FERC allows utility recovery of canceled nuke plant costs

U.S. regulators have allowed an electric utility serving customers in North Carolina and South Carolina to recover half of the wholesale portion of the costs of a canceled nuclear power plant through wholesale formula rates contained in 14 power purchase agreements with wholesale customers.

At issue is Duke Energy Carolinas, LLC, a vertically integrated utility with generation, transmission, and distribution facilities used to serve its retail customers. DEC also provides long-term requirements service to a number of electrical cooperatives and municipal utilities whose service territories are within the DEC balancing area.

In 2006, DEC proposed to develop the William States Lee III Nuclear Station Units 1 and 2 in Cherokee, South Carolina. In 2007, DEC applied to the Nuclear Regulatory Commission for a combined construction and operating license, which the NRC granted in 2016. The utility ultimately incurred actual costs for the project's development that exceeded $558 million. But DEC subsequently decided to cancel the project, citing circumstances outside its control which negatively impacted its ability to initiate construction, and which led DEC to conclude that it would no longer be beneficial to its customers to construct and commence operation of the Lee Nuclear Project.

With respect to state retail rates, DEC obtained approvals from both the North Carolina Utilities Commission and the Public Service Commission of South Carolina to recover certain project costs in rates, finding that (with limited exceptions) the costs DEC incurred for the development of the project were reasonable and prudent, and allowing DEC to amortize and recover each state's retail portion of those costs over a twelve-year period.

With respect to federal rates, DEC negotiated with its wholesale customers to recover half of the wholesale portion of the canceled project's costs, based on a load-ratio share, from the wholesale customers through the formula rates in their power purchase agreements. Under this approach, some customers would make a one-time payment, while others would pay over a twelve-year amortization period.

DEC then applied to the Federal Energy Regulatory Commission for approval to recovery these amounts in rates. The Commission cited its Opinion No. 295, in which it found that prudently incurred costs from a utility's investment in a nuclear unit which was canceled prior to completion should be equitably allocated between ratepayers and shareholders. It accepted DEC's filing to recover the wholesale portion of 50 percent of the $516.5 million of eligible cancelled Lee Nuclear Project costs from the wholesale customers. Noting that Commission policy generally requires recovery of these costs over the "life of the plant" (40 years for the Lee Nuclear Plant), the Commission accepted the abbreviated twelve-year amortization method.

The process highlights the challenges of planning, permitting, and developing centralized power plants, in an environment where regulatory approvals can take nearly a decade, during which time markets and technologies may have shifted so much that the project no longer makes sense. While a stranded cost or stranded asset may be more costly than the cost of a canceled project, these forces highlight how ratepayers can bear financial risks associated with utility megaprojects.