IUB staff raises red flags about nuclear power plant legislation

The Iowa Utilities Board (IUB) staff has raised several warning flags about legislation sought by MidAmerican Energy to shift the risk of building a new nuclear power plant to utility ratepayers.

In a memo sent to the IUB and state legislators in December, the IUB staff warns that "some of these (bill) provisions could create incentives for the company to engage in behavior that could be contrary to the public interest in certain situations."

To illustrate what might happen, the staff report gives this possible scenario:

"For example, imagine that at some point a few years into the project the utility has spent $1 billion on the proposed plant, all of which was determined to be prudent during the annual review proceedings. That year, the company makes a mistake during construction that is entirely the company's responsibility and will cost $50 million to correct. Normally, that cost correction would most likely be paid by the company and its shareholders. However, with this provision (plant abandonment) the company could come to the board for pre-approval of recovery of the cost of the correction. The company would be guaranteed a profit on all spending up to that point. This could create a stronger incentive to walk away from the plant than to complete it. Given that knowledge, the Board (IUB) would be faced with the choice of (a) making customers pay for the utility's mistake (in order to receive the future benefit of a plant for which customers have already been committed to the tune of $1 billion, or (b) making retail customers pay $1 billion (plus profits) to the utility for a plant that will abandoned. Under the circumstances, this would likely cause the Board to approve recovery of the $50 million cost of correction, even though it is entirely a result of the company's own error in this hypothetical example."

The legislation to alter how utilities recover the cost of nuclear plant construction from ratepayers was passed by the Iowa House of Representatives in 2011, but was not brought up for a vote in the Senate.

The same bill, House File 561, is expected to be introduced again in this legislative session. The IUB, a three-member board appointed by the governor, did not weigh in on the bill last year, and is expected to remain neutral in the upcoming legislative debate.

However, the IUB staff comments circulated to state legislators provides a very critical review of loopholes in the bill that nearly passed the legislature last year.

In addition to concerns on shifting of risks to customers, the IUB staff believes that "some provisions of HF 561 may go beyond leveling the playing field and could give a nuclear power plant unintended advantages over alternative sources of electric power."

When planning to build a new power plant, utilities must demonstrate they have considered other "feasible sources of long-term supply" and that the proposed plant "is reasonable when compared to those alternatives."

One of the provisions in the proposed legislation would only require "that the company demonstrate, through a detailed business case, that it is prudent to build the proposed nuclear plant."

The IUB staff points out there is no definition of what a "detailed business case" involves, nor is there such a definition in the public utility regulatory arena.

MidAmerican Energy last October began charging customers for a 3-year $15-million study on the feasibility of building a nuclear power plant in the state.

The surcharge for the nuclear plant feasibility study was approved by the legislature and not through the normal rate-making process of the IUB.

CLICK HERE to download a copy of the full staff report to Iowa Utilities Board.