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OCR for page 143
Bang ~lner~11hies and
Opportunities
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Energy: Production, Consumption,
and Consequences. 1990.
Pp. 145-164. Washington, D.C:
National Academy Press.
Managing Volatility in the Oil Industty
JOHN F. BOOKOUT
A concern often expressed nowadays is that the survivability of parts
of the oil industry is threatened. Over the past 15 years the oil industry has
experienced a succession of rapid and significant changes. The dimensions
of change include oil price, of course, but also changes in activity levels,
employment, supply and demand, and in economic and political conditions.
In this chapter we will examine some of these changes.
First, we will compare the volatility of oil prices with that of other
commodities, to determine whether the oil industry environment is unique
in any way. Also in this discussion we will consider the impact of futures
market trading. Second, we will look at the performance of various parts of
the industry the upstream exploration and production sector, the refining
and retailing parts of the downstream sector, as well as a brief look at
consumers. Last, we will consider whether the industry has adapted to this
changed environment, and what we might expect in the 1990s.
LONG-TERM COMMODITIES PRICES
Although many in the oil industry may not think of it this way, the
experience over the past 15 years, in fact over the past 60 years, has many
precedents. A statistical analysis of the price history for corn, soybeans,
tin, and oil indicates that price volatility of oil is similar to that of other
commodities (see Figure 1~. The same picture emerges if oil prices are
superimposed on plots of copper, sugar, cocoa, rubber, and many other
commodities. It is also useful to note that there have been several epochs in
145
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Representative terms from entire chapter:
nuclear regulatory
46
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on
MANAGING VOLATILITY IN THE OIL INDUSTRY
TABLE 1 Effect of Futures Trading on Pace
Volatility
Commodity
itlih~ Trig Die ~ -
Metals
Gems
Aluminum
Copper
Id
Fidel
Tin
~7
Zinc
Rice
Sorghum
Wheat
Other edibles
Uses
BE
Cocoa
Coffee
Sugar
Soybeans
Meal
Oil
Agna~ltural raw materials
Couon
Palm od
Rubber
Wool
Crude on
1965
1974
1965
1969
1965
1965
1859
1981
1965
1859
1965
1925
1955
1941
1936
1951
1970
1981
1975
1965
1965
1983
Nate
Now
Nan
Now
147
oil, there was no more volatility after futures trading began than before,
as measured by the variance in quarterly prices. Oil futures markets, like
other futures markets, appear to be a response to, rather than a cause of,
price volatility (see Bible 1~.
As we will see later, the establishment of oil futures is just one example
of how the oil industry has embraced the technology of other industries,
in this case, financial markets, as a way of adapting to an environment of
volatile prices.
U.S. OIL AND GAS ADDITIONS AND PRODUCTION
Figure 2 shows the history of U.S. oil and gas production and additions
to the known reserve base in equivalent barrels per year. Additions are
148
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--- 1960 1970 1980 1990
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FIGURE 2 U.S. oil and gas production and additions to reserves (billion barrels of oil
equivalent). The inset shows the reserve additions due to discoveries in Alaska and response
to price increases.
defined as the volumes of hydrocarbon added to the inventory of proven
reserves through discoveries, development drilling, and revisions of the
volumes of existing recoverable oil and gas deposits as more is learned
about reservoir properties over time.
As the figure shows, during the period from 1940 to the late 1960s there
was a large backlog of opportunities to add to the country's reserve base,
even though there were low prices prevailing at the time. Additionally, the
regulatory bodies of the various states had proration policies that limited
the oil production rates below capacity. For these reasons, until the late
1960s, additions were well above production. By the end of the 1960s, the
backlog of low-cost prospects had been depleted, additions were down, and
so reserve replacement was in decline.
In 1970 the United States was fortunate to have added to its reserve
base the giant field at Prudhoe Bay, Alaska. But reserve replacement in the
lower 48 states continued to fall off, and production started to decline by 5
percent after 1970. It was not until the stimulation of the price increases in
1973 that reserve replacement picked up. The inset in Figure 2 shows that,
if the 5 percent decline that was apparent after 1970 continued indefinitely,
oil and gas production today would be nearly 40 percent less than it is, that
is, about 6 million barrels of oil equivalent per day less.
The data suggest that increase in additions to reserves, stimulated by
the price increases in the 1970s, contributed about 65 percent of what
was needed to stabilize production. Alaska contributed the remainder, and
many would suggest that Alaskan production could be brought to market
MANAGING VOLATILITY IN THE OIL INDUSTRY
149
only because of the price increases. In both cases, the maximum volume
effects came six to eight years after the price change.
These statistics probably do not give a sense of the role that technol-
ogy played over this period. The advances in the sciences of geology and
geophysics before 1970 are now taken for granted. But where would the
industry be without the breakthroughs in such fields as seismology, stratig-
raphy, and plate tectonics? Those tools added to our routine vocabulary
such terms as bright spots, source rocks, and lithofacies, to name a few. In
more recent years, particularly in response to the imperatives perceived
in the 1970s, advances in three-dimensional seismic imaging, enhanced re-
covery techniques, and dealing with harsh environmental conditions such
as deep water in the Gulf of Mexico and ice packs in the Beaufort Sea,
have made available oil and gas resources that were sometimes not even
considered feasible 20 years ago.
EXPLORATION AND PRODUCTION SECTOR ACTIVITY
Figure 3 presents several key indicators of oil industry activity. Three
phases of wellhead price behavior can be identified:
1960 1973: oil and gas prices were constant or declining
197~1981: prices increased rapidly
1981-1986: prices declined
Three key activities over this period seem to follow closely the oil and
gas price profiles—the number of seismic crews employed in the United
States, the number of rotary rigs in operation, and the number of wells
completed. Each of these activities responds to the price pattern of gradual
decline, surge, and collapse. There have also been changes in efficiency
and productivity in response to this cycle.
Behavior Patterns
The number of well completions per active drilling rig is a measure of
efficiency in drilling. During the era of declining prices in the 1960s, the
level was about 24 to 28, as shown in the left graph of Figure 4. After
price increases in the 197Os, the number of wells drilled increased, but
the number of completions per rig declined about 20 percent. Reasons
for this decline include lack of experience among the new drilling crews,
lack of good matching between rigs and their prospects, and the fact that
some older rigs may have been kept in service longer than they should
have been. More recently, oil prices have come down and the utilization
of the Beet of rigs has declined; productivity of the operating rigs has
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MANAGING VOLATILITY IN THE OIL INDUSTRY
45 _
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FIGURE 4 [tends in exploration performance by U.S. oil industry.
soared, as the industry responded to the need to improve productivity
during retrenchment.
The graph on the right of Figure 4 shows another measure of behavior,
the size of the hydrocarbon additions per successful well drilled. In the
1960s industry was upgrading by selecting higher volume prospects as prices
gradually declined. With the price rises in the 1970s, the additions per well
dropped as the incentives to drill smaller prospects increased. In 1986, the
last year for which we have data, the size of the additions per well rose,
suggesting that industry has once again started to upgrade its prospects.
Revenues
Turning now to the financial behavior of the industry, Figure 5 shows
the sources of industry revenues, which peaked in 1981 at $180 billion. On
the right, the percentage disposition of those revenues is divided among
the royalties and production taxes and the costs of lifting, manpower, and
materials (overhead). The remainder is operating cash income, which is
the cash left for reinvestment, paying income taxes, dividends, or debt.
The wedge labeled WET represents the revenues consumed by the windfall
profits tax.
Over the 26-year history shown in Figure 5, operating cash income
has been a remarkably consistent 60 percent of total revenues, with the
exception of the period when some $80 billion was paid in windfall profits
tax.
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MANAGING VOLATILITY IN THE OIL INDUSTRY
Reinvestment Patterns
153
Reinvestment includes both those costs that can be expensed, such
as dry hole costs, some drilling costs, research, and so forth, as well as
the capital expenditures for exploration and production. In the left graph
of Figure 6, the total funds reinvested in exploration and production are
compared with the operating cash income. The right graph shows the ratio
of reinvested funds to operating cash income. Despite the unstable market
that prevailed, and the intrusions of the federal government, the expansion
and contraction behavior of the industry results in a rather stable ratio of
about 70 percent.)
Incidentally, the low point in 1971 was due to the absence of any federal
lease sales in that year. And the high point in the early 1980s reflects the
high price expectations that prevailed. Coupled with the behavior shown
in these last few figures, this consistent pattern of reinvestment throughout
the period is a sign of continuing adaptation to the changing environment.
~ URE CRUDE OIL PRICES
lbrning to the future, let us look at the kind of volatility that might
be expected. In a recent report by the National Petroleum Council (NPC,
1987), two oil price trajectories were used as guidelines for their study.
In this chapter, the NPC price projections, shown in Figure 7, are used
as boundary conditions for the variation in year-to-year prices. Crude oil
prices in the year 2000 are projected to range from $20 to $35 per barrel, in
1987 dollars. Consistent natural gas prices are also assumed by equilibrating
gas with fuel oil prices sometime in the early 1990s. 1b model the future
performance of the U.S. oil industry, each boundary will be used as a
price trajectory in conjunction with the industry behavior just described
in the previous figures: expansion and contraction canahili~v chnnoe. in
efficiencies, and financial performance.
fir hi- --a,
FUTURE U.S. OIL AND GAS ADDITIONS AND PRODUCTION
The logic of the model that underlies the projections on Figure 8 is that
the price in any year determines revenues, which in turn control investment
level. After accounting for price effects on efficiency, productivity, finding
rates per well, and additions to reserves, production for the following year
is determined.
With the model structured as described, depending on the price path,
additions to reserves would fall to the level of the early 1970s, that is, the
3- to 5-billion-barrel range, and the rate of production would approach the
rate of additions. With no surprises, U.S. oil and gas production would
decline 1 to 3 percent per yeas.
192
RICIL4RD E. BALZHISER
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FIGURE 8 fiends in financial environment affecting nuclear power in the United States.
commitment to nuclear power plants reached a peak as inflation and
interest rates were reaching double-digit levels, as shown in Figure 8.
The delays already resulting from intervention and order backlogs were
substantially increased for all plants after the TMI accident in 1979 at a
time when prime interest rates approached 20 percent. A capital-intensive
technology encountered both high inflation and high interest rates—coupled
with regulatory uncertainty and large increases in the time required to
complete and license plants and created the absolute worst-case cost
environment. Plant cost increased dramatically, undermining the long-
promised economic advantages and providing market resistance to nuclear
power. In.addition, a large number of backfits and redesigns imposed on
the industry by the regulators after the TMI accident substantially increased
the direct construction costs and reduced labor productivity.
It is ironic that the seeds of these failures were planted at the outset
of the program by two visionary actions: the Atomic Energy Act and the
decision to provide containment.
· The Atomic Energy Act was framed to provide a continuing and
in-depth level of public participation in the commercial deployment of
nuclear power. But this ultimately allowed opposition groups to intervene
in nuclear plant construction and operation in any locality.
· The containment design process required studies of the loss of
integrity in the reactor systems, which in turn led to studies of the loss of
integrity of the containment systems so that the ultimate public risks could
be quantified. Such quantification, necessarily at the upper limit, added to
the apprehension concerning nuclear power safety; and the need to provide
a technically competent, independent regulatory agency to oversee these
complex matters became apparent. The Nuclear Regulatory Commission
has evolved from this need into its present staff of thousands.
FUTURE CONSEQUENCES OF NUCLEAR NONPOLICY
193
In sum, the decisions to give unprecedented attention to safety and
public scrutiny have generated a much greater level of detailed regulatory
oversight and knowledgeable public opposition than would otherwise have
occurred. There was a blind spot, however, in the implementation of these
visionary safety-motivated policy decisions. The focus of development and
attention was placed primarily on the nuclear systems. It was assumed
that the balance of plant technology, construction methods, operation
standards, and maintenance approaches had already been developed in the
power industry and could be put to use essentially as is in nuclear power
plants. As history shows, this was not the case.
HOW DO WE FIX IT?
The first step in resolving the problems that now beset the U.S.
nuclear power program is very much the responsibility of the nuclear power
industry. Confidence must be restored in the public mind, in political and
financial communities, and among senior utility management—confidence
in the safety and effectiveness of nuclear power in the United States. It
is imperative that we achieve a uniform level of excellence across the
industry with an extremely low incidence of technical problems even under
continued detailed scrutiny by the public and the media. And the industry
must accept fair or unfair the fact that its overall performance will be
measured by that of the poorest individual performer. This excellence must
also reflect itself in improved economic performance. There is a vital need
to turn around the continuing increase in nuclear power operating costs
shown in Figure 9.
The U.S. utility industry is fully committed to this drive for excellence
and has established three cornerstones to assist in achieving this goal:
1. Formation of the Nuclear Utility Management and Human Re-
sources Council to conduct an integrated review and development of man-
agement and people-related issues of nuclear power plant operation in
consultation with the commissioners and staff of the Nuclear Regulatory
Commission;
2. Formation of the Institute of Nuclear Power Operations (INPO)
to establish and monitor high standards of operational performance; and
3. Continued funding of EPRI to provide improved technology.
An important part of these industrial activities is exhaustive scrutiny of
plant safety: both enhancing design and operations to minimize the chance
of a severe accident, and evaluating and improving accident mitigation
features and containment systems to ensure protection of the public in the
event of a severe accident. A dominant element in the pursuit of enhanced
plant safety is the improvement of human factors in the control room along
194
RICHARD E. BALZHISER
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1985 1 986
FIGURE 9 Average variable costs of nuclear power.
with the intense effort made by the utilities and INPO—with technical
input from EPRI to increase the level of proficiency in operations and
maintenance.
Of equal importance to this operational drive for excellence is the
licensing, construction, and operation of a permanent repository for spent
fuel. Congress has acted forthrightly to provide for this high-level ra-
dioactive waste repository as well as for regional repositories for low- and
intermediate-level radioactive waste. The U.S. Department of Energy is
dedicated to accomplishing this difficult task.
The completion of the TMI cleanup is another critical remedial action,
now in its final phases. At the same time, the utilities have gained tremen-
dous research and development (R&D) value from the cleanup effort.
Decontamination methods, robotics developments, equipment qualification
diagnoses, and waste-handling methodologies are of value to all nuclear
utilities. Unique data are being obtained on the course of a core-melt
accident, providing the single most important benchmark of our analytical
ability to evaluate severe accidents and their risk to the public. The industry
has benefited from the participation and funding of both the Department
of Energy and the Nuclear Regulatory Commission in obtaining some of
FUlURE CONSEQUENCES OF NUCLEAR NONPOLICY
195
these significant results, supplementing the funding provided by the utilities
and EPRI.
The progress being made in this drive for excellence is encourag-
ing. The challenging performance goals set by INPO and the utilities are
generally being met, and the success has been noted by several Nuclear Reg-
ulatory Commission sources. In testimony before Congress, Lando Zech,
chairman of the Nuclear Regulatory Commission, said, "There has been
a substantial improvement in nuclear power plant performance over the
1984 1987 period" (Zech, 1988~. According to the Office of Analysis and
Evaluation of Operational Data at the Nuclear Regulatory Commission,
"Overall performance at nuclear power plants steadily improved during
1987, continuing the trend which has developed over the past several
years" (Nuclear Regulatory Commission, 1988~. Success in these important
efforts must continue as a first and fundamental step to a nuclear power
future.
In light of the Chernobyl and TMI experiences, an improved inter-
national understanding and consensus on nuclear power safety must be
achieved, because a nuclear plant accident anywhere in the world affects
public acceptance of nuclear plants everywhere. Encouraging steps have
been taken. With the recent development of the World Association of
Nuclear Operators, all countries with commercial nuclear programs partic-
ipate freely in an exchange of information on a working level. Moreover,
the USSR, a participant in this operator-to-operator exchange, extended
a formal invitation to chief executives at nuclear utilities throughout the
world to take part in an open forum in Moscow in May 1989.
Even as these measures are taken to restore confidence in present
nuclear power generation, there is a need for parallel effort to prepare to
reopen the nuclear option in the future. Over the past several years, EPRI
and DOE have sponsored a major program to develop an advanced light
water reactor (ALWR) for the next increment of nuclear power generating
capacity. There is exceptional promise in providing a design that both
builds on the extensive operating experience with current designs of light
water reactors and incorporates state-of-the-art technological improvement.
Utilities in Japan, the Netherlands, Taiwan, and the Republic of Korea are
contributing financially and technically to this effort.
For the ALWR to be a viable candidate for utilibr investment, it must
have the following three attributes:
1. It must meet the highest standards of safety and environmental
protection.
2. It must be economically attractive in relation to its alternative
fossil-fired units.
196
RICHARD E. BALZHISER
3. It must provide the utility with a reasonable opportunity to earn
a fair return on investment. It must offer predictable construction costs
and schedules, assured licensability, predictable operating and maintenance
costs, and a near-zero risk of a severe accident. In short, the investor must
have high confidence that the large capital investment in the nuclear plant
is warranted, and that the investment will sustain its economic superiority
throughout the life of the plant.
To achieve these fundamental acceptance criteria, the utility sponsors
have established design principles to govern ALWR development, with
emphasis on passive safety, simplicity, design margin, human factors, and
standardization. Passive safety means that the design principles of the
reactor are such that no active safety system is required in the event of
a major subsystem failure. These principles are being applied by defining
detailed utility requirements for future light water reactor plants, ensuring
that the extensive experience gained to date is fully incorporated. Both
1300-MWe and 600-MWe ALWR designs are being sponsored.
Both designs are achieving levels of severe-accident prevention 10
times better than present systems, and both have robust containments in-
corporating the experience from TMI and extensive testing of containment
integrity. Much of the increased prevention capability comes from im-
proved human factors and increased passive safety features. The 600-MWe
plant designs have taken a further step in passive safety by incorporating
passive decay heat removal features.
The liquid metal reactor (LMR) and the modular high-temperature
gas-cooled reactor (MHTGR) have been mentioned as successors to the
light water reactor in the United States. In addition to electricity produc-
tion, each of these systems has its own unique function in the long-term
energy strategy of the United States the LMR as a source of fuel supplies
and the MHTGR as a source of industrial process heat. However, these
concepts are less mature than the ALWR and will require considerably
more development time and the construction of demonstration reactors be-
fore they will be ready for commercial introduction to this nation's power
grid.
Having discussed the necessary technical fixes, we now must discuss
the more difficult and important subject of institutional repair. The needs
for regulatory stabilization, Price-Anderson extension, and domestic en-
richment supply remedies are well known, and supportive congressional
action is being taken in each of these areas.
But there is little action to remove the most formidable barrier to
reopening the nuclear option in the United States the problem of financing
a nuclear power plant. Both the regulatory and the financial communities
are loath to support any move by a utility to raise funds for nuclear power
FUTURE CONSEQUENCES OF NUCLEAR NONPOLICY
197
plants. At the same time, it is doubtful that a utility executive would wish
to proceed with construction of a nuclear plant considering the billion-
dollar prudency issues that could be placed at his doorstep if the predicted
demand does not materialize.2
lUday's nuclear plant owners face economic risk far greater than any-
thing contemplated before. Their risk goes well beyond the plant itself, as
TMI and Chernobyl have dramatically illustrated. Clearly we must develop
a symmetry between risks and rewards if we are to reestablish the incentive
to build. Either we lower the risk or we raise the potential reward. ldday's
utility executive is not likely to see either alternative as highly probable in
an economically regulated environment, at least not one based on historical
rate-making practices. That is not to say that business opportunities could
not be structured to offer attractive returns over the lifetime of a project.
There is much tank today about restructuring and economic deregulation of
the utility industry. It may well be that restructuring and economic dereg-
ulation are prerequisites to the authorization of a future nuclear plant.
Further study is needed to identify appropriate initiatives for overcoming
this barrier.
More important, however, a national consensus on nuclear power is
needed to provide a stable foundation for public understanding. The con-
sensus process must be defined. Serious efforts should be brought forth
to develop the options for consensus from a broader base of both society
and science. There is an important need to introduce new players into this
process because of the polarization that has set in among the old players-
the industry and the antinuclear segments of the environmental movement.
The seemingly irreconcilable positions of these protagonists come from
arrogance an attitude that characterized the industry in the heyday of its
unquestioning support, an attitude that has become increasingly apparent
in the opposition groups as political and public opinion has shifted in sup-
port of them. The players must include the nuclear industry, environmental
interests, the ratepayers represented by the financial analysts, nuclear op-
position groups, media leaders, and the public as represented by elected
officials at both the federal and the state levels.
The approach would consist of a persistent, logical, step-by-step build-
ing process. It must be agreed that the issue is important and urgent.
Common ground must be defined among all parties with a stake in the
outcome. The individual interests must be established and options for
reconciling them must be explored. The R&D and evaluations involved
in consensus making should entail evaluation of comparative risk and par-
ticipation by the behavioral and communications sciences as well as the
physical and economic sciences.
The toughest and most important of all is public acceptance of nuclear
power. As essential as the technical and political steps are, it is not
198
RICHARD E. BALZHISER
clear that they will be sufficient to turn around public opinion sufficiently
to restore the nuclear option. The industry-sponsored U.S. Council for
Energy Awareness is active in presenting the case for nuclear power to the
public, but it cannot be expected to cause a major turnaround in public
opinion. We need a consensus process in which all the interested, key
players from all sides of the issue participate.
CONSEQUENCES OF CONTINUED INDIEPE;RENCE
If we fail to restore the viability of the further use of nuclear power in
the United States, we risk major losses. We risk
exacerbating global environmental problems;
increasing U.S. electricity rates;
increasing dependence on foreign oil;
· continued loss of influence in international nuclear policy;
· loss of the human and capital infrastructure necessary to design,
deploy, and use the nuclear options;
loss of the opportunity to export reactors, fuels, and engineering
services; and
loss of the ability to influence how other nations acquire and use
nuclear technology.
Two broad ramifications of these consequences are of special concern.
First is the loss of the infrastructure that would be needed to expand
nuclear power again. This loss carries a correlative weakening of the
skilled personnel needed to operate and maintain the present nuclear
power capability. The lack of incentive for qualified people to enter an
industry that has no future is a formidable problem and inevitably will
result in lower staff capability, which will militate strongly against the drive
for excellence. The lack of this infrastructure with which to rebuild implies
that if nuclear power is needed in the United States again, that need will
be met from foreign sources. The potential impact on the trade balance
is obvious. The picture of a country the size of the United States being
dependent on an overseas supply for a vital form of electricity production
is disturbing. Compare this possibility with the overreaction expressed in
calls for "energy independence" in the immediate aftermath of the OPEC
embargo—plausible scenarios border on the incredible.
ISSUES
Ironically, there is no serious issue that has been raised as a problem
for nuclear power that does not have its counterpart in a broad segment
of industry today. The difference has been that the nuclear power version
liUTURE CONSEQUENCES OF NUCLEAR NONPOLICY
199
of the problem has been identified earlier and publicized more fully in the
United States than in other industries.
Radioactive waste disposal, still the single most serious problem for the
nuclear industry, has now burgeoned into the widespread issue of toxic waste
disposal. The political problems we have in dealing with radioactive waste
may appear mind-boggling. Indeed, the public is becoming increasingly
cautious about the handling of all wastes, as evidenced by the Long Island
garbage scow that wandered the oceans for months in the spring of 1987;
"NIMBY" (not in my back yard) has now become a household word.
Emergency response plans are deemed essential to protect lives in the
event of a severe reactor accident. Although little attention has been given
to this issue by other industries, in several instances emergency response to
industrial accidents in the United States has been substantially aided by the
organization and preparation provided in emergency planning for nuclear
plants.
Another continuing problem for the nuclear power industry has been
the assessment of the potential increase in cancer incidence from very low
levels of radiation. This subject is still fraught with uncertainty because
the radiation levels of interest are so low that the effects cannot really be
distinguished from other causes of cancer, particularly from the prevailing
natural background radiation. This uncertain has a counterpart in the
rising controversy over the carcinogenic effects of low levels of contaminants
in food and even the natural carcinogens in food. Other emerging concerns
are associated with the effects of low-level nonionizing radiation such as
very weak magnetic fields.
Another dimension of regulatory uncertainty is the issue of prudency,
that is, conducting post hoc audits to disallow utilizer costs. As can be seen
in Figure 10, this is another escalating problem in the nuclear industry.
But prudency audits are now spreading to other generation systems and
will probably grow until the extremes perpetrated on the utilities lead to
effective reform.
The problems of nuclear power are largely specific forms of broader
issues that affect our society overall. In many respects we are well ahead of
the rest of industry in solving them. A Forbes cover story entitled "Nuclear
Follies" concluded with the question: "In the end, the problem may well
boil down simply to this: Can a technology as rigorous and as useful as
nuclear power find a place in a society as open as the United States?"
(Cook, 1985).
It is becoming more and more apparent that this question applies not
only to nuclear power but to most, if not all, high-technology industry. Yet,
these technologies are vital to our quality of life. The implications of a
negative answer are far more serious than losing the nuclear power option.
200
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1945-1974 1974-1983 1986
FIGURE 10 Growing trend in prudency audits of utility capital investments.
NOTES
1. In August 1988, Congress authorized a 15-year compromise version of the Price-
Anderson Act. The measure raises the pool of potential no-fault insurance funds
available to compensate victims of an accident at a nuclear power plant from $700
million to $7 billion. It also exempts Department of Energy contractom from liability
for accidents, although it does allow DOE to impose civil penalities on contractors
who violate safety regulations. The money would come from two sources: nuclear
liability insurance of about $160 million per reactor, which utilities purchase from
private insurance companies, and retrospective assessments on each operating reactor
in the event of an accident.
Such prudently hearings are conducted when a plant is being brought into the rate
base to determine whether the utility made a prudent decision in building the plant,
given the information available at the time, and whether the utility proceeded with
construction of the plant in an efficient manner. If it is determined that the utility
may have been imprudent in any of the decisions it took regarding the nuclear project,
it may be disallowed to recover a portion of the plant cost through the rate base.
2.
REFERENCES
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FVI ORE CONSEQUENCES OF NUCLEAR NONPOLICY
201
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