Barrie McKenna
The Globe and Mail
August 25, 1997

Deregulation is making many aging reactors suddenly unprofitable and threatening once-powerful utilities with bankruptcy.
U.S. nuclear plight may be omen for Canada

Washington –

Five of the six nuclear reactors owned or operated by the Berlin, Conn.-based power company were closed last year, at least two of them permanently. At the company’s aptly named Millstone site on the shore of Long Island Sound, for example, federal regulators ordered the shutdown of three reactors built within the last 25 years because of safety and operational concerns. The rulings have left New England’s largest power company drained of cash and scrambling to get at least part of its tattered nuclear arsenal back on line. Meanwhile, regulators, consumers and investors are fighting over who should pay the massive bill — for the temporary shutdowns, for permanently decommissioning reactors, and for the billions of dollars sunk into power plants that may no longer be economically viable in a deregulated electricity market. Last February, Northeast Utilities’ chairman and chief executive officer abruptly quit, paralleling the sudden departure this month of Ontario Hydro president Allan Kupcis.

In the U.S. industry, where monopoly utilities once papered over troubles by charging consumers more, the advent of competition has been cataclysmic. It has triggered thousands of layoffs, a wave of takeovers, executive departures, financial distress and nasty regulatory battles.

Before direct competition, which is being phased in over time in most U.S. states, utilities recovered investments over time through regulated rates. The utilities borrowed money on the understanding that this arrangement was permanent.

But as competition grows in the electricity market, utilities with plants built in the old era are being forced to lower rates and costs to retain their market shares, which sometimes means they can no longer turn a profit or even service their debt. Such utilities are left with what’s known as "stranded costs" — massive depreciated investments in multibillion-dollar plants.

It is estimated that stranded costs now total $200-billion (U.S.) or more in the United States. Estimates vary widely because it’s unclear how soon full competition will occur, or to what extent regulators will pass on those costs to customers or rival suppliers.

Alternative suppliers — private power producers and utilities as far away as Canada — will be able to offer electricity directly to some customers as early as next January in states such as California, Massachusetts, New Hampshire, Illinois, New York and Michigan. In most cases, they will do so at prices well below existing, regulated, rates.

That will leave companies like Northeast Utilities saddled with a stable of power plants that could become the dodo birds of the electrical industry.

"The primary lesson from the United States is that customers ought to be in control — not regulators, not utilities," said Tom Adams, executive director of Toronto-based Energy Probe, an independent environmental research organization. "The people who pay the bills . . . should be guaranteed the right to shop around."

The U.S. Department of Energy estimated in a recent study that deregulation will lower prices by 6 to 13 per cent, saving consumers as much as $60-billion a year. But those savings could be reduced by the amount that consumers will have to pay to cover stranded costs.

The U.S. nuclear industry claims responsibility for just a third of the problem of stranded costs, noting that producers of hydroelectric power and fossil fuels face similar trouble of such costs, through high-priced long-term contracts to buy power.

The industry adds that its plants, particularly those built in the 1970s and early 1980s, have been victims of bad timing. Galloping inflation and a regulatory backlash after the leak of radiation at Three Mile Island in 1979 added billions to the cost of projects.

Bernard Weinstein, director of the Center for Economic and Development Research at the University of North Texas, warned in an interview that some companies could face bankruptcy if they can’t recover most of their stranded costs, resulting in "serious negative implications for system reliability."

Much of the stranded costs, Mr. Weinstein said, inevitably will be paid through a surcharge on energy bills or an "exit fee" for consumers who switch to an alternative supplier. Another mechanism of payment would be to charge suppliers of alternative power hefty additional fees to use a region’s transmission lines, but ultimately the consumer would pay the price for that too.

"The longer the day of reckoning can be put off, the better off utilities will be and the lower the stranded costs will be," Mr. Weinstein said.

At least six of the more than 100 nuclear reactors in the United States have been closed permanently since 1990. Several, like Millstone, are closed temporarily. But countless more are operating while their owners assess their continued viability in a deregulated environment.

"Utilities are looking at their portfolios and making decision about which plants can compete," said Leigh-Ann Marshall of the Washington-based Nuclear Energy Institute, a research group financed by the nuclear industry. "It’s not exclusive to nuclear."

Still, the trend away from nuclear power seems irreversible. Since the late 1970s, more than 100 planned nuclear reactor projects in the United States have been cancelled. Analysts expect output by the nuclear industry, which now supplies 20 per cent of U.S. power, to decline by a third by 2015.

The transition won’t be cheap or easy. At Millstone, where workers are busy upgrading three reactors to appease regulators, stranded costs may total more than $2-billion.

"What we need to do, and are concentrating on doing, is to get the plants back," said Northeast Utilities spokesman Rich Gallagher. "Our financial health will start to recover when that happens."

The company is also embroiled in litigation with investors and regulators over who should pay for the mess at Millstone. In New Hampshire, Northeast Utilities is suing to block a deregulation plan that, it says, would bankrupt two of its power plants. In Connecticut, it is appealing a decision by state regulators that prevents it from billing customers for shutdown expenses. Connecticut has not passed deregulation legislation that would allow the company to pass on its stranded costs to consumers.

Analysts warn that Canadians will not be immune to what is happening in New England and elsewhere in the United States where the transition to an open market is causing so much turmoil.

There is much discussion in Ontario about the problem of stranded costs in the wake of Hydro Ontario’s recent announcement. The pending closing of Ontario nuclear facilities also has redoubled calls for provincial deregulation of the electricity market.

Some of the fallout from U.S. deregulation actually will be positive for Canada’s monopoly utilities. For example, the Millstone shutdown has forced Northeast Utilities to buy additional power from other utilities, including Hydro-Québec.

Still, the quid pro quo for Canadian utilities, and indirectly for Canadian consumers, is that there must be open competition at home before U.S. regulators will allow unfettered access to the U.S. market.

So far, Alberta is the only province to have fully deregulated its wholesale electricity market. Others, such as Quebec and British Columbia, are doing so in a piecemeal way as opportunities for export sales expand. But deregulation in Ontario remains several years away and it remains to be seen whether the recent news about Ontario Hydro will change that.