Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 10:00 AM

Mike Wallace

President , Constellation Generation Group

Testimony for the Record

 

Michael J. Wallace

Executive Vice President

Constellation Energy

 

United States Senate Committee on Energy & Natural Resources

Hearing on the Department of Energy’s Nuclear Power 2010 Program

 

April 26, 2005

 

Mr. Chairman, members of the Committee, thank you for the opportunity to appear before you today.

 

I am Michael Wallace, Executive Vice President of Constellation Energy and President of Constellation Generation Group.  I want to take just a moment to tell you about Constellation Energy.  Constellation Energy, a Fortune 200 company based in Baltimore, is the nation’s leading competitive supplier of electricity to large and industrial customers and the nation’s largest wholesale power seller.  Constellation Energy also manages fuels and energy services on behalf of energy intensive industries and utilities.  The company delivers electricity and natural gas through the Baltimore Gas and Electric Company (BGE), its regulated utility in Maryland.  We are the owners of 107 generating units at 35 different locations in 11 states, totaling approximately 12,500 megawatts of generation capacity.  In 2004, the combined revenues of the integrated energy company totaled more that $12.5 billion and we are the fastest growing Fortune 500 Company over the past two years.

 

Our portfolio based on electricity produced is approximately 50 percent nuclear, 35 percent coal-fired, 7 percent gas-fired and 5 percent renewables.  We own and operate the Calvert Cliffs nuclear plant in Maryland, and the Nine Mile Point and Ginna nuclear stations in New York State. 

 

Constellation is part of the NuStart consortium that is preparing an application to the NRC for a license that would allow us to build and operate a new nuclear plant.  Additionally, in December 2004, we submitted a proposal to the Department of Energy (DOE) for studies that could lead to an application to the Nuclear Regulatory Commission for an Early Site Permit as part of the Nuclear Power 2010 program.  So, as you can tell, we have a vested interest in the continued success of Nuclear Power 2010, and we’re bullish on the future of nuclear power.

 

Although I am here testifying today on behalf of Constellation, this testimony is supported by our trade association, the Nuclear Energy Institute (NEI).

 

My statement this morning will address four major issues:

 

1.      The strategic value of our 103 operating nuclear power plants, and the compelling need to build new nuclear plants to preserve our nation’s energy security, meet our environmental goals, and sustain our economic growth.

2.      The critical importance of the Department of Energy’s Nuclear Power 2010 program as a platform from which to launch the next generation of nuclear power plants in the United States.

3.      The need to recognize that the Nuclear Power 2010 program does not address all of the challenges facing companies interested in building new nuclear power plants, and that additional joint investment initiatives by the federal government and the private sector will be necessary.

4.      The urgent need for comprehensive energy legislation that squarely addresses the critical need for additional investment in our electricity and energy infrastructure, including advanced nuclear and coal-fired generating capacity, electric and natural gas transmission, and other areas.  Construction of the next nuclear power plants in the United States will require some form of investment stimulus, but I know I speak for the entire electric sector when I say that the need for investment stimulus extends well beyond nuclear power.  This sector is starved for investment capital, and new federal government policy initiatives are necessary to reverse that trend and place our economy and our future on a sound foundation.

 

The Strategic Value of Nuclear Power

And the Need for New Nuclear Power Plants

 

The United States has 103 reactors operating today.  Nuclear power represented 20 percent of U.S. electricity supply 10 years ago, and it represents 20 percent of our electricity supply today, even though we have six fewer reactors than a decade ago and even though total U.S. electricity supply has increased by 25 percent in the period.

 

Nuclear power has maintained its market share thanks to dramatic improvements in reliability, safety, productivity and management of our nuclear plants, which today operate, on average, at 90 percent capacity factors, year in and year out.  Improved productivity at our nuclear plants satisfied 20 percent of the growth in electricity demand over the last decade.

 

Due, in part, to excellent plant performance, we’ve seen steady growth in public support for nuclear energy.  The industry has monitored public opinion closely since the early 1980s and two key trends are clear:  First, public favorability to nuclear energy has never been higher; and second, the spread between those who support the use of nuclear energy and those opposed is widening steadily:  80 percent of Americans think nuclear power is important for our energy future and 67 percent favor the use of nuclear energy; 71 percent favor keeping the option to build more nuclear power plants.  Six in 10 Americans agree that “we should definitely build more nuclear power plants in the future.”  Sixty-two percent said it would be acceptable to build new plants next to a nuclear power plant already operating.

 

The operating nuclear plants are such valuable electric generating assets that virtually all companies are planning to renew the operating licenses for these plants, as allowed by law and Nuclear Regulatory Commission regulations, and operate for an additional 20 years beyond their initial 40-year license terms.  Sixty-eight U.S. reactors have now renewed their licenses, filed their formal applications, or indicated to the Nuclear Regulatory Commission that they intend to do so.  The remaining 35 reactors have not yet declared because most of them are not yet old enough to do so.  We believe that virtually all U.S. nuclear plants will renew their licenses and operate for an additional 20 years.  At Constellation, we are proud that our Calvert Cliffs station was the first U.S. nuclear plant to renew its license.  At the time, the license renewal process was a novel concept.  Today, thanks to efficient management of the process by the Nuclear Regulatory Commission, it is a stable and predictable licensing action.  Ten years from now, we hope and believe that the issuance of combined construction/operating licenses for new nuclear plants — a novel concept today — will be similarly efficient and predictable.

 

Although it has not yet started to build new nuclear plants, the industry continues to achieve small but steady increases in generating capability —  either through power uprates or the restart of shutdown nuclear capacity.  The Tennessee Valley Authority is restarting Unit 1 at its Browns Ferry site in northern Alabama.  This is a very complex project — fully as challenging as building a new nuclear plant — and it is on schedule and within budget at the midpoint of the project.

 

However, despite the impressive gains in reliability and output, there are obviously limits to how much capacity we can derive from our existing nuclear power plants.  The time has come to create the business conditions under which we can build new nuclear power plants in the United States.  We believe there are compelling public policy reasons for new nuclear generating capacity.

 

First, new nuclear power plants will continue to contribute to the fuel and technology diversity that is the core strength of the U.S. electric supply system.  This diversity is at risk because today’s business environment and market conditions in the electric sector make investment in large, new capital-intensive technologies difficult, particularly the advanced nuclear power plants and advanced coal-fired power plants best suited to supply baseload electricity.  More than 90 percent of all new electric generating capacity added over the past five years is fueled with natural gas.  Natural gas has many desirable characteristics and should be part of our fuel mix, but over-reliance on any one fuel source leaves consumers vulnerable to price spikes and supply disruptions.

 

Second, new nuclear power plants provide future price stability that is not available from electric generating plants fueled with natural gas.  Intense volatility in natural gas prices over the last several years is likely to continue, thanks partly to unsustainable demand for natural gas from the electric sector, and subjects the U.S. economy to potential damage.  Although nuclear plants are capital-intensive to build, the operating costs of nuclear power plants are stable and can dampen volatility of consumer costs in the electricity market.

 

Third, new nuclear plants will reduce the price and supply volatility of natural gas, thereby relieving cost pressures on other users of natural gas that have no alternative fuel source.

 

And finally, new nuclear power plants will play a strategic role in meeting U.S. clean air goals and the nation’s goal of reducing greenhouse gas emissions.  New nuclear power plants produce electricity that otherwise would be supplied by oil-, gas- or coal-fired generating capacity, and thus avoid the emissions associated with that fossil-fueled capacity.

 

In summary, nuclear energy represents a unique value proposition:  new nuclear power plants would provide large volumes of electricity — cleanly, reliably, safely and affordably.  They would provide future price stability and serve as a hedge against price and supply volatility.  New nuclear plants also have valuable environmental attributes.  These characteristics demonstrate why new nuclear plant construction is such an imperative in the United States.

 

The Critical Value of the Nuclear Power 2010 Program

 

As I said earlier, the Department of Energy’s Nuclear Power 2010 program is an essential foundation in the joint government/industry partnership to build new nuclear power plants.  This committee and, in particular, you, Mr. Chairman, deserve great credit for your leadership in ensuring adequate funding for this program in the 2005 Fiscal Year.

 

Nuclear Power 2010 is designed to demonstrate the various components of the new licensing system for nuclear power plants, including the process of obtaining early site permits (ESPs) and combined construction/operating licenses (COLs), sharing the cost of the detailed design and engineering work necessary to prepare COLs, and resolving generic licensing issues.  This work is an essential risk-management exercise because it allows industry and the NRC staff to identify  and resolve scores of technical and regulatory issues that must be settled before companies can undertake high-risk, capital-intensive construction projects like new nuclear plant construction.

 

The Nuclear Power 2010 program is the springboard that launched a tangible and visible industry commitment to new plant construction.  The industry’s commitment to Nuclear Power 2010 includes a planned investment of $650 million over the next several years on design, engineering, and licensing work, which will create a business foundation for decisions to build.  Three companies have applications for early site permits under review at NRC.  In addition to these three, Constellation and possibly one other company are also considering ESP applications.  The industry is developing at least three applications for construction/operating licenses; the first will be filed in 2007, the second and third in 2008.

 

As you know, the administration has proposed $56 million for the Nuclear Power 2010 program in the 2006 fiscal year.  The $56 million funding proposed for 2006 is sufficient for the ESP and COL demonstration projects already underway.  It is not adequate, however, to cover more recent expressions of interest from Constellation and others, and additional resources will be needed to ensure this program is viable into the future.

 

It is also important to recognize that Nuclear Power 2010 is a multi-year undertaking.  Certainty of future funding and program stability are a big concern for industry.  However, our biggest frustration with the Nuclear Power 2010 program involves the time it has taken the DOE to award the grants.  In the case of NuStart, we submitted our application in April 2004 and we were not notified that we received the grant until November 2004.  As for Constellation’s ESP application, we submitted it almost four months ago and have yet to hear from DOE.

 

To support the ESP and COL demonstration projects currently underway and future projects, we anticipate that the Department of Energy will need to significantly increase funding for Nuclear Power 2010 over FY 2006 levels.

 

The process of developing the first COL applications, certifying new designs and completing NRC review of the first ESP and COL applications will take some time.  We are looking for ways to accelerate that process, and the Congress may be able to help there — by ensuring sufficient funding for Nuclear Power 2010 and even accelerating that funding; and by providing NRC sufficient resources to ensure that the commission has adequate manpower to conduct licensing reviews and meet aggressive but realistic schedules.

 

The Nuclear Power 2010 Program Does Not Address

All The Challenges Facing New Nuclear Plant Construction

 

The Department of Energy’s Nuclear Power 2010 program is a necessary, but not sufficient, step toward new nuclear plant construction.  We must address other challenges as well.

 

Our industry is not yet at the point where we can announce specific decisions to build.  We are not yet at the point where we can take a $1.5 billion to $2 billion investment decision to our boards of directors.  We do yet not have fully certified designs that are competitive, for example.  We do not know the licensing process will work as intended:  That is why we are working systematically through the ESP and COL processes.  We must identify and contain the risks to make sure that nothing untoward occurs after we start building.  We cannot make a $1.5 — $2 billion investment decision and end up spending twice that because the licensing process failed us.

 

The industry believes federal investment is necessary and appropriate to offset some of the risks I’ve mentioned.  We recommend that the federal government’s investment include the incentives identified by the Secretary of Energy Advisory Board’s Nuclear Energy Task Force in its recent report.  That investment stimulus includes:

  1. secured loans and loan guarantees;
  2. transferable investment tax credits that can be taken as money is expended during construction;
  3. transferable production tax credits;
  4. accelerated depreciation.

 

This portfolio of incentives is necessary because it’s clear that no single financial incentive is appropriate for all companies, because of differences in company-specific business attributes or differences in the marketplace – namely, whether the markets they serve are open to competition or are in a regulated rate structure.

 

The next nuclear plants might be built as unregulated merchant plants, or as regulated rate-base projects.  The next nuclear plants could be built by single entities, or by consortia of companies.  Business environment and project structure have a major impact on which financial incentives work best.  Some companies prefer tax-related incentives.  Others expect that construction loans or loan guarantees will enable them to finance the next nuclear plants.

 

It is important to preserve both approaches. We must maintain as much flexibility as possible.

 

It’s important to understand why federal investment stimulus and investment protection is necessary and appropriate.

 

Federal investment stimulus is necessary to offset the higher first-time costs associated with the first few nuclear plants built.

 

Federal investment protection is necessary to manage and contain the one type of risk that we cannot manage, and that’s the risk of some kind of regulatory failure (including court challenges) that delays construction or commercial operation. 

 

The new licensing process codified in the 1992 Energy Policy Act is conceptually sound.  It allows for public participation in the process at the time when that participation is most effective – before designs and sites are approved and construction begins.  The new process is designed to remove the uncertainties inherent in the Part 50 process that was used to license the nuclear plants operating today.  In principle, the new licensing process is intended to reduce the risk of delay in construction and commercial operation and thus the risk of unanticipated cost increases.  The goal is to provide certainty before companies begin construction and place significant investment at risk.

 

In practice, until the process is demonstrated, the industry and the financial community cannot be assured that licensing will proceed in a disciplined manner, without unfounded intervention and delay.  Only the successful licensing and commissioning of several new nuclear plants (such as proposed by the NuStart and Dominion-led consortia) can demonstrate that the licensing issues discussed above have been adequately resolved.  Industry and investor concern over these potential regulatory impediments may require techniques like the standby default coverage and standby interest coverage contained in S. 887, introduced by Senators Hagel, Craig and others.

 

Let me also be clear on two other important issues:

 

  1. The industry is not seeking a totally risk-free business environment. It is seeking government assistance in containing those risks that are beyond the private sector’s control. The goal is to ensure that the level of risk associated with the next nuclear plants built in the U.S. generally approaches what the electric industry would consider normal commercial risks.  The industry is fully prepared to accept construction management risks and operational risks that are properly within the private sector’s control.
  2. The industry’s financing challenges apply largely to the first few plants in any series of new nuclear reactors.  As capital costs decline to the “nth-of-a-kind” range, as investors gain confidence that the licensing process operates as intended and does not represent a source of unpredictable risk, follow-on plants can be financed more conventionally, without the support necessary for the first few projects.  What is needed limited federal investment in a limited number of new plants for a limited period of time to overcome the financial and economic hurdles facing the first few plants built.

 

In summary, we believe the industry and the federal government should work together to finance the first-of-a-kind design and engineering work and to develop an integrated package of financial incentives to stimulate construction of new nuclear power plants.  Any such package must address a number of factors, including the licensing/regulatory risks; the investment risks; and the other business issues that make it difficult for companies to undertake capital-intensive projects.  Such a cooperative industry/government financing program is a necessary and appropriate investment in U.S. energy security.

 

I hope this Committee can find a place for this type of investment stimulus in the comprehensive energy legislation now being developed

 

In addition, I would be remiss if I did not thank the Chairman for his support for three additional programs/provisions that will assist in the construction of new nuclear power plants in the United States:

 

1. Sustained progress with the Yucca Mountain project is essential. This includes the funding necessary to maintain the schedule, ensure timely filing of the license application, and access to the full receipts of the Nuclear Waste Fund.

 

2. Renewal of the Price-Anderson Act, which provides the framework for the industry’s self-funded liability insurance.  I am pleased to note that this is included in the recently House-passed energy bill.

 

3. Updated tax treatment of decommissioning funds that would provide comparable treatment for unregulated merchant generating companies and regulated companies.  This provision, included in the energy tax legislation passed recently by the House, would allow all companies to establish qualified decommissioning funds and ensure that annual contributions to those funds are treated appropriately as a deductible business expense. 

 

The U.S. electricity business and our nation are paying the price today for our inability to strike an appropriate balance between what was expedient and easy in the short-term, and what was prudent and more difficult in the long-term.  We are paying the price today for 10 to 15 years of neglect of longer-term imperatives and the oversupply of base-load generation in the 1990’s.

 

The United States faces a critical need for investment in energy infrastructure, including the capital-intensive, long-lead-time advanced nuclear and coal-fired power plants that represent the backbone of the U.S. electricity supply system.

 

While some may not realize it, the United States faces an imminent energy crisis today.

 

Electric power sales represent three to four percent of our gross domestic product.  But the other 96 to 97 percent of our $11-trillion-a-year economy depends on that three to four percent.  We cannot afford to gamble with something as fundamental as energy supply, and the biggest problem we face with nuclear energy is not having enough of it.

 

Thank you again, Mr. Chairman and the other members of the committee and your outstanding professional staff, for your strong support for energy policy initiatives, for nuclear power and for your continued and strong support for the Nuclear Power 2010 program.