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Energy Outage
Making sense of the sale of Millstone nukes
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Business New Haven
8/7/2000
By: Fiona Phelan
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Perhaps it is just a coincidence that the word “millstone” is synonymous with words like “albatross,” “burden,” “encumbrance” and “impediment.” Or did someone have insight when naming three of Connecticut's nuclear power plants Millstone?
Whatever the answer, the Millstone nuclear power plants in Waterford (currently owned by Connecticut Light & Power, United Illuminating and several small utilities) will become another company's responsibility by year-end as Connecticut's utilities comply with the state's new electric restructuring law.
Under the law, CL&P and United Illuminating will no longer be able to both generate electricity and transmit and distribute electricity to customers. Electricity generation must come from a licensed supplier - which may turn out to be an unregulated subsidiary of your current electric utility.
The law allows electric customers to choose their power supplier beginning this year. It also reduces prices by ten percent and freezes rate through the year 2003. After that, the free market will set rates. Connecticut was the 18th state to restructure its electric utility industry.
The law requires electric utilities to divest nuclear assets by January 2004. Neither Northeast Utilities, its subsidiaries, nor Consolidated Edison will participate as bidders for the nuclear power plants. ConEd is in the process of a takeover of NU (parent company of CL&P). If an agreement to sell the nuclear plants is reached before the merger closes, NU will earn a $1-a-share premium on the $25-a-share takeover offer. Although the takeover has already received federal approval, a decision from the state's Department of Public Utility Control (DPUC) is not expected until mid-September.
“The company chose not to participate in the nuclear plant auction because of the nature of that market,” says CL&P spokesman Frank Poirot. “There are five or six companies that are focusing on nuclear plants and some already have ownership of 20 or more plants across the country.”
J.P. Morgan, the investment banking firm, is conducting the auction of the Millstones. The auction, which began in May, is expected to be complete by year's end. Regulatory approval is expected next spring.
The sale includes: Millstone Unit 1, which was retired from service in 1998 after 28 years of service and a construction cost of $101 million; Millstone Unit 2, which began commercial operation in 1975 and cost $424 million to build; and more than 92 percent of Millstone Unit 3, which began operation in 1986 and cost $3.7 billion. Current owners are retaining the remaining portion of Unit 3.
Bids for the power plants are being solicited individually (three different companies could each own one plant); for all three reactors to be sold to one company; or for Millstone Unit 2 and 3 together without Unit 1. If Unit 1 is sold, it will be the first time in U.S. history that a nuclear plant undergoing decommissioning has been sold.
The minimum bid for Millstone Unit 3 is $222 million; $20 million for Unit 2; and a yet-to-be-determined amount for Unit 1. Because Unit 1 is retired, it has no value other than the land it sits on, says DPUC spokesperson Beryl Lyons. The DPUC approved the market value of the plants earlier this year.
The profit from the sale of the units will be divided among the utilities based on the percentage of ownership in each unit. CL&P owns approximately 81 percent of Millstone Unit 2 and 53 percent of Unit 3. United Illuminating owns approximately 3.7 percent of Unit 3.
By selling their power plants - both nuclear and non-nuclear - Connecticut's utilities will be able to collect some of their so-called stranded costs, or unrecovered investments in the plants. Stranded costs include: investments in generating plants made to assure adequate electric supplies for reliable service; regulatory assets, or costs that utilities incurred earlier, but for which cost-recovery was postponed until later in order to hold rates down; mandated purchased-power contracts with independent power producers, which were required by state and federal law; and other mandated public policy programs such as low-income protection and conservation programs. In early July, the DPUC ruled that CL&P could recover up to $3.5 billion in stranded costs.
Earlier this year, CL&P complied with another requirement of the law by selling its fossil and hydroelectric generating plants. CL&P's 29 plants sold for more than $1.3 billion to two different companies, including an unregulated affiliate of Northeast Utilities. That auction brought in prices for the plants at three to eight times book value, according to information on the company's Web site. The money received above and beyond the book value will help offset outstanding stranded costs on those facilities.
UI sold its Bridgeport Harbor and New Haven Harbor plants in 1998 for $272 million to Wisvest, a non-utility subsidiary of Wisconsin Energy Corp. UI's third plant - English Station in New Haven - was decommissioned after no offers were received during the bid process. In July 1999, the DPUC ruled that UI could recover $726 million in stranded costs for its generating plant investments.
Stranded costs are included on utility customers monthly bill under a line item named “Competitive Transition Assessment”(CTA). If the auction price of the nuclear units exceeds the minimum then the CTA may be reduced. If the minimum is not reached then the existing charge will remain the same.
The goal of “Electric Choice” - the marketing slogan employed by the DPUC, which regulates public utilities in the state - is to “lower electric bills and lead to more efficient and cleaner technologies and new service options.”
According to the Nuclear Energy Institute, there are currently 103 commercial nuclear power plants in the U.S. On average, the plants are 16 years old and are licensed to operate for 40 years, with an option to renew for an additional 20 years. Nuclear power supplies about 20 percent of the nation's electricity annually.
In 1998, AmerGen Energy Co. - a joint venture between Philadelphia-based PECO Energy and British Energy - became the first company to acquire an operating nuclear power plant in the United States. Entergy Nuclear became the first company to win a competitive bid process for an operating U.S. nuclear plant, when it submitted the winning offer for Boston Edison's Pilgrim plant. That sale was completed a year ago.
According to the Washington D.C.-based Edison Electric Institute, more than 50 of the companies registered to sell electricity in states that are implementing retail competition have revenues in excess of $1 billion; five of the companies have annual revenues greater than $10 billion.
In approving CL&P and UI's nuclear power plant divestiture plan earlier this year, the DPUC noted that “Several new potential bidders for the nuclear units have emerged and the current market for nuclear units appears robust.”
We'll see. BNH
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