Revenue Sharing Agreement

N.B. This was written in July, 2009 and has not been updated.

Nothing to Share: There’s Little Value in the RSA

Introduction and Executive Summary

 

Last summer, an article in the Rutland Herald[1] suggested that revenue sharing from an agreement made during the sale of Vermont Yankee to Entergy[2] could amount to up to $1.2 billion for Vermont ratepayers. As it turns out, that figure was exaggerated by a relatively minor error,[3] but some of the evidence in the Public Service Board Docket 7440 purports to value the clause at up to $1 billion.  In fact, Entergy has repeatedly asserted that this clause alone justifies relicensing the plant.[4]  Indeed, at this time, the great value it assigns to the RSA is at the very core of Entergy’s case for relicensing. Given all of the testimony presented to the PSB, the value of the revenues shared by the RSA is actually far more likely to be zero, or very close to zero.

 

Most of the assumptions required for the RSA to produce any greater value are improbable taken one-by-one. The probability of all of the assumptions occurring simultaneously is virtually nil. Specifically, four conditions must all occur at the same time to lend the RSA any real value:

 

1)      The electricity price market must rise substantially from current levels and remain there from 2012 to 2023.

 

2)      Vermont Yankee must sell all of its power at (or above) these market prices. In particular, there can be no reduction from market prices for Vermont consumers.

 

3)      At the same time, inflation must remain approximately 25% below the historically low levels of the decade from 1997-2007.

 

4)      Vermont Yankee must operate at capacity factor levels which have no precedent either in its own long-term history, or elsewhere nationally.

 

The analyses presented to the Board simply assume all of these conditions; in most instances, tacitly. There is virtually no argumentation presented for any of them.  Yet all but the first seem implausible on their face, and the concatenation of all of them seems virtually unimaginable.

 

Clearly then, the RSA does not provide an adequate justification for relicensing Vermont Yankee: not as a sole condition, as suggested by Entergy, nor even as a significant part of a larger set of conditions.

 

While the RSA does have value as an insurance policy against the improbable events just enumerated occurring simultaneously,[5] this value can be replicated in different ways without any of the risks associated with running a nuclear power plant and with indefinitely storing its radioactive waste.  But if the “premium” for this insurance is relicensing VY, the policy costs way too much.  Better policies are available at lower costs.

 

The purpose of this report is to scrutinize the evidence presented in Docket 7440, carefully interrogating the data already presented, and, in particular, delving into the explicit and tacit assumptions made by the analysts.  A close examination reveals that many key premises are unjustified and improbable, and that therefore, the conclusions reached are either tenuous at best or, at worst, plain wrong.  In other words, our conclusions are based on looking more analytically at the existing evidence than the experts[6]  who presented it, rather than on offering any new facts or data.

 

A More Detailed Review of the Evidence

 

Consider, first, the precise definition of what is to be shared, according to the MOU: “”Excess Revenue” equals the excess of VYNPS’s revenues determined by taking VYNPS’s average energy price (dollars per MWh) during the fiscal year less the “Strike Price” (dollars per MWh). If the average energy price is greater than the “Strike Price,” that difference (in $/MWh) times the total MWh sold from VYNPS by ENVY during the fiscal year commencing on March 13 shall be the “Excess Revenues.”  … VYNPS revenues are based on actual price for energy and capacity sold by VYNPS during such fiscal year whether to VYNPC, its sponsors, other PPA purchasers or to market.”

 

Imagine two lines.  One is energy prices over time.  The other is the “strike price,” which rises with inflation.[7]  Until the energy price for a given year exceeds the strike price, there is nothing to share.  In other words, if there’s no gap between those 2 lines, there’s no revenue sharing. The energy price line sets the first 2 conditions required to obtain value from the RSA.

 

1) The Market Price for Electricity

 

Wholesale electric power in New England has dropped to as low as the $30-35 per MW range because demand fell both regionally and nationally, thanks largely to the economic depression. Since the strike price in 2012 beginning is $61, in order for the RSA to take effect, energy prices would need to more than double between 2009 and 2012 for there to be any “excess” revenues to share.  The only plausible way that can happen is if the primary reason prices declined is reversed: namely, if the economy recovers.  While it is quite reasonable to assume such a recovery, it is an assumption, not a certainty. Even in a recovery, electricity prices between 2012 and 2022 are now expected to be roughly 1/3 lower than what was previously forecast,[8] given changed conditions.[9]

 

Higher market rates for electricity are necessary for the RSA to take effect, but they are not sufficient. There are 3 more hurdles.

 

2) All VY power must be sold at or above Market Prices

 

In order for the value of the RSA to reach the figures projected by the analysts,[10] Vermont Yankee must receive full market rates for all of its output, including any power sold to Vermont utilities. However, to the extent that any substantial amount is sold below the anticipated market price, the value of the RSA will be concomitantly reduced. There is thus a direct correlation between the value of the profit share and the price at which VY energy is sold to Vermonters: the lower the price to Vermonters, the lower the value of the RSA. Similarly, the higher the value of the RSA, the higher the price Vermonters will pay for VY power.  There is no free lunch.

 

Still, the expert analyses all simply assume that all of Vermont Yankee’s output is sold at market rates, probably because, as of today, there are no power agreements for the relicensing period. Nevertheless, this is certain to be a political non-starter,[11] and it is likely to prove a regulatory hurdle as well. It is virtually certain that the legislature will not vote for relicensing in the absence of power contracts advantageous to Vermont consumers.  It is unlikely that the PSB will grant a Certificate of Public Good under these circumstances either.[12]

 

In sum, if Vermont Yankee is to be relicensed at all, it is unlikely to be selling power to Vermont ratepayers at full market rates.  To the extent it does not do so, the revenues forecasted by the analysts will be exaggeratedly high. Thus, this analytical assumption is exceedingly unlikely to prove correct. Yet it forms the unspoken basis for all of the numbers thrown about in the PSB case and in public so far.

 

3) Economic Recovery and Price Inflation

 

Another basic assumption is that an economic recovery powerful enough to get electric prices to double will, at the same time, permit inflation rates to fall from historic levels. Yet, if the historic rate were merely to hold steady, then even with doubled energy prices, the RSA would be worth either substantially less or nothing at all, because the strike price line would move with the energy price line and there would be no gap between them: no excess, and therefore no sharing.

 

Indeed, this postulate of sharp economic recovery and falling inflation is quite unusual.  Inflation and economic growth have been highly correlated in the US economy, such that, generally speaking, greater economic growth produces higher rates of inflation and vice versa.

 

Moreover, this is especially problematic right now, because most economists, including the Chairman of the Federal Reserve Bank, believe that the very policies which have been implemented to allow the economy (and therefore electricity prices) to recover will, if not carefully monitored and adjusted, also produce substantial inflation, presumably higher than the historically rather low levels of the last decade.

 

It is therefore odd to say the least that not one of the experts in the Public Service Board case explains why it is plausible simply to assume both a full and robust economic recovery and, simultaneously, assume lower rates of inflation than during the decade from 1997-2007.[13]

 

Specifically, the strike price escalator is set by a formula including general inflation, wage inflation, and uranium prices (see Footnote #7). The numbers produced by the experts all assume that this escalator will grow by no more than 2-3%. Yet, in the years 1998-2008, however, the strike price escalated at 4.1%,[14] a rate already lower than during many years in the past 3 decades.

 

In sum, while it is possible that this combination of high growth and low inflation may occur, there is simply no basis for assuming it.  Indeed, there is every reason to doubt   such a presupposition.  Yet, without it, the forecaster’s estimates of RSA would again decline, perhaps to zero.

 

4) Vermont Yankee must run perfectly

 

In addition to everything already noted, virtually all of the testimony also assumes that Vermont Yankee will generate power at a rate which exceeds both its own historic average, and the national historic average.[15]  It must accomplish this during the full 10-year period of the RSA, despite the fact that it will have already reached the end of the life for which it was designed and built. Any decline in VY’s capacity factor will result in less revenues generated and therefore less “excess” revenues to share.

 

According to Bruce Wiggett’s testimony, Vermont Yankee has operated at close to 100% output during the non-outage years and 87.88% during the outage years during the last decade.  He then reduces the 100% to 98% for the non-outage years in his projections.[16] DPS assumptions are very similar. This translates to an overall capacity factor of 91.25%.

 

Nationwide, however, according to the website of the Nuclear Energy Institute {“NEI”), an industry group, the only year since 1971 to achieve this high a rate was 2007, and that figure is provisional. The years since 2000 have been in the range of 88-91%, 1999 was a bit over 85% and all previous years well under 80%. As of 2003, Vermont Yankee’s lifetime average was around 80% according to DPS.  My best guess is that VY’s lifetime average capacity factor to date may now be on the order of 85%.

 

It is worth noting that, when it comes to putting one’s money where one’s mouth is, neither CVPS nor their insurer JP Morgan are betting on this rosy scenario.  CVPS maintains forced outage insurance — basically insurance against a lowered capacity factor — for which they paid $1.3 million for the 2007 calendar year. The policy has a $1 million deductible and a $10 million maximum limit.[17] Insurance cost is based on risk: if the probability of a forced outage were truly close to zero, one would assume that the price of such insurance should be much lower.  If it were zero, presumably no insurance would have been needed or purchased.

 

In addition, the PSB testimony already shows that Entergy plans to replace the plant’s condenser during the 10-year period covered by the MOU, which will necessitate at least 2 longer outages than usual.[18] Other components – especially the transformer[19] — may well also need replacing, according to the testimony.

 

Thus, while it is possible that Vermont Yankee will come close to achieving the unprecedented capacity factors assumed by the analysts, it certainly is not probable.

 

Combining the factors just discussed

 

In sum: if electricity prices don’t at least double from 2009 prices, the RSA will be worthless.  If Vermonters are not paying these higher rates for any VY power they purchase (approximately 50% higher than current rates paid for VY power), the RSA will be worth less than anticipated by the experts. If electricity rates do rise, but general inflation continues at historic rates or higher, the RSA will be worth either less or nothing. Finally, if Vermont Yankee does not operate at historically unprecedented capacity factors, the RSA will be worth considerably less than all of the expert testimony calculates.

 

It is possible that all of these improbable scenarios will occur simultaneously. On the other hand, there is simply no good reason to assume that they will.  The purpose of the analyses presented to the PSB is to provide a well-founded basis for projecting future economic impacts.  That basis, in turn, will become one of the premises for decisions about whether or not to relicense Vermont Yankee.  These dramatically unconservative assumptions provide an extremely unstable foundation for decision-making.

 

It would be unwise to use even one unreasonable or improbable assumption as the premise for such an analysis.  But in this case, the majority of analysts have strung four of them together, each additional improbability reducing still further the probability of the whole concatenation.  At some point, the exercise gets to be a version of the old Israeli joke “If grandmother had wheels, she’d be a bus.”

 

But alas, the problems do not end here.

 

Problems, Problems  

 

Four witnesses presented full analyses to the Board: Bruce Wiggett (for Entergy), Jacob Thomas and George Nagle (for DPS) and Paul Chernick (for the Conservation Law Foundation and VPIRG).  Douglas Smith also performed an analysis, but because he maintained that GMP’s revenue figures are proprietary, we have no way of examining his methods or his computations.[20]

 

Wiggett’s and Thomas’s figures are much higher than those of Nagle and Chernick, because they are based on revenue projections made before the economic collapse. We are thus left with George Nagle’s calculations with updated revenue forecasts, as corrected and further updated by Paul Chernick.[21]

 

These Nagle-Chernick calculations (if we may call them that) show that, if electricity rates rise, if Vermonters pay higher rates for VY power, if Vermont Yankee continues to achieve exceedingly high capacity factors over a full decade, and if inflation declines by 25% from recent levels, then there is some, albeit small, value to VYNPC for the RSA.  Specifically, Vermont Yankee Nuclear Power Corporation’s share of the RSA would be a bit less than $165 million in nominal dollars over a ten year period.

 

The question then becomes: who gets this money from VYNPC?  Unfortunately, the answer is not at all straightforward.

 

CVPS’s July 31, 2002 press release announcing the sale to Entergy reported: “Vermont Yankee Nuclear Power Corporation is owned by Central Vermont Public Service Corp. (35%); Green Mountain Power Corp. (19%); New England Power Company (22.5%); Connecticut Light and Power Co. (9.5%); Central Maine Power Co. (4.0%); Public Service Company of New Hampshire (4.0%); Cambridge Electric Light Co. (2.5%) and Western Massachusetts Electric Co. (2.5%).”   Approximately 1 year later, the VT Supreme Court still referred to CVPS and GMP as 55% owners.

 

Currently, however, CVPS and GMP own 92.5% of VYNPC, with Central Maine Power owning the other 7.5%. Despite informal questioning and pre-filed and verbal testimony in PSB Docket 7440, how this ownership change took place and what its implications are for the RSA remains a mystery.[22]  This much is clear, however: ownership of VYNPC has changed.

 

In her February 11, 2009 pre-filed testimony, Mary Powell from GMP testified that: “Although GMP believes that Vermont is entitled to 92.5% of the revenue sharing benefits, I also understand that the issue of Vermont’s entitlement may be disputed in the future.” (p.5)  Under questioning at the Board on June 2, 2009, CVPS’s William Deehan noted that the now-former owners of VYNPC have told CVPS employees that they expect to receive a share of RSA revenues,[23] virtually assuring such a dispute.  At best, considerable uncertainty persists, such that virtually all of the testimony before the Public Service Board models both a 55% share and a 92.5% share.[24]

 

Ultimately, this question will almost certainly be sorted out by lawyers,[25] either through negotiation or through the courts. This assures that even if Vermont utilities do receive the higher share at the end of the day, there will be significant offsetting legal costs involved to obtain it.  (None of the testimony makes any allowance for this obvious eventuality).  It is also worth noting that, since this needs to be settled by either negotiation or litigation, there will be an overhang of uncertainty until it is resolved, which could last for years.

 

Dollars and No Sense

 

In other words, by stringing together an exceedingly improbable concatenation of assumptions about the future, there could be as much as $165 million dollars of VYNPC’s portion of “excess revenues” to be shared over the ten-year period of the MOU. This would imply savings for Vermonters of around $90-150 million, depending on whether the allocation is ultimately fixed at 55% or at 92.5%.  It’s quite clear that the higher figure would be subject to some reduction by legal (and possibly court) fees.

 

However, this scenario can take place only if either 1) Vermont ratepayers are also paying upwards of $3 billion for VY power over the 20-year relicensing period or if 2) Vermonters purchase none of VY’s power, allowing all of it to be sold at the highest possible prices.  The second assumption presumes that VY is allowed to operate strictly as a merchant generator, with Vermonters purchasing all of their power elsewhere.  Clearly, this is a political non-starter. It is simply unimaginable that the legislature would allow VY to be relicensed based conditioned on Vermonters receiving none of its power. Since we can safely eliminate the second possibility, only the first remains.

 

In sum, under an implausible set of assumptions all geared to maximize its value, the RSA might reduce Vermonters’ electric rates by as much as somewhat less than $150 million, but only in the context of paying $3 billion for power from VY. More plausible assumptions would reduce the maximum value still further.  For example, if inflation produced the historical strike price escalation rate of 4.1%, then the estimates just given would decline to $46M (at the full, unrealizable 92.5% share)  If inflation were to go to 4.6% — hardly a staggering or unprecedented rate, these figures would fall to zero.  In similar fashion, sensitivity analyses for all questionable assumptions are likely to show similar reductions.

 

Additional Problems

 

Since we believe that the value of the RSA will be vanishingly small or non-existent, we have put a number of other complex issues to one side.  Nonetheless, in the interests of scanning the whole horizon, we will present some of them here briefly.

 

First, we have already quoted the MOU to the effect that, “VYNPS revenues are based on actual price for energy and capacity sold by VYNPS….”  Nevertheless, Entergy apparently contests this, and is currently attempting to assert that capacity sales should not be included in calculating the shared “excess” revenue.[26]  For the purposes of our discussion, we need only note that all of the figures discussed in the PSB case and elsewhere assume that capacity sales are included in these calculations.  If they were to be excluded as Entergy suggests, the “excess” to be shared would be even lower that what is suggested above, reinforcing still further all of the conclusions previously drawn.

 

Second, since the RSA depends on the “actual price” received, there is an incentive for Entergy to “game” its sales.[27]  To give the most obvious example, if Entergy were to sell VY power to one of its subsidiaries at well below market prices, total revenues could easily be reduced enough to guarantee that there would be no “excess.”  The power could then be resold by the subsidiary at full market prices (or conceivably, even higher).  Should the plant be relicensed, the PSB will need to exercise considerable imagination and diligence to assure that this and other devices are not used.  To the extent that the Board fails in this endeavor,[28] if energy prices are high, Entergy has every incentive to find ways to keep all of the revenue rather than sharing it with VYNPC.

 

Third, and similarly, under the MOU, “excess” revenues would be shared only on power sold during the 10-year period of the RSA, giving Entergy an incentive to make any necessary time-consuming modifications or repairs during the RSA period. Since revenues earned during this period would have to be shared with others, they would have less value than either before or after the RSA period, when they would not.

 

Fourth, at present it is not certain what would happen to the portion of “shared revenues” attributable to Vermont utilities.  One way or another, all parties appear to assume that they would belong to the ratepayers.  Whether that means ratepayers of utilities other than GMP and CVPS remains an open question, currently being negotiated by those utilities.  Other proposals, including using the funds to underwrite efficiency programs, have also been floated in Docket 7440 testimony and briefs.

 

Finally, fifth, as noted repeatedly, all current estimates are based on Entergy receiving full market rates for electricity sold.  As this is written, however, negotiations are continuing in search of Power Purchase Agreements between Vermont utilities and Entergy which would probably, if successful, result in less than market prices for a substantial portion of VY’s output.  This, in turn, would minimize any “excess revenues” available to be shared, thus reducing still further, and almost certainly to zero, the value of the RSA.

 

Conclusions

 

At best, any value which the RSA is alleged to produce is a “best guess,” based perhaps on considerable knowledge, but reliable only to the extent that crystal balls are operating well.  Over time, however, economic forecasts in general and electricity market forecasts in particular have proven to be consistently, even staggeringly, wrong.[29]

 

With that caveat firmly in mind, however, the conclusions in this case are pretty obvious. Energy prices and the strike price inflator are likely to move in tandem, virtually assuring that, from today’s lowered platform for energy prices, there is no “spread” between the revenues VY earns and the so-called “Strike price.” Vermont Yankee is not likely to receive a Certificate of Public Good or approval from the legislature unless the utilities can agree to power contracts which price VY power considerably below market prices, but such contracts would virtually guarantee that there would be no “excess” revenues to be shared.   And Vermont Yankee is unlikely to operate virtually perfectly over the entire decade of the MOU, and therefore its output is extremely likely to be lower than the experts are assuming.

 

Each of these seems, in isolation, sufficient cause to cast considerable doubt to the value obtained by these analyses, since they are based on presupposing exactly the opposite.  After all, just as in any logical argument, if any of the premises are wrong, the conclusions do not follow. The likelihood of all of these improbable assumptions proving correct – simultaneously – is vanishingly small.  And finally, even if they did prove to be correct, the greatest plausible value which could result from the RSA is but an extremely tiny fraction of what Vermonters would pay out in energy prices.

 

We conclude from all this that:

 

  1. The most probable case is that there will be no revenues to share, because the probability of all components required aligning simultaneously is vanishingly small.  Increased electricity prices are likely to matched by increasing general inflation, labor rates, and uranium prices.  Unprecedented capacity factors are unlikely to be maintained over the ten-year period, and VY is unlikely to be relicensed at all without significantly discounted power prices for Vermonters.

 

  1. Should this inference prove false, however, it is possible that Vermont ratepayers will see a benefit of at most well under $150 million over a 10-year period in the context of paying over 20 times this amount for electricity over a 20-year period.  And

 

  1. This marginal benefit is far from assured.  Substantial technical and legal hurdles could well make even this amount of revenue sharing disappear.  Therefore, finally,

 

  1. The only real assured value of the RSA at this time is as insurance against extreme market volatility.[30]  Purchasing power from renewably generated sources at fixed rates, or owning renewable generating facilities, could provide similar price protection at considerably lower risk, financially, legally, and environmentally[31].  Offsetting demand with efficiency efforts would, in fact, guarantee this result at lowest cost to Vermonters.  Since we have argued these points at length in another report, we will not repeat ourselves here.

 

John Greenberg



[1] “Utilities may reap $750M from Yankee: Profit-sharing provision likely incentive for re-licensing” by Susan Smallheer, published July 6, 2008.

[2] When Vermont Yankee Nuclear Power Station was sold to Entergy in 2002, a Memorandum of Understanding (“MOU”) was signed between the Vermont Yankee Nuclear Power Corporation (“VYNPC”), Entergy (Entergy Nuclear Operations and Entergy Nuclear Vermont Yankee “ENVY”), the Vermont Department of Public Service (“DPS”), Central Vermont Public Service (“CVPS”) and Green Mountain Power (“GMP”). The MOU’s profit sharing provision, section 4, which is also referred to as the “revenue sharing agreement (“RSA”) or “revenue sharing clause (“RSC”) specifies: “In the event that ENVY extends the operation of the VYNPS pursuant to extension of its NRC license, ENVY agrees to share with VYNPC fifty percent of the “Excess Revenue” for ten years commencing on March 13, 2012.”

 

To avoid any possible confusion, I also want to note here that Vermont Yankee’s current price contracts end with the termination of its existing license in March of 2012. Currently, there are no contracts for power purchases after that date.  Conversely, the RSA begins only with the start of the new license, and then covers a ten-year period.  It has no bearing at all on the current contract.

[3] A DPS analyst included a so-called “retail adder” when he should not have.  This erroneously added 11% to the figures his spreadsheet generated.

[4] One example suffices here.  On December 22, 2008, Jay Thayer wrote to the Board, explaining that while a negotiated contract had been promised for that day, no contracts had been signed and none were necessary.  In particular, on the 2nd page of his letter, he asserts: “It should be evident that the value embedded in the Revenue Sharing Clause in and of itself provides sufficient economic justification for the Board to issue a CPG in Docket No. 7440.”

[5] This notion of the RSA as insurance was introduced by a variety of witnesses who appeared before the PSB in May and June, such as William Deehan and Richard LaCapra.

[6] Indeed, I make no claim to expertise of any kind.

[7] More precisely, the MOU states:  “The Strike Price will be adjusted based on three indices determined by the most recently published information as of the adjustment date: the Employment Cost Index (“ECI”), the Gross Domestic Product Implicit Price Deflator (“GDP-IPD”) and the Nuclear Fuel Market Index (“NFMI”). The weighting of the indices is 60% for ECI, 25% for GDP-IPD and 15% for NFMI. The indices are determined as follows:

* Employment Cost Index (ECI) – Total compensation for private non-farm workers in the Northeast Region including NY; Source Bureau of Labor Statistics (Index June 1989 = 100).

* Gross Domestic Product Implicit Price Deflator (GDP-IPD) – US Government Statistic; BEA National Income and Product Accounts Tables (Index 1992 = 100).

* Nuclear Fuel Market Index (NFMI) – Using market from trade publications such as Trade Tech, Nukem and UX, the uranium market price, conversion, enrichment and fabrication costs will be updated monthly and indexed to February 2012 prices and calculated using weighted averages as set forth in Schedule 1 hereto.”

[8] Before the national economic depression took hold, there was something like a consensus around the forecast based on a report called Avoided Energy Supply Costs in New England: 2007 FINAL REPORT:  FINAL – August 10, 2007 (“AESC”).

[9] Despite a dramatically different economy, Entergy’s witness, Bruce Wiggett, is sticking to his guns.  In his May 20, 2009 testimony to the PSB, he was asked:  “Have you updated your calculations of the revenue sharing agreement value given current economic conditions?   A.     No, I have not.”   He goes on to add that, while “Certainly the short-term market has changed.  But my testimony is for an extended period of time, and I feel that it’s still reflective of the conditions that could be prevail [sic] over that extended period.”  (p.11)  Never let facts get in the way of a good argument.

[10] The possible exception is Douglas Smith from Green Mountain Power.  His testimony provides a low value and a high value for the RSA, and a discussion of scenarios, but he does not correlate the two, at least in part because his market forecasts are proprietary.  It is therefore not clear exactly how he arrived at his figures, and accordingly, I have not made any effort to assess his projections.

[11] I will merely note that I have spoken to numerous legislators, not one of whom appeared to believe that the plant would be relicensed in the absence of contracts highly favorable to Vermont ratepayers.

[12] As of this writing, even some of the parties supporting relicensing believe that a CPG should not be granted in the absence of new contracts.  Specifically, GMP (cf., e.g., July 17 brief, pp. 6-8), VEC, and DPS (July 17 brief, pp. 58-62) have all stated this explicitly.  CVPS attempts to strike a middle position by arguing that PPAs are not “required” for a CPG, but that, at the same time, “ENVY likely has not satisfied its burden” without them.  (p.12)  What “likely” means is never really made clear in their brief, at least not to this reader.

[13] Though his point of attack is rather different from mine, William Deehan’s June testimony challenges this notion as well.  Indeed, the CVPS July 17, 2009 brief is even more pointed in finding #48, on page 20: “After 2012, the indices that control the strike-price should be expected to escalate faster than overall inflation because of its partial weighting on labor costs.”

[14] The historical figure is from Bruce Wiggett’s pre-filed testimony of March 3, 2008, pp 6-7. To be fair, Wiggett does take a stab at an explanation.  Because he believes that the price of uranium will return to the averages of the 10 years preceding 1997, Wiggett’s analysis assumes that the escalator will fall to about 2.8%.  Frankly, this reasoning appears completely specious to us, particularly in the light of a new generation of nuclear reactors around the world which can only increase the demand for and therefore the price of both raw uranium and processed nuclear fuel.  Moreover, Wiggett never addresses the broader disjunction between assuming this reduction in the escalator and simultaneously assuming market price increases.

[15] Douglas C. Smith presented testimony for GMP on Feb. 11, 2009 in which he raises this issue and provides a performance range.  See pages 9-15.  All other testimony appears to just assume unusually high capacity factors.

[16] Wiggett pre-filed March 3, 2008, p. 6.

[17] 2006 CVPS Annual Report, p. 38.

[18] Cf. Jay Thayer’s May 21,2009 testimony, pages 23-24.

[19] See DPS July 17 brief p.12: “If the spare transformer proves to be unreliable, it could take approximately 18 months to obtain a replacement transformer.… Installation of the designated spare transformer would require VY to reduce its output by approximately 20%.”

[20] Frankly, this is a shame because he appears to be the only analyst to have carefully considered the assumptions and tested scenarios by varying the key ones.

[21] Specifically, Chernick shows that Nagle used the wrong index to calculate the strike price; that he used peak energy rather than round-the-clock energy to calculate the price of VY’s estimated sales (thus inflating the revenues on which the RSC would be based); that he incorrectly adjusts prices to the “Vermont Yankee node,” (again inflating revenues) and finally that he overestimates the value of capacity in New England.  Finally, both Chernick and Nagle filed testimony correcting a mathematical error on Nagle’s original spreadsheet.

[22] For example, on p. 10, GMP’s July 17, 2009 brief states: “Although there were eight VYNPC owners at the time of the sale of the VY Station by VYNPC to ENVY, Docket 6545 Order at 12-13, all but three owners sold their interests back to VYNPC in 2003.” Finding #67 in CVPS’s July 17 brief (p.25) concurs on the 2003 date.  But the DPS brief of the same date says, on p.5: “Coincident with the sale from VYNPC to ENVY [which took place in 2002], ten of the original 13 owners liquidated their holdings in VYNPC, leaving CVPS, GMP and Central Maine Power Company as the remaining stockholders of VYNPC.”  It cites the order in Docket 6545 at 165, ¶¶ 7-8. On their face, these statements contradict one another. (I added the boldface to point up the contradiction).

[23] Deehan testimony, p. 123-124:  line 9:   “MR. JANSON:  If you please turn to page 14 of your testimony, at lines 8 to 11 you state that you are aware that most or all of non-Vermont owners that sold their ownership interests in 2003 appear to have an expectation that they should receive sponsor/power purchasers shares of the excess revenue under the revenue sharing clause. What’s your basis for that statement, that awareness?  MR. DEEHAN:  Statements made to CVPS employees by those sponsors.  Now none of them were directly to me, but they were directly to people who I work with and they made it clear that they had an expectation of receiving a share of the revenue sharing clause revenues. MR. JANSON:  And that’s most or all of those non-Vermont owners?  MR. DEEHAN:  Yes.  That’s my           understanding.”

[24] Bruce Wiggett’s pre-filed testimony for Entergy does not actually do the 92.5% calculations, but takes note of the problem as well.  He simply assumes a 55% share.

[25] CVPS’s July 17, 2009 brief makes precisely this point in its proposed finding #43 on page 18: “There is a significant risk of expensive, time-consuming litigation over this sharing issue.  CVPS believes that should a decision, an alternative RSC, a PPA, or some other agreement result in the non-Vermont Sponsor/power purchasers being excluded from sharing in the excess revenues, those parties would likely commence litigation against any or all of Vermont Yankee Nuclear Power Corporation (“VYNPC”), CVPS, GMP, the regulators, and/or any other parties they felt were responsible for that result.  Deehan pf. of 2/11/09 at 14.  See, Findings 64, 65, below, discussing non-Vermont Sponsor/power purchasers.”

[26] References to this claim appear throughout the PSB testimony.  For example, Jay Thayer testified on May 20, 2009 as follows: “Q.     What is Entergy’s position with respect to [p.59]under the revenue sharing agreement, with respect to revenues from capacity sales?  Are they included in the sharing or excluded from the sharing?  A.     For the purposes of our testimony in this case, we have assumed that the revenue sharing clause applies to sales of energy only.”

[27] Cf. Paul Chernick’s June 1, 2009 testimony from page 162, line 23 to p. 163 line 21.

[28] On page 53 of its July 17, 2009 brief, the DPS makes a recommendation which is guaranteed to fail: “Only arms-length (non-affiliate), commercially reasonable power sales transactions shall be utilized to calculate the unit revenue received for output sold by the plant for purposes of calculating Excess Revenue under the RSA. Structured sales whereby value attributable to the sale of plant output is not paid directly to the plant, or where a monetary substitute is accepted as consideration by the plant in exchange for delivery of output, shall not be considered commercially reasonable sales under this condition. Petitioners shall share data showing actual revenue from sales and VYNPC or purchasing Vermont utilities may challenge the reasonableness of any transaction based on the data received from Petitioners. The Board shall resolve any disputes over such a challenge.”  If, in accordance with this proposed provision, ENVY were to sell all of their power in a “structured sale,” then they would produce no revenues which count towards the RSA, guaranteeing that there would be no sharing.  Sorry, but it’s back to the drawing board on this one!

[29] For example, the Department’s 2007 forecasts for 2012 and following are about 40% higher than their high estimate just 3 years earlier.  As of fall 2008, both CVPS and GMP found these estimates too HIGH, though neither was specific, and GMP explicitly refused to share their forecast.  Riley Allen, right before he left the Department, told me he thought the forecast was 10-30% too LOW.  So much for agreement among the experts! Finally, the above statements concern a forecast which, in turn, by 2008, was considered about 33% too high by everyone except Bruce Wiggett.

 

Part of the problem is the extreme volatility of electricity prices.  For example, in Bill Sherman’s testimony in the 2002 case, he noted, “The ISO-New England average market-clearing price for wholesale electric energy (for all hours) for January 2001 was $62.57 per MWH. The corresponding clearing price for January 2002 was $25.49 per MWH.” (p. 18)

[30] Cf. the comments of the 2002 PSB:  “We note that the $61 strike price is higher than the prices that any party has forecast for wholesale market power in 2012…. Thus, based upon present projections, this sharing provision is not likely to have any value to ratepayers.  Nonetheless, it does provide protection should energy market prices change precipitously. (Docket 6545, Order of 6/13/2002 at 71 (footnote 142)(emphasis added)” Quoted at page 5 of J. Randall Pratt’s pre-filed testimony of Feb. 11, 2009.

[31] To cite just one striking example, CLF and VPIRG introduced a report which estimates that a Spent fuel pool loss of coolant accident would produce between $167 and $878 billion (that’s with a “b”) of damages to New England.

 

Clairifying the problems of Nuclear Power in the Green Mountain State and beyond