Monday, December 10, 2012

A Little Now, A Lot Later–Florida and Cost Recovery

Michael Waldron, who is director of nuclear communications at Florida Power & Light, takes an unusually pugnacious tone in this op-ed in the Miami Sun-Sentinel. He is defending the concept of cost recovery, a process by which a company can levy a small surcharge on ratepayers to improve or build reactors. In this case, FPL is using this to upgrade their reactors at Turkey Point and do some early work on two more potential reactors there:
Over the past several years, Florida's nuclear cost recovery statute has allowed FPL to upgrade our existing nuclear plants and add over 500 new megawatts of clean, cost-effective power-generation to our fleet.  To put this in perspective, this is about the same amount of electricity generated by a medium-sized nuclear power plant without having to build one.
Waldron says that FPL is saving a lot of money for its customers – for itself, too, of course, but that also benefits customers:
For example, the 400 new megawatts we have already added will save our customers roughly $7.5 million a month on fuel costs going forward.  Over the lifetime of the units, these upgrades are expected to save customers approximately $3.8 billion. These projects would not have been possible without Florida's nuclear cost recovery statute.
Waldron is answering Stephen Smith of the Southern Alliance for Clean Energy, an anti-nuclear group. Smith’s argument is actually a – little – strange. Aside from just generally not thinking nuclear energy represents a worthwhile investment, Smith links cost recovery to socialism and rapacious capitalism. There’s a ton of risk associated with it and it’ll be a financial bonanza. His argument is actually kind of wacky.
But this law now socializes costs and all the risk of reactor construction by shifting it to customers. Meanwhile it privatizes all the reward to big power company shareholders, such as FPL — even though they shoulder no risk. FPL has recently requested an 11.25 percent return for its shareholders as part of a base rate increase. The FPL project, if ever completed, is estimated to cost upwards of $20 billion. Clearly an 11.25 percent return on $20 billion is a sweet return for FPL shareholders for a risk-free investment.
This might be the part that actually made Waldron put up his dukes, because it’s not exactly what is happening. He explains this:
Under the law, FPL is only reimbursed for amounts that we have already spent IF these expenses are deemed prudent through an independent evaluation by the Florida Public Service Commission.  In practice, this means that during the licensing phase, customers pay only for licensing activities; during construction, FPL must borrow the money and customers pay only for financing charges, not the construction itself; and, it is only after the plant is in operation that customers would pay for the charges incurred during construction.
Waldron doesn’t point out that paying interest charges early reduces the overall cost of the project – as when you double pay on your credit card. Cost recovery can be used for any large capital projects – it works especially when the outcome benefits the commonweal, as it does here.

Florida is always going to be a somewhat prickly environment when it comes to even small surcharges because so many people there live on fixed incomes. I cannot fault that – and maybe it’s a better angle from which to make an argument about cost recovery, especially in Florida. But Waldron’s aggressive response to Smith seems exactly correct – Smith isn’t giving cost recovery its due and Waldron says so.

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