75, the NRC shares responsibility for
decommissioning funding regulation with rate regulators--that is, with
the State Public Utility Commissions (PUCs) and the Federal Energy
Regulatory Commission (FERC). Traditionally, the NRC has relied on the
FERC and the PUCs for such decisions as the sources of decommissioning
funds (whether rate-payers or licensee stockholders), the timing of
funds collection (questions of intergenerational equity), and the
investment in trust funds. This practice is consistent with earlier NRC
determinations that traditional cost-of-service rate regulation provides
reasonable assurance of funds for operations and decommissioning.
Current regulations allow only those licensees that meet the NRC
definition of "electric utility" to use the external "sinking fund"
method of decommissioning funding assurance. Electric utility means any
entity that generates or distributes electricity, and which recovers the
cost of this electricity, either directly or indirectly, through rates
established by the entity itself or by a separate regulatory authority
(i.e., the FERC and the PUCs). Included within this definition of
"electric utility" are investor-owned utilities, including generation or
distribution subsidiaries, public utility districts, municipalities,
rural electric cooperatives, and State and Federal agencies--including
associations of any of the foregoing.
The NRC also has explicit requirements in 10 CFR 50.82 concerning the
release of decommissioning funds from trust accounts. The NRC has
regulatory authority to stop any unwarranted withdrawals, and to require
reimbursement of the trust fund for unwarranted withdrawals already
made. Based on the broad authority given under the Atomic Energy Act,
the NRC also could order trust fund disbursements for a particular
decommissioning-related activity, based on the presence of a threat to
public health and safety if this activity did not occur.
Although the FERC and the PUCs typically do not become too closely
involved in the release of decommissioning funds, some states, such as
California, are more proactive in this area and have their own
requirements for funds release.
B. Changes Due to Deregulation
When the Energy Policy Act of 1992 was passed, with provisions that
enabled wholesale competition in electricity generation, few of us would
have predicted the speed with which the shift to both wholesale and
retail competition would occur. Orders 888 and 889 issued by the FERC,
together with the FERC merger policies, were major enabling actions for
the economic deregulation of wholesale markets. As these changes began
to take shape, the NRC found it to be critical that we understand the
changes, identify any safety concerns, and forward those concerns to the
agencies responsible for economic regulatory decisions, or take
regulatory action, as appropriate, for issues within our direct
statutory purview.
Some of the most significant changes involve new ownership arrangements.
For example: generation, transmission, and distribution assets may be
spun off into subsidiaries or fully separate companies (called "GENCOs,"
"TRANSCOs," and "DISCOs"). We expect to see a variety of hybrid
ownership arrangements that go beyond current structures, which
typically are defined geographically and integrated vertically.
Another focus area is the problem of above-market or "stranded" costs,
including some nuclear plant capital and decommissioning costs. States
and the FERC are considering various remedies, including exit fees for
customers leaving a company's system, transmission access fees for new
bulk electricity suppliers, and other transmission or "wires" charges.
In some States, nuclear plant owners have been allowed to accelerate the
depreciation of their plants, so that by the time full retail competition arrives, the capital costs of certain nuclear plants will
have been amortized fully. States also are exploring securitization as
a method for providing recovery of stranded costs.
The NRC does not have the responsibility of determining how ownership
arrangements may be structured, nor how nuclear "stranded" costs (or
assets) should be addressed by State PUCs or State and Federal
legislatures. However, we are responsible for making clear that power
reactor licensees must continue to have sufficient resources both to
operate and to decommission their plants safely. That responsibility
includes taking appropriate regulatory action for issues within NRC
jurisdiction. Where warranted, it also includes weighing in on
legislative initiatives under consideration by the Congress.
C. NRC Actions to Address Deregulation
What has the NRC done to respond to deregulation and emerging utility
restructuring scenarios? In the Fall of 1995, the NRC initiated a broad
review of its policies and regulations--including a re-evaluation of our
decommissioning funding policies--to ensure that the existing regulatory
framework was sufficient to cope with any potential safety impacts on
NRC power reactor licensees. In February 1996, the agency issued an
Action Plan that described a framework and schedule for specific actions
needed, based on our understanding of the likely future shape and
structure of nuclear electricity generation. To date, these actions
have included the issuance of an Advance Notice of Proposed Rulemaking,
the formulation of a Proposed Rule, and the development of a draft
Policy Statement and draft Standard Review Plans, with due consideration
of public comments at the various stages. I will discuss each of these
actions briefly.
In April 1996, the NRC issued an Advance Notice of Proposed Rulemaking
seeking stakeholder input on a series of questions related to electric
utility restructuring and the potential need for NRC actions. The
Advance Notice requested public comment on a specific proposed change to
NRC regulations which would revise the definition of "electric utility,"
and would impact those power reactor licensees no longer subject to rate
regulation by the FERC or the State PUCs. As proposed in the Advance
Notice, this change would not affect the current requirement that non-electric utility licensees must provide some other means of assurance--such as a letter of credit or surety bond--for any unfunded balance of
decommissioning costs.
The staff reviewed a wide range of public comments submitted in response
to the Advance Notice. One area of comment concerned "benchmarking," or
specifying the amount of decommissioning funding that a licensee should
possess at given points in the projected operational life of a nuclear
power plant. For example, benchmarking might require licensees to
accumulate 25 percent of their decommissioning funds by the end of the
10th year of a projected 40 years of the nuclear plant's operation.
As I have already stated, the NRC traditionally has relied on rate
regulators--the FERC and the State PUCs--for responsibilities such as
setting the amortization schedule under which decommissioning funds are collected. Although 10 CFR 50.75 requires licensees to revise annually
the estimate of total decommissioning funds needed, it does not require
licensees to adjust immediately the amount of funds set aside based on
changes in these estimates. Those commenters who advocate
"benchmarking" believe that the NRC should take a stronger role in
requiring, at periodic junctures, that licensees evaluate the status of
their decommissioning funds relevant to current economic factors and the
projected remainder of operational life, and to make adjustments in
funds set aside, as necessary. Considering the existing approaches to
economic deregulation and the responsible actions of State PUCs, the NRC
continues to believe that reliance on and coordination with the PUCs is
well-founded. However, we will continue to monitor changes stemming
from economic deregulation, to ensure that our responsibilities are met
with regard to ensuring the availability of decommissioning funding.
Based on a rigorous review of these and other public comments, as well
as ongoing analysis of emerging industry developments, the staff has
drafted a proposed rule, which currently is undergoing Commission review
and should be released shortly for public comment. As drafted, the
proposed rule would modify NRC decommissioning regulations in three
areas. First, it would additionally refine the proposal given in the
Advance Notice concerning the revised definition of "electric utility,"
and the need for additional funding assurance for power reactor
licensees not covered under the new definition. This refinement would
clarify that, for entities within the definition of electric utility,
rates must be established by a regulatory authority, either directly
through traditional "cost of service" regulation, or indirectly through
another non-bypassable charge mechanism. Distinctions would also be
made for those entities whose rate-related costs are only partially
covered by existing regulatory mechanisms.
Second, under the current draft of the proposed rule, we are considering
the allowance of credit on earnings on the decommissioning trust funds.
Third, to keep the NRC informed of licensee decommissioning funding
assurance, the proposed rule would require licensee reporting of the
status of decommissioning funding and any changes to trust agreements.
While the proposed rule does not contain any benchmarking requirements,
this reporting requirement would provide the NRC the information needed
to assess whether licensee contributions to their decommissioning funds
are adequate relative to the life of their plants. Following a review
of initial licensee reports in this area, it may be prudent to consider
again the appropriateness of a benchmarking requirement. I encourage
you to review the proposed rule, and to take this opportunity to provide
us your insights.
The NRC also is finalizing its policy statement on the Restructuring and
Economic Deregulation of the Electric Utility Industry. The policy
guidance provides a framework for our approach to future reviews. Under
this approach, the NRC will continue to conduct financial
qualifications, decommissioning funding, and antitrust reviews. Under
the approach outlined in the draft policy statement, the NRC will also
continue to identify all owners, indirect as well as direct, of nuclear
power plants; to evaluate the relative responsibilities of power plant co-owners and co-licensees; and to re-evaluate our regulations for their
adequacy in addressing the changes caused by rate deregulation.
On December 27 of last year, the NRC issued for public comment the draft
Standard Review Plans on Antitrust and Financial Qualifications and
Decommissioning Funding Assurance. These plans are intended to ensure
that the NRC clearly communicates its expectations concerning existing
requirements and relevant owner/operator responsibilities in these
areas. The NRC staff is currently is finalizing these documents, with
due consideration of public comments, and expects to issue the final
Standard Review Plans later this summer.
III. ELECTRICAL GRID RELIABILITY
An equally important area of NRC focus has been electrical grid reliability,
or security. As many of you know, the term "Station Blackout" is used, in the
nuclear power industry, to refer to an event in which a loss of offsite power
is coupled with the inability of the onsite emergency diesel generators to
provide vital power to plant safety equipment. In recent years, NRC
probabilistic risk assessments have made it clear that a Station Blackout at a
nuclear power station is a major contributor to a particular measure of risk
known as reactor "core damage frequency" (that is, the probability per year
per reactor that core damage will occur). Although Station Blackouts have
been extremely rare to date, there have been a number of times when offsite
power was lost, and there have been separate instances in which facility
diesel generators have not been operable for sustained periods. Therefore,
the possibility of a Station Blackout continues to be an area of NRC focus.
In 1996, within a 5-week period, two electrical disturbances on the United
States' Western Grid caused 190 power generating plants to trip off-line,
including several nuclear units. This set of occurrences illustrated an
interesting two-sided coin. On the one side, nuclear plants are designed to
withstand unexpected trips. However, events of this type cause unnecessary
challenges to plant safety systems. On the other side of the coin, the
nuclear plants themselves are an important element of maintaining electrical
network stability.
In reviewing the electrical disturbances, the Western Systems Coordinating
Council listed the following contributing factors: high Northwest
transmission loads; equipment out of service; inadequate maintenance of right-of-way; operation in a condition in which a single failure would overload
parallel lines, triggering cascading outages; communication failures to
neighboring utilities, prior to the disturbances; and the lack of response to
earlier events.
At about the time these events were occurring last year, I reviewed a status
report on the NRC accident sequence precursor program. This program was
established in 1979 to review operational events and to provide a reasonable
estimate of their significance. The program assesses the extent to which a
given event is a potential contributor to a serious accident sequence. It
uses probabilistic risk assessment techniques to provide quantitative
estimates of the operating event significance in terms of the potential for
reactor core damage. The report indicated that, in 1995, six of the ten
precursor events involved problems with electrical equipment.
These events and studies tell us that, while nuclear generating stations are
robust in design and operational standards, they also are vulnerable to grid
disturbances, and especially to Loss-of-Offsite-Power events.
Let me add a practical perspective. The North American Electric Reliability
Council (NERC) has prepared an independent assessment of the reliability of
electric supply in North America for this summer. The peak summer demand for
electricity in the United States is projected to increase by 5.3% from the
actual 1996 summer peak. Electric utilities in Illinois, Wisconsin, and the
New England area anticipate that electrical supply shortages may occur due to
the prolonged unavailability of several thousand megawatts of nuclear
capacity. The different geographic areas have made extensive preparations to
mitigate these problems. However, such shortages, if realized, could require
controlled interruption (or "rotating blackouts") to customer facilities for
short periods.
As I stated in January, in a speech to the National Association of Regulatory
Utility Commissioners (NARUC): from the perspective of a nuclear safety
regulator--the NRC--economic deregulation must proceed with a sensitivity to,
and an understanding of, the vulnerability of nuclear plants to Loss-of-Offsite-Power events. This means that transmission network governance
structures must reflect that standards of performance, operational criteria,
and training of personnel are critical oversight issues, which must be
considered and addressed as deregulation proceeds. Whatever form network
governance structures assume, their authority must be strong enough to ensure
that these factors are addressed.
Although grid reliability is a voluntary function under the North American
Electric Reliability Council (NERC) and the regional councils, Federal
oversight currently is handled by the FERC and at the Department of Energy
(DOE). The DOE has created a working advisory committee on the reliability of
the U.S. electric system. The NRC has been coordinating with DOE, and will
remain abreast of this effort, participating as appropriate. We know that
under discussion is the question of whether a Federal entity, such as the
FERC, should be vested with more authority to police grid reliability, or
whether a voluntary organization such as the North American Electric
Reliability Council should be given enforceability teeth. What is important
to the NRC is that grid reliability is not left to chance, but is explicitly
addressed as electric industry restructuring unfolds.
In April, at my request, the Commission held two public meetings on aspects of
electric power industry restructuring. The first meeting focused on grid
performance and reliability, and the second meeting addressed electric utility
restructuring, with a significant amount of discussion on independent system
operators (ISOs). These meetings brought together representatives of the
nuclear power industry, as well as economic regulators, from both the Federal
and State governments. The meetings were intended to improve both NRC and
public understanding of the progress of economic deregulation and industry
restructuring, to explore related safety questions, and to ensure that we are
taking the right actions, at the right time, in the appropriate manner.
Based on the insights gained at those meetings, the Commission has asked the
NRC staff to give greater urgency to ensuring that health and safety issues
within NRC jurisdiction are addressed--particularly in reviewing terms of the licensing basis for nuclear power licensees, and in validating grid
reliability assumptions. The staff was asked specifically to inform the
Commission of actions by Federal and State economic regulators in establishing
membership requirements for the North American Electric Reliability Council
(NERC). The Commission is especially interested in the effectiveness of such
requirements and enforcement policies as they relate to grid reliability.
Finally, the Commission asked that appropriate NRC regional staff visit a
power pool and a reliability council within their jurisdiction--to improve NRC
understanding of regional grid reliability issues.
IV. SAFE NUCLEAR OPERATIONS
My third topic of discussion today is safe nuclear operations. The NRC
traditionally has relied on inspection and plant assessment programs to
identify any adverse trends in safety performance. Based on inspection
program results, plant performance reviews, and other evaluative mechanisms,
the NRC takes the action it deems appropriate to protect public health and
safety.
While the overall safety performance of the U.S. nuclear power industry
continues to improve, we have seen events that may signal a need for
heightened concern. NRC safety assessments at several reactor facilities have
identified deficiencies stemming from common root causes--both of which are
receiving increased NRC focus. The first root cause is the economic pressure
on a licensee to be a low-cost energy producer, which has limited the
resources available for corrective actions and plant improvements. The second
is the licensee failure to identify and correct promptly problems arising in
areas that licensee management has viewed--not always correctly--as having low
safety significance.
The Commission has taken certain actions in response to these kinds of
signals. To ensure that the NRC can detect safety degradations at licensee
facilities, we are developing measures that would identify plants where
economic stress may be adversely impacting safety. The NRC evaluates the
safety performance of nuclear power plants using licensing information,
inspection results, operating experience, performance indicators, enforcement
actions, and assessments of licensee effectiveness in identifying and
correcting problems. Semi-annually, these various measures and assessments
are integrated into an overall review at NRC Senior Management Meetings. These
meetings help to ensure that NRC resources are focused properly on facilities
that most need regulatory attention. The result of these meetings is a
proposed list of facilities that have demonstrated weaknesses and warrant
increased NRC attention.
To improve the effectiveness of the Senior Management Meeting process, the NRC
is developing objective, meaningful, "leading" performance indicators of
nuclear plant performance, as well as an enhanced approach for monitoring and
assessing licensee corrective actions. In the Summer of 1996, we commissioned
an outside study by Arthur Andersen to evaluate the Senior Management Meeting
process, to suggest improvements to the timeliness and thoroughness of plant
safety assessments, to recommend performance indicators based on objective
data, and to define a methodology for assessing management and operational
effectiveness.
The resulting Arthur Andersen report proposed a detailed methodology for using
existing performance indicators in reaching Senior Management Meeting
decisions. The Commission has endorsed significant portions of the report and
its recommendations, and has asked the NRC staff to evaluate critically the
Arthur Andersen approach, considering the assumptions, the weighting and the
periodicity of data, and the need for appropriate validation. In addition,
the methodology being developed will more effectively use existing performance
indicators in NRC decision-making processes, and will phase in new risk-based
indicators as they are developed.
While NRC regulatory and safety decisions must not be influenced by a
perceived need to lower nuclear plant operating costs, we feel keenly our
responsibility to pursue our health and safety mission within the most
efficient and effective regulatory framework possible--for both the NRC and
the nuclear energy industry. We have been working with the nuclear energy
industry to remove unnecessary regulatory requirements through conversion to
improved Standard Technical Specifications, changes to rules that are marginal
to safety, and the implementation of the NRC Regulatory Review Group
recommendations. These recommendations include expedited review of cost-beneficial licensing actions, as well as the development of guidelines that
would permit licensees to implement changes to their quality assurance
programs, emergency preparedness plans, and security plans without prior NRC
review and approval, as long as the underlying regulations are met. We have
continued the movement toward risk-informed, performance-based regulation
through the development of Probabilistic Risk Assessment (or PRA) guidance in
the form of a Regulatory Guide and Standard Review Plan, as well as through
pilot processes for risk-informed regulation, out of which application-specific regulatory guides will be developed. These efforts will assist the
NRC and nuclear licensees in focusing their resources on the most safety-significant aspects of nuclear operations, while maintaining defense-in-depth--which in turn should both enhance safety and improve cost-competitiveness.
V. INTERNATIONAL PERSPECTIVE
This overall topic--trends in electric generation and their effect on nuclear
safety--is not only an issue for the U.S. Just last month, the International
Nuclear Regulators Association was created, a new body designed to enhance
nuclear safety worldwide. I am pleased to serve as the first Chairman of this
group. During our two-day meeting in Paris, the issue of trends in electrical
generation was one of two broad topics discussed at length. Each country has
seen, or foresees, potential impact from changes in electric utility structure
or markets.
VI. CONCLUSION
In closing, let me reiterate that the NRC will continue to take seriously its
responsibility as a safety regulator. I firmly believe that ensuring safety
is in no way inconsistent with economic deregulation and competition. A focus
on the bottom line is not, in itself, a bad thing, so long as our vision is
not narrowly focused on short-term returns.
As the Chairman of the NRC, I have the Chief Financial Officer (CFO) reporting
directly to me. Working with the CFO and the Executive Director for
Operations, I have the responsibility of developing the NRC budget for Commission consideration. Right now the NRC, like all government agencies, is
in the final planning stages for the Fiscal Year 1999 budget. I know how
difficult it is to take a long-term view when many needs are competing for
resources today. Making judgments based on cost-benefit analyses can be
difficult, especially when the pay-off is far in the future. But
understanding and valuing long-term returns is an important part of the
planning process.
My own view is that adequate protection of public health and safety is
entirely compatible with a deregulated environment, provided that the economic
restructuring of the electric power industry addresses the elements that are
necessary for that protection. As I have outlined this morning, those
entities responsible for economic deregulation must recognize the safety
implications of change, and those of you in the nuclear energy industry must
recognize that there are no economic short cuts to safely operated,
economically viable nuclear power facilities. The many players who have a
role in the interesting and challenging environment of electric power industry
restructuring must work together--including the NRC as safety regulator, the
FERC and the State regulatory commissions as rate regulators, and industry
underwriters, owners, operators, and licensees. Each must understand the
concerns of the other parties involved in order to ensure that we will
continue to enjoy the benefit of safely operated, soundly regulated nuclear-generated electricity, together with the economic benefits of deregulation.
Thank you for the opportunity to address you. I wish you a very successful
annual meeting. I do appreciate your interest in the NRC perspective, and I
would be happy to respond to your questions at this time.
