Hincipal Utility Financial Analyst Office of Accounting and Finance
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Exhibit__(JDS-12) Page 1 of 90 THE ECONOMIC AND FINANCIAT IMPLICATIONS OF NINE MIIE POINT NUCTEAR STATION TWO AND ITS ALTERNATTVES Authored by Thomas G. Dvorsky, P.E. Nine Mile Point fI Project Coordiirator Power Division Kevin M. Bronner hincipal Utility Financial Analyst Office of Accounting and Finance Princip al Investi gat ors Ronald Calkins - Accounting William Kasper - Fossil Fuel Richard Kenney - hogrammer Frederick Haag - System Planning Andrew Harvey - Nuclear Fuel James Lahtinen - Forecasting Patrick Piscitelli - Finance John Stewart - Finance Salvatore Tilaro - System Planning ; Exhibit__(JDS-12) Page 2 of 90 TABLE OF CONTENTS CHAPTER PAGE I Introduction A. Background I-I B. Objectives and ScoPe I-t C. Approach I-r tr Executive Summary A. Overall Conclusions II-1 B. Recommendations II-5 trI Options A. Plan A m-1 B. Plan B m-t C. Plan C Itr.1 D. Plan D u-1 E. Plan E and Plan F trI-2 w Capital Costs A. Total Costs of Generating Units w-1 B. Direct Cost of Nine Mile Point tr IV.2 C. Direct Cost of Coal Units rv-3 D. Escalation M E. Allowance for Funds Used During Construction (AFDC) IV-7 F. Decommissioning IV.8 G. Accounting rv-9 v Sunk Costs A. Expenditures to Date and Penalty Charges v"1 B. Ratemaking Impacts v-I C. Financial Impacts Y-l VI hoduction Simulation A. General Inputs vI-l B. Fuel Costs VI.1 C. Lo¿d Forecaot vI-3 D. Capacity Factors YI.4 E. Statewide Coal Conversion vI-5 Exhibit__(JDS-12) Page 3 of 90 CHAPTER PAGE Vtr Economic Analysis A. EconomicComparisons vII-1 B. The Economic lrnpact of Nine Mile Point II Sunk Costs VII-8 C. Break-Even Analyses VII.9 VIII Financial Implications A. GeneralConsiderations vltr-r B. Finaneial Impacts and Ratemaking Effeets of Plans A & B VItr.2 C. Financial Implications - Plans A through F vltr-r8 D. Investment Standing of New York's Utilities VIII.19 IX Assessment and Recommendations IX"1 Appendix: A Capital Costs B Fuel Cost Forecast Staff's Table B-1 ICFÆ'{YPP's Table B-2 Exhibit__(JDS-12) Page 4 of 90 CHAPTER I INTRODUCTION A. Background The 1085 MW Nine Mile Point II Nuclear Plant under construction near Oswego, New York, started in 197I with an estimated direct eost of $357 million and commercial operation date of December, L977. There have been several revised estimates and commercial in'service dates- the latest being September, 1980, indicating a direct cost of $2.4 billion, $I.3 AFDC and a commercial in-service date of November, 1986. Niagara Mohawk Power Corporation is responsible for building the plant and owns 4l percent. The remaining 59 percent is shared by four other New York State electric utilities, Long Island Lighting Company, Inc. (18 percent), New York State Elecbic and Gas Corporation (18 percent), Rochester Gas and Electric Corporation (14 percent) and Central Hudson Gas and Electric Corporation (9 pereent). In December, 1979, Niagara Mohawk and its Co-Tenants initiated a conshuction slowdown to evaluate the project. The New York State Public Service Commission awarded Theodore Barry & Associates (TB&A) and its subcontractor, Canatom, Inc., a conhaet to assess the feasibility and cost of further construction on the Nine Mile Point II plant. This audit began in August, 1980 and its findings were issued in July, 1981. To complement TBA/Canatom's audit, the Staff of the Department of Public Service under- took the responsibility of assessing the economic and financial implications of Nine Mile Point tr and its alternatives. This task began in December 1980 and is the subject of this report. B. Objectives and Scope The objectives of this study are the following: o Provide the economics of particular expansion plans under various conditions; r Assess and determine the economic choice of the studied plans; c Examine the financial impact of particular expansion plans on the individual utilities; and o Identify the potential rate increases associated Ìr'ith particular expursion plans. The Department of Public Service staff (Staff) developed, reviewed and analyzed New York State production simulations, capital costs of future plant additions, economie analyses, utility financial models and various related documents. This study presents the results of Staff's aialyses and evaluations. C. Approach The study evolved from the verification process of the Januar)¡, t98I Niagara Mohawk and its Co-Tenants' economic and financial study. In Staff's opinion this study did not present a complete and meaningful eva-luation, since various alternative options and assumptions which needetl to be evaluated were not considered. Staff, tJrerefore, incorporated these options and assumptions into various computer programs to assess their economic and financial implications. I-1 Exhibit__(JDS-12) Page 5 of 90 Niagara Mohawk and the Co-Tenants were cooperative in assisting with computer support. This enabled the Staff's and the Niagara Mohawk and its Co-Tenants'studies to be put on a comparable basis. The study was performed by a multidisciplinary staff within the Department of Public Service and is solely the result of the work of those individuals. I-2 Exhibit__(JDS-12) Page 6 of 90 CHAPTER II EXECUTWE SUMMARY This study examines the economic and financial feasibility of Nine Mile Point II and its alter' natives. Studies were made comparing the economic consequences of generation expansion plans which include Nine Mile point II (Plans A, C and E) and three alternate generation expansion plans (8, D and F). The generation unit additions of the plans under study are explained in Chapter III and illusbated in Table tr-l. Two separate economic scenarios were made; first, Plans A through D and second, plans E and F. The basic difference between the two sets of scenarios is the total amount of required future caPacitY. Nine Mile point tr is a major undertaking for each of the five Co-Tenants. This study provides an analysis demonstrating the major financial effects that may occur if the project is completed. This examination used eãch Co-Tenants' long-term financial forecasting model to project items such as increases in electric revenues, cents per kilowatt-hour (c/Kwh), capitalization, and projected securities iszues. Financial models were performed for Plans A and B. In addition to the detailed financial forecast for these plans, all options were compared by a cash flow analysis to determine if any significant benefits can be derived from changing options. A. Overall Conclusions I. Economic Implications The economic implications of Plans A through F were assessed by discounting the lifetime revenue requirements ù9Sl dollars) relating to the capital, production, and sunk costs. The base case assumpti"* for the economic study are a $4.9 billion Nine Mile Point II capital cost with a l9B? commercial in-service date, Staff's estimate of fuel costs, Ilz percent statewide annual load and 3665 megawatts of coal conversions. For the plans without Nine Mile Point II, a 'lSgrowth, y"", amortization fãr sunk costs is assumed. Many comparisons were made to show the effects of varying key assumptions, including fuel costs, Ioad forecasts, nuclear capacity factors, the number of units to undergo coal conversion, future generation unit size, the level and amortization of sunk costs, and Nine Mile Point II in-service dates.* The major results of the economic comparisons are: .Aú phns which include Nine Mile Point II (4, C & E) showed an economic advantage as compared to their respective alternative plans (8, D & F): Plan A over Plan B by $1251 million; Plan C over Plan D by $1303 million; and Plan E over Plan F bY $20?2 million; oThe amortization of sunk costs due to abandonment of Nine Mile Point II was a major factor in the economics. The 19Bl present value of the revenue requirement for the sunk costs was approximately $1,900 million; and "See Chapter VII for details. tr-t Exhibit__(JDS-12) Page 7 of 90 TABTE II-T PSC STAFF OPTIONS (Unit Size-MW) Year A B C D E F 1987 r0s5 (NMFrr) r0B5 (NMPtr) r0B5 (NMPrr) r988 625 (Jamesport) ffi; 625 (LEGST) lTqqo 800 (Jamesport) ó25 (Jamesport) 625_(LEGSIX) I t t.l 8990 850 (LEGST) 625 (LEGSI) 800 (Jamesport) fïoor Lr' 850 (LEGSI) 1,992 850 (IEGSII) 400 (LEcsrI),Êl+ 625 (COAI I) r993 235 (Coal tr)" 235 (Coal tr)** 625 (Jarnesport) 1994 460 (LEGSI)'ç" 1'otal (MW) 2735 2735 2735 2735 --Tr0B5 r0B5 *Characteristics of an 850 MW unit *#Clraracteristics of. a625 MW unit Exhibit__(JDS-12) Page 8 of 90 oA-ll sensitivity runs produced small variations in the economics but none were large enough to swing the economic choice from one plan to another. The results of the sensitivity runs are quantified in Chapter YII. An important assumption of tJre economic analyses is the total capital cost of Nine Mile Point II. Since this project has experienced extensive cost increases and the cost of the facility can change the overall cost advantage of the project, Staff felt it necessary to determine how high the cost of Nine Mile Point fI could increase to make the economics of the comparative plans equal. This would provide boundaries to the economic comparisons in terms of Nine rVlile Point tr capital costs. The break-even analyses Ì,v'ere performed on the base case assumptions and varying Nine Nlile Point II in-service dates and fuel costs. For the base case assumptions, Plans A, C & E would require lesg revenue than their respeetive alternatives (8, D & F) until the capital costs of Nine Mile Point II exceed the levels shown in Table tr-2.