By Dan Zegart, crossposted from Climate Investigations Center
With Southern Company’s board voting today to green light the completion of the Vogtle nuclear power plant, the prospect that Georgia utility customers may be on the hook for many billions for a plant that may never be economically feasible becomes very real.
Southern Company CEO Tom Fanning has blamed the bankruptcy of nuclear reactor builder Westinghouse for the plant being billions over budget and years behind schedule, calling the Westinghouse collapse an unforeseeable event that caught Southern by surprise.
Tomorrow, Southern Company will recommend to the Georgia Public Service Commission that it nevertheless continue to build the project – which is only 32 percent complete after four years of construction – despite the huge and ever-increasing cost of a plant that the PSC’s own analyses indicate may never be viable commercially.
But a growing chorus of public interest and environmental groups blame the project’s collapse on Southern Company itself. They say a chronic failure to properly oversee project schedule and cost sealed Vogtle’s fate. The Southern Alliance for Clean Energy and other watchdogs have called for an emergency public hearing to re-open the question of whether spending on the plant so far has been prudent, and whether it ought to be scrapped.
Specifically, these groups point to Southern’s refusal to insist on the use of modern construction management tools, and its persistent lack of candor reporting on progress and likely future construction outcomes, as reasons for the plant’s poor progress.
That argument is buttressed by the testimony of the Georgia Public Service Commission’s own experts, who have followed Vogtle’s long history of missed deadlines, shoddy work, and massive cost overruns. Their testimony in recent hearings before the PSC makes it clear that Southern Company should have known that a Westinghouse collapse was almost inevitable.
Meanwhile, utility customers are already paying for some of the $6 billion that their elected representatives on the Georgia Public Service Commission are letting Southern Company put into electrical rates as part of a formal stipulation negotiated and agreed to by Southern and the PSC in the fall of 2016.
And both the company and the commission say that finishing the reactors almost certainly won’t be feasible if Toshiba, Westinghouse’s corporate parent, defaults on a $3.7 billion “parental guarantee” it promised Southern after Westinghouse’s March bankruptcy to cover some of Vogtle’s ever-rising costs.
Given Toshiba’s recent series of financial scandals, default cannot be ruled out. The first payment of $300 million is due in October.
In fact, customers of Georgia Power, the Southern Company Georgia subsidiary responsible for Vogtle, have already paid some $500 through their monthly utility bills for a plant that may never operate, and, under a 2009 law backed by Southern Company, may continue to pay billions more of Southern’s costs for many more years – – even if the plant never produces a single watt of electricity.
Vogtle’s reactors are a new Westinghouse design, the AP-1000, which has never been built or tested anywhere in the United States. Constructing a first-of-its kind nuclear design after a forty-year hiatus in new nuclear projects meant that predictions about cost and schedule were no more than guesses, according to utility expert David Schlissel, who warned the PSC of this at a 2008 hearing.
The two Vogtle reactors, known as Units 3 and 4, were to go on-line in 2016 and 2017 respectively, but are now at least five years behind schedule, delayed until 2021 and 2022 respectively. The result is that a $14.3 billion construction job has ballooned to $25.2 billion with no end in sight. (Georgia Power’s costs represent its 45.7 percent ownership of the plant, with the balance owned by three much smaller utilities.)
The delays came as the Georgia PSC’s own experts warned that Southern Company was allowing Westinghouse and previous prime contractors for Vogtle to operate without computerized planning tools that are standard for an incredibly complex project involving over 200,000 interconnected activities.
Over a period of years, PSC experts repeatedly testified before the commission that failing to use the industry-standard planning software was inherently not prudent, meaning costs that resulted from such a failure could be excluded from the rate base, and that the lack of proper planning meant confusion and waste at the enormous Vogtle construction site near the Savannah River, a few miles from the South Carolina border.
Southern Company and the Georgia Public Service Commission claim they didn’t learn that Westinghouse, Vogtle’s builder and designer, was near collapse until the end of March, when the company filed for bankruptcy, citing $9 billion in losses on Vogtle.
However, public interest watchdogs and other observers believe the PSC could have learned of Westinghouse’s dire financial condition had regulators conducted a traditional full-scale prudency hearing on the project instead of a brief prudency “review.”
In fact, while the PSC and Georgia Power negotiated an agreement on Vogtle late last year it was already public knowledge that parent company Toshiba was in serious fiscal straits. Toshiba’s troubles actually date back to at least July 2015 when the company admitted it had overstated its earnings by over $1.2 billion over a seven-year period. By the end of the year, the Japanese firm had slashed some 10,000 jobs in a desperate attempt to stay afloat.
“It’s been well understood for some time that Toshiba was not a stable company,” said Schlissel, the utility expert.
The truncated proceeding at which the Georgia Public Service Commission examined prudency late last year was quickly denounced by public interest groups as a hasty rubber stamp. The PSC took just four hours to approve $5.7 billion in spending on the two new Vogtle reactors – – and under terms critics say are a very poor bargain for Georgia Power’s customers.
“Unbelievably sloppy,” said Robert Baker, a former chairman of the PSC who represented the Southern Alliance for Clean Energy in the Vogtle case at the time of December 6th proceeding.
“It was not a prudency review. It wouldn’t have qualified as any kind of review. A pay phone license would have taken more time,” said Baker.
Under cross-examination by Baker during the hearing, PSC experts admitted that no financial audit of the project had been conducted in preparation for the hearing, and no memos or other documentation had been produced to justify a prudency finding for $3.5 billion spent on the plant as of the end of 2015 and a total cost, including future construction, of $5.7 billion.
Instead, the staff’s review consisted of collecting already available information and putting it into notebooks.
The hearing took place just as Toshiba announced it might have to write down billions on its Westinghouse unit due to overruns at Vogtle and a twin facility being built in South Carolina.
“If a full-on prudency review had taken place on Vogtle last year, there would have been no getting away from Westinghouse’s situation,” said Sara Barczak, a program director at the Southern Alliance for Clean Energy. “But it was only a settlement process. So eight months later, hundreds of millions have been spent that never should have been spent.”
That settlement process had already been completed by the time of the prudency review in early December, rendering the hearing itself largely meaningless, since by then the PSC and Georgia Power had signed a three-page stipulation on October 20, 2016 that gave the utility everything it wanted.
The stipulation shifted the burden of proof away from Georgia Power to anyone challenging the spending. And perhaps most startling, not only did the agreement bless the $3.5 billion spent on Vogtle through December 2015, it actually declared future spending prudent: “Capital costs incurred up to $5.680 billion will be presumed to be reasonable and prudent.”
“Pursuant to what authority may the Commission determine that forecasted costs are either prudent or reasonable prior to the completion of the plant?” Baker asked a panel PSC staff and company officials in December.
“We didn’t really address that,” replied Georgia Power Comptroller David Poroch.
Other recent PSC hearing testimony revealed that PSC staff and consultants had identified between $800 and $1 billion in costs that should not be declared prudent – but gave up those claims as a concession to make the stipulation happen.
A full-scale prudency hearing would have been consistent not only with standard operating procedure for state utility regulators nationally but with past practice in Georgia – indeed, foregoing a full-scale hearing for a utility project of this scale may be unprecedented.
The Vogtle 3 and 4 reactors are being built adjacent to Vogtle 1 and 2, the original two nuclear reactors. In marked contrast to Vogtle 3 and 4, Vogtle 1 and 2 were subjected to an exhaustive review befitting a project that cost $8.9 billion, which at the time was the “largest single investment ever constructed in the state of Georgia,” according to the PSC.
Vogtle 1 and 2 were only approved in late 1987 after 42 days of hearings over a six-month period. One series of proceedings determined prudency while a separate set established new rates for Southern Company’s customers. Altogether, the process generated 12,329 pages of transcript and 502 exhibits. The prudency segment included testimony from nine individual witnesses and thirteen panels of anywhere from two to six witnesses, according to the PSC.
When contrasted with that, the PSC’s recent four-hour version of prudency seems an undeniable example of “regulatory capture” by a company whose leadership often boasts to investors of its cordial working relationships with state regulators.
Far from bearing down on a project that has gone so far off track, Georgia commissioners seem to take offense at criticism of the Vogtle plant or Southern Company.
As Baker bored in on the PSC experts about the lack of evidence for prudency, an annoyed Commissioner Lauren “Bubba” McDonald interrupted, saying he didn’t “know why we need to go through and see what size shirt they wear and all of this in order to reach and look at what the document is in front of us.”
McDonald asked what the object of Baker’s questions was.
“The object, Commissioner McDonald,” Baker replied, “is to understand how the staff came to its conclusion to enter into this proposed stipulation, which is a seven billion dollar plus agreement that will burden or be the responsibility of Georgia ratepayers for the next 60 years.”
After two South Carolina utilities decided to scrap the V.C. Summer nuclear plant on July 31, Commissioner Tim Echols issued a series of tweets castigating critics of the plant, and stressing the differences between Summer and Vogtle.
“Our commissioners will look at total cost to complete soon. Hopefully, we can move forward and finish. It is VERY important,” Echols commented, adding, “We have strong partners on this project, and GA Power has negotiated masterfully. Toshiba must make good on commitments.”
Echols also tweeted;
“GA’s situation slightly different. Larger utility, Federal Loan Guarantee, and fully-supportive elected commission.”
There is certainly plenty of evidence for the latter. Georgia’s five elected commissioners have presented a largely united front supporting the plant from the beginning of the project’s construction history with little criticism.
They have largely ignored years of complaints by the independent monitors, the PSC’s on-site project watchdogs, who have faulted Southern Company for failing to provide a reliable cost-to-complete the project.
They have also pointed out on numerous occasions that Southern has never come up with an Integrated Project Schedule, a computerized planning tool. The IPS is an industry-standard program that tracks the project’s myriad engineering, procurement and construction operations and updates project cost and schedule to reflect actual progress.
The IPS is considered essential for such a complex, expensive job – the first nuclear project built in the United States in decades and one that employs a never-before-tested design and equipment, the Westinghouse AP-1000 reactor. PSC experts have said several times over the years that a failure to use an IPS is inherently imprudent.
Georgia Power has blamed Westinghouse for failing to develop an IPS as the project’s prime contractor and designer, but in fact, PSC experts have pointed out, it is ultimately Georgia Power’s responsibility to make sure such safeguards are in place.
In a series of emails to Climate Investigations Center, Commissioner Tim Echols said he opposed the prudency review idea but was outvoted.
“How can you review prudency when the reactors are not even working?” Echols commented.
But Echols also argued that the stipulation does provide safeguards for utility customers. He noted that the agreement delays the worst of the rate impact, and lowers Southern’s return on investment for the entire project if a December 31, 2020 completion date is missed.
“It was not perfect, but given the circumstances and the vote count, I felt like it was the best we could get,” Echols said.
Georgia Power says productivity has improved recently on the Vogtle site, but testimony at a June PSC hearing revealed that the net result of the past year’s construction activity has been to put the project yet another year behind.
With Westinghouse out of the picture, Southern Company’s Southern Nuclear subsidiary became the prime contractor, with Westinghouse agreeing to provide some support services. Southern Nuclear has never built a nuclear plant, or coordinated a project that currently involves 5,000 craft and other workers.
Under the terms of the Southern’s agreement with Toshiba, Toshiba is absolved from liability beyond the $3.7 billion it has promised, meaning Southern itself will now be responsible for all future cost and schedule snafus. Ultimately, with a compliant PSC, those obligations could wind up in the laps of Georgia consumers.