Witness Panel 1

• Asst. Secretary Dennis Spurgeon

  Department of Energy

  Read statement

  Witness Panel 1

  Asst. Secretary Dennis Spurgeon

  STATEMENT OF DENNIS SPURGEON
  ASSISTANT SECRETARY
  OFFICE OF NUCLEAR ENERGY
  BEFORE THE
  COMMITTEE ON ENERGY AND NATURAL RESOURCES
  UNITED STATES SENATE
  MAY 22, 2006
  Chairman Domenici, Senator Bingaman, and members of the committee, it is an honor
  and a great pleasure for me to be here today to discuss the Administration’s progress
  implementing the provisions contained in the Energy Policy Act of 2005 (EPACT 2005)
  that encourage building new advanced nuclear power plants in the U.S. As this is the
  first hearing at which I have testified since being sworn in as Assistant Secretary for
  Nuclear Energy six weeks ago, I can think of no better topic for discussion than efforts of
  the Administration and this committee to stimulate more nuclear generating capacity to
  meet our growing demand for energy.

  
  The President has stated a policy goal of expanding nuclear power in the U.S. and around
  the world. The resurgence of nuclear power is a key component of President Bush's
  Advanced Energy Initiative and a key objective contained in the President’s National
  Energy Policy. The reasons for this are obvious. As we enter a new era in energy
  supply, our need for energy – even with ambitious energy efficiency and conservation
  measures – will continue to grow as our economy grows. While nuclear is not the only
  answer, there is no plausible solution that does not include it.

  Just over a year ago, Deputy Secretary of Energy Clay Sell testified before this
  committee on the Department’s Nuclear Power 2010 program and the risks associated
  with building the first few nuclear plants. Since then, significant progress has been made,
  in both Nuclear Power 2010 and in terms of mitigating the risk associated with building
  the first few new nuclear plants.

  Last year, President Bush proposed and Congress created Federal risk insurance, called
  Standby Support, as part of EPACT 2005 to protect first movers of new nuclear plants
  from regulatory or litigation-related delays that are outside of the control of these first
  movers. I am pleased to report that earlier this month the Department issued the interim
  final rule for the Standby Support program on-schedule, establishing the requirements for
  risk insurance to cover costs associated with covered delays. We look forward to
  receiving comments on the interim final rule over the next month and issuing the final
  rule by August 8, 2006, the one-year anniversary date of EPACT’s enactment.
  In addition, EPACT 2005 contains other key provisions aimed at addressing economic
  and regulatory risks associated with building new nuclear plants – extension of Price
  Anderson Act indemnification, creation of a production tax credit program for new
  advanced nuclear generation, and creation of a loan guarantee program for advanced lowemission energy systems, including nuclear energy.

  With enactment of these provisions and the continued work of the Department and
  industry, I am confident that we will have these programs fully in place on a schedule
  that supports the construction schedule for the first movers of new advanced nuclear
  power plants. I firmly believe that we will see new plants ordered before President Bush
  leaves office. It is a key priority for the President, for the Department, and for me.
  Today, it is appropriate that we pause to review what has been accomplished and where
  we go from here. I would like to thank you for holding this hearing.

  NUCLEAR ENERGY, KEY TO U.S. ENERGY SECURITY

  Benefits, Challenges, and Opportunities
  The Energy Information Administration forecasts that U.S. energy demand will increase
  by one-third between 2004 and 2030, climbing to 134 quadrillion British thermal units
  (Btu). At the same time, most of the growth in energy demand will occur in the
  petroleum and electricity sectors. Electricity sales, which are most germane to nuclear,
  are forecast to increase from 3,567 billion kilowatt hours in 2004 to 5,341 billion kilowatt
  hours in 2030, more than 50 percent over the next 25 years. At the same time, carbon
  emissions from combustion of fossil fuels are forecasted to increase by more than onethird
  over present levels, from 5,900 million metric tons in 2004 to 8,114 million metric
  tons in 2030.

  Nuclear energy is an important technology for maintaining our economy and our way of
  life with minimal impact on the environment. Nuclear power is the only mature
  technology with significant potential to deliver large amounts of emissions-free baseload
  power to meet projected demand for electricity. In the future, as the country turns to
  other sources of energy for transportation, such as hydrogen, nuclear energy may also be
  an important technology for producing hydrogen without carbon emissions. While this
  hearing is focused on near-term deployment of new nuclear plants, it is important to
  recognize that the benefits of nuclear extend beyond electricity, to medicine, space
  exploration, and possibly in the future, through hydrogen production, to transportation.
  In the U.S. today, 103 nuclear plants provide one-fifth of the nation’s electricity. These
  plants are emissions-free, operate year round in all weather conditions, and are among the
  most affordable, reliable, and efficient sources of electricity available to Americans.
  Nuclear, like coal, is an important source of base-load power and is the only currently
  available technology capable of delivering large amounts of power without producing air
  emissions. Last year, the operation of U.S. nuclear power plants displaced 681.9 million
  metric tons of carbon emissions, which is almost as much carbon as released from all
  passenger cars combined.

  Over the last 15 years, as ownership of nuclear plants has been concentrated, industry has
  done an exceptional job improving the management and operation of the plants. In this
  country, nuclear plants have an outstanding record of safety, reliability, availability, and
  efficiency. In fact, the operation of these plants over the last 15 years added the
  equivalent of 261-1,000 megawatt units without building a single new plant. Longer
  periods between outages, reduction in the number of outages needed, power up-rates, use
  of higher burn-up fuels, improved maintenance, and a highly successful re-licensing
  effort extending the operation of these plants another twenty years, have collectively
  improved the economics of nuclear energy. Today, nuclear energy is among the cheapest
  electricity available on the grid, at 1.8 cents per kilowatt-hour. Public acceptance of
  nuclear energy is also higher than it has been at any time in the last 25 years – industry
  studies indicate more than three-quarters of Americans are willing to see a new reactor
  built near them and the vast majority (83%) of those living in the vicinity of a nuclear
  plant favor nuclear power.

  Yet, despite these successes and growing recognition of the benefits and need for more
  nuclear energy, industry has not ordered a new nuclear plant since 1973 (an additional
  plant ordered in 1978 was subsequently cancelled). In fact, not much base-load
  capacity—whether nuclear, hydro-electric, or coal—has been ordered since the 1970s,
  other than some mine-mouth coal-fired plants located in the western United States.
  While today’s nuclear plants are economic, during their construction, the sponsors and
  owners of many of these plants experienced major financial and regulatory challenges
  that significantly drove up the capital cost of the plants and delayed their initial start-up.
  Although this is partially attributed to the recession of the 1970’s, significant challenges
  were brought about by a difficult, uncertain, and often contentious regulatory process for
  siting and commissioning the plants. In addition, investment premiums were so high that
  capital markets could no longer support nuclear power plant projects. As a result, by the
  1980’s a large number of commercial orders were cancelled and no new orders were
  placed.

  The Energy Policy Act of 1992 (EPACT 1992) authorized a “one-step,” streamlined
  licensing process for construction and operation of new nuclear plants (also promulgated
  through Nuclear Regulatory Commission (NRC) regulations in 10 CFR Part 52). The
  combined Construction and Operating License (COL) process established by EPACT
  1992 was intended to resolve all public health and safety issues associated with the
  construction and operation of a new nuclear power plant before construction begins. The
  process remained untested for the next decade as industry viewed the combination of
  high up-front capital costs and difficult-to-control regulatory risks as show stoppers to
  building new nuclear plants. In addition, during this time period there was surplus
  electricity, fuel costs of fossil fuels remained relatively stable, and additional base-load
  power was not needed.

  The conditions are significantly different today, with rising fossil fuel costs, increased
  price volatility of fossil fuels, and increasing demand. As such, to address the economic
  and regulatory risks associated with new nuclear plants, in February 2002, the
  Department launched the Nuclear Power 2010 program. In July of that year, the
  Department issued a report on the critical risks associated with deploying new nuclear
  plants, and additional approaches that could be used for mitigation of the risks. More
  1 Increase in nuclear generation between 1990 and 2005 with a 90% capacity factor
  importantly, Congress and the Administration began working together to enact landmark
  legislation to address our nation’s long-term energy security. Finally, EPACT 2005,
  enacted last summer extended Price Anderson indemnification, reauthorized Nuclear
  Power 2010, and created incentives that could remove the last barriers to deployment of a
  new generation of nuclear plants.

  NUCLEAR POWER 2010

  Demonstrating Regulatory Certainty
  Nuclear Power 2010 addresses the regulatory and financial uncertainties associated with
  siting and building new nuclear plants by working in cost-shared cooperation with
  industry to identify sites for new nuclear power plants, by developing and bringing
  advanced standardized plant designs to the market, and by demonstrating untested
  regulatory processes. Nuclear Power 2010 is focused on Generation III+ reactor
  technologies, which are advanced, light water reactor designs, offering advancements in
  safety and economics over the Generation III designs certified by the Nuclear Regulatory
  Commission (NRC) in the 1990’s.

  Since the program was launched in 2002, DOE and industry have provided more than
  $270 million for the activities under this initiative. The Department has requested $54
  million in Fiscal Year 2007 to continue the work under this program. While the funding
  requested for Fiscal Year 2007 is less than the current year appropriation, at the time of
  the request, the Department believed that the combination of the requested funding and
  projected carryover would provide the funding needed in FY 2007 to keep the program
  on schedule. However, at the end of December 2005, one of the consortia refined its
  estimates and submitted its project baselines, shifting a number of key milestones
  forward, including the submittal of applications for combined COL a year earlier than
  envisioned by the original project plan. The consortium also proposed submitting an
  additional COL application to the NRC for a reactor technology already included in the
  program but at a different site. We did not request funding for these new proposals,
  which we estimate would cost an additional $34.2 million in Fiscal Year 2007.

  The Department is currently sponsoring cooperative projects for preparation of Early Site
  Permits (ESP) for three commercial sites. The ESP process includes resolution of site
  safety, environmental, and emergency planning issues in advance of a power company’s
  decision to build a new nuclear plant. The three ESP applications are currently in various
  stages of NRC review and licensing decisions are expected by the end of 2007.
  In Fiscal Year 2005, the Department established competitively selected, cost-shared
  cooperative agreements with two power-company led consortia to obtain COLs. The
  Department selected Dominion Energy and NuStart, a consortium of nine electric
  generating companies, to conduct the licensing demonstration projects to obtain NRC
  licenses and operate two new nuclear power plants in the U.S. Dominion is examining
  North Anna in Virginia and NuStart is examining Bellefonte in Alabama and Grand Gulf
  in Mississippi. The two project teams involved in these two licensing demonstration
  projects represent power generation companies that operate more than two-thirds of all
  the U.S. nuclear power plants in operation today. Already this approach has encouraged
  nine power companies to announce their intention to apply for COLs. Several have
  specifically stated that they are building on work being done in the Nuclear Power 2010
  program as the basis for their applications. In addition, UniStar, a consortium of
  Constellation, AREVA and Bechtel Power, announced plans to pursue new nuclear
  plants. The design and engineering activities necessary to finish the preparation of the
  first COL application for submittal to the NRC will be completed in Fiscal Year 2007.
  These projects include design certification and completion of detailed designs for
  Westinghouse’s Advanced Passive Pressurized Water Reactor (AP 1000), General
  Electric’s Economic Simplified Boiling Water Reactor (ESBWR) and site-specific
  analysis and engineering required to obtain COLs from the NRC. Under the Nuclear
  Power 2010 program, two COL applications are planned for submission to the NRC in
  late 2007. Industry is planning for issuance of the NRC licenses by the end of 2010.
  Several nuclear utilities have announced plans to quickly follow these with an additional
  12 COL applications. It is possible that a utility decision to build a new plant could be
  announced as early as 2008 with construction starting in 2010 and a new plant
  operational by 2014.

  STANDBY SUPPORT
  Addressing Licensing Risk for First Purchasers
  Last year, the President proposed and Congress established the Standby Support
  provisions of EPACT 2005 (section 638) to encourage building of new nuclear power
  plants in the U.S. by addressing financial risks to first “movers” of these new advanced
  plants. Under section 638, the Secretary can enter into contracts to insure project
  sponsors against certain delays that are outside the control of the sponsors and to provide
  coverage for up to six reactors but for no more than three different designs. The level of
  coverage is distinguished between the first “initial two reactors,” for which the Secretary
  will pay 100 percent of covered costs up to $500 million per contract and “subsequent
  four reactors,” for which the Secretary will pay 50 percent of covered costs up to $250
  million after a 180-day delay. EPACT 2005 required the issuance of an interim final rule
  by May 6, 2006, and the issuance of the final rule by August 8, 2006.

  As you know, the Department issued the interim final rule on May 6, 2006, establishing
  the requirements for risk insurance to cover costs associated with certain regulatory or
  litigation related delays in the start up of new nuclear power plants. The Department will
  receive comments on the rule over the next thirty days and issue the final rule by August
  8, 2006.

  The interim final rule establishes a two-step process for obtaining risk insurance. First,
  the project sponsor of a new advanced nuclear facility may seek to enter into a
  conditional agreement with DOE after the sponsor has an application docketed by the
  NRC for a combined construction and operating license for an advanced nuclear facility.
  Second, after all applicable requirements have been satisfied, including the issuance of a
  license by the NRC, the project sponsor and DOE may enter into a standby support
  contract.

  The project sponsors for the first six reactors to satisfy the requisite conditions can
  qualify for reimbursement of certain losses that are associated with covered delays. The
  rule identifies events that would be covered by the risk insurance, including delays
  associated with the NRC’s review of inspections, tests, analyses and acceptance criteria
  or other licensing schedule delays, and certain delays associated with litigation in state,
  federal, or tribal courts. Insurance coverage would not be available for the sponsor’s
  failure to take actions required by law or regulation, events within the sponsor’s control,
  and normal business risks such as employment strikes and weather delays. Covered
  losses would, subject to satisfaction of all requirements, include principal or interest on
  debt (subject to the Federal Credit Reform Act of 1990) and losses resulting from the
  purchase of replacement power to satisfy certain contractual obligations.

  PRODUCTION TAX CREDITS
  Addresses Economic Risk for First Purchasers
  EPACT 2005 (section 1306) permits a taxpayer producing electricity at a qualified
  advanced nuclear power facility to claim a credit equal to 1.8 cents per kilowatt-hour of
  electricity produced for eight years. The provision also specifies a national megawatt
  capacity limitation of 6,000 megawatts. Only capacity up to this limitation will qualify
  for the credit. The tax credit is administered by the Department of Treasury, in
  consultation with the Department of Energy. The Department of Treasury has asked the
  Department to assist by developing a "certification process" under which the Secretary of
  Energy certifies that a facility is an advanced nuclear facility, that construction is
  proceeding on schedule, and that it is feasible to place the facility in service before 2021.
  The Secretary of Treasury will allocate the national megawatt capacity limitation of
  6,000 megawatts only to facilities that have received such a certification.
  On May 1, 2006, the Department of Treasury published a notice in the Internal Revenue
  Bulletin providing guidance on the production tax credit for advanced nuclear facilities.
  The notice specified the method that will be used to allocate the 6,000 megawatt capacity
  limitation and prescribed the application process by which taxpayers may request an
  allocation. It is anticipated that the notice will be subsequently converted to regulations.

  LOAN GUARANTEES
  Addressing Financial Risk and Promoting Emissions Free Technologies
  EPACT 2005 (Title 17) authorizes the Secretary of Energy to enter into loan guarantees.
  The loan guarantees may be provided for projects that avoid, reduce, or sequester air
  pollutants or emissions of greenhouse gases and that use new and significantly advanced
  energy technologies, including advanced nuclear power plants.
  The challenge that confronts the introduction of new nuclear generating capacity is the
  same challenge that confronts many energy systems – the up-front capital costs are
  substantial and the financial community views them as risky. In addition, the
  uncertainties caused by possible regulatory delays or delays from potential litigation,
  particularly as associated with new nuclear plants, further increase the risk to sponsors of
  new plants and their investors. While these licensing risks will be mitigated by the
  standby support program, loan guarantees potentially provide a tool for addressing risks
  associated with major energy projects.

  Therefore, consistent with the new authorities provided to us by EPACT 2005, we are
  establishing a loan guarantee program within DOE for energy technologies that avoid,
  reduce or sequester pollutants or greenhouse gases. We are mindful that the Department
  does not have an enviable record of accomplishment with loan guarantees issued in the
  past, but we will follow the Federal Credit Reform Act of 1990 (FCRA) and the Office of
  Management and Budget (OMB) guidelines issued since our last experience with loan
  guarantees, and we will emulate the best practices of other Federal agencies. We will
  move prudently to ensure that the program objectives are achieved while meeting our
  responsibilities to the taxpayer. Toward that end, the Department has established a small
  loan guarantee office under the Department’s Chief Financial Officer and is proceeding
  to staff that office with staff detailed from other programs and possibly staff from other
  agencies with experience in Federal loan guarantee programs. DOE staff is currently
  developing the overarching policies and procedures to implement the program and
  establish a credit review board. Finally, we will employ outside experts for financial
  evaluation, construction engineering evaluation, and credit market analyses to assist in
  the evaluation of loan guarantee applications.

  We are proceeding but doing so with the appropriate measure of caution and prudence.
  While these provisions of EPACT 2005 provide a “self-pay” mechanism that may reduce
  the need for appropriations, they do not eliminate the taxpayer’s exposure to the possible
  default of the total loan amount. It is possible that the ultimate cost to the taxpayer could
  be significantly higher than the cost of the subsidy cost estimate. Therefore, DOE’s
  evaluation of loan guarantee applications will entail rigorous analysis and careful
  negotiation of terms and conditions.

  It is also our view that the Federal Credit Reform Act of 1990 contains a requirement that
  prevents us from issuing a loan guarantee until we have an authorization, such as a loan
  volume limitation, to do so in an appropriations bill. We do not believe we have the
  authority to proceed with an award without having explicit necessary authorizations in an
  appropriations bill.

  CONCLUSION
  Nuclear power is not the only answer to maintaining our economy and our way of life,
  but there is no plausible solution that does not include it. Mr. Chairman, I thank you and
  the Committee for being an early and serious voice encouraging the country to consider
  building more nuclear plants. This is a unique moment in time in which key drivers of
  new nuclear plants – increasing demand, price volatility in other electricity sectors,
  performance of the last decade, supportive government policies, and strong bi-partisan
  and public support have converged to create a foundation for a new generation of nuclear
  power plants in the United States. I pledge to this Committee that I will do all that I can
  to make this a reality.

• The Honorable James Asselstine

  Managing Director

  Lehman Brothers, Inc.

  Read statement

  Witness Panel 1

  The Honorable James Asselstine

  TESTIMONY FOR THE RECORD

  James K. Asselstine
  Managing Director
  Lehman Brothers, Inc.

  United States Senate Committee on Energy and Natural Resources
  Hearing on the nuclear power provisions contained in the Energy Policy Act of 2005

  May 22, 2006

  
  Mr. Chairman and members of the Committee, thank you for the opportunity to appear before you today.

  My name is Jim Asselstine.  I am a Managing Director at Lehman Brothers, where I am the senior fixed income research analyst responsible for covering the electric utility and power sector.  In that capacity, I provide fixed income research coverage for more than 100 U.S. electric utility companies, power generators, and power projects.  As a research analyst, I also work closely with the large institutional investors who have traditionally been a principal source of debt financing for the power industry. 

  I appreciate your invitation to testify at today’s hearing regarding the nuclear power provisions contained in the Energy Policy Act of 2005.  My testimony will provide a financial community perspective on the current industry activities that may lead to applications to construct and operate new nuclear power plants, and the efforts by the federal government to implement the nuclear power provisions in the Energy Policy Act of 2005.

  Mr. Chairman, I believe that you, the Ranking Minority Member, and the other members of this Committee deserve enormous credit for your efforts leading to the enactment of comprehensive energy legislation last year.  Thanks to many of the initiatives and incentives in the Act, the industry is now embarking on a new construction cycle including investments to upgrade and expand transmission and distribution system reliability, to ensure environmental compliance for our large coal-fired generation fleet, and to add much-needed new baseload generating capacity.  These new investments will require new sources of financing for the industry.

  The Energy Policy Act contained four provisions that were intended to facilitate and encourage industry commitments to build and operate new nuclear power plants in this country.  First, the Act included a 20-year extension of the Price-Anderson Act, which provides insurance protection to the public in the event of a nuclear reactor accident.  With the previous expiration of the Price-Anderson Act, insurance coverage for the public remained in place for our existing 103 operating nuclear units, but that coverage would not have been available for new plants.  The 20-year extension of the Price-Anderson Act corrected this problem.  Second, the Act provided a production tax credit of 1.8 cents per kilowatt-hour for up to 6,000 megawatts of generating capacity from new nuclear power plants for the first eight years of operation.  This production tax credit is subject to an annual cap of $125 million for each 1,000 megawatts of generating capacity.  A similar production tax credit was provided, and has historically been available, for certain renewable energy resources.  Third, the Act provided standby support or risk insurance for a new nuclear project’s sponsors and investors against the financial impacts, including financing costs, of delays beyond the industry’s control that may be caused by delays in the Nuclear Regulatory Commission’s licensing process or by litigation.  This standby risk insurance for regulatory and litigation delays provides protection for the first six new nuclear units built.  Up to $500 million in protection is provided for the first two new units, and 50 percent of the cost of delays up to $250 million, with a six-month deductible, is provided for units three through six.  Finally, the Act provided for federal loans and loan guarantees for up to 80 percent of the project’s cost.  These federal loan guarantees were made available to support the development of innovative energy technologies, including advanced nuclear power plants, that avoid or reduce certain air pollutants and greenhouse gas emissions.

  Mr. Chairman, although we are still at an early stage in the process and no company has yet placed a firm order for a new nuclear unit, there is clear evidence from the level of activity within the industry over the past nine months that these provisions in the Energy Policy Act are having their intended effect of facilitating and encouraging new plant development.  Three companies, Exelon, Dominion Resources, and Entergy, have filed applications with the Nuclear Regulatory Commission for early site permits (ESPs), and the NRC review process is now underway.  Other companies have announced that they are planning or considering early site permit applications as well.  Of the three new plant designs that appear to be of the greatest interest to the industry, one has received its design certification from the NRC, and the review processes for the remaining two are either underway or will begin within about a year.  Finally, nine companies have announced that they are preparing a total of 11 applications for a combined license (COL) for as many as 19 new units, to be submitted to the NRC in 2007-2009.  Taken together, the industry is investing more than $1.5 billion in the engineering, design, license preparation, and long-lead time procurement activities needed to support these applications.  Over the past nine months, those of us in the financial community have become increasingly familiar with the level of activity and the seriousness of the industry’s efforts leading toward new plant commitments.

  Mr. Chairman, the process of planning, developing, licensing, building, and financing a new nuclear plant is likely to be very complex.  From a financing perspective, investors will need confidence that a new nuclear plant can be built on a predictable schedule and for a predictable cost, that the cost will be competitive with that of other available baseload generating alternatives such as coal, and that they will be protected against the risk of licensing and litigation delays at least until the new NRC licensing process has demonstrated a track record of successful performance.  Enactment of the provisions in the Energy Policy Act was the first critical step in meeting these financing requirements, but much of the detailed work remains ahead of us.  It is therefore critically important for this Committee and other relevant committees of the Congress to continue to actively monitor and oversee the implementation of the provisions in the Energy Policy Act.  To that end, I would offer a few comments on the implementation of the provisions in the Act to date.

  With regard to the production tax credit, on May 1, 2006, the Internal Revenue Service issued a bulletin providing interim guidance on the eligibility and allocation of the production tax credit for new nuclear plants.  Under the Service’s interim guidance, in order to qualify for the tax credit, a company must file an application for a combined license by the end of 2008.  Allocations of the tax credits for the 6,000 megawatts would subsequently be made for the plants which commence construction by the start of 2014.  The Service’s interim guidance seems to be sensible and practical, and consistent with the objectives of the statute.  The guidance has the effect of encouraging the early filing of COL applications before 2009, but of allocating the available tax credits proportionately among all of the plants that begin construction by 2014.  This should have the beneficial effect of encouraging a larger number of new applications, although the economic benefit on a per plant basis could be reduced if the total generating capacity of the eligible plants exceeds 6,000 megawatts.  Issuing final regulations implementing this interim guidance will provide certainty and predictability for financing purposes.  In addition, in order to maximize the availability of alternative financing sources, it would be helpful if the final IRS regulations permitted the transfer of the production tax credits to passive equity partners who may not be utilities or electric generating companies.

  Concerning the standby support or delay risk insurance provision, the Department of Energy has done substantial work to develop its implementing regulations.  The Department has conducted an open and collaborative process, starting with the publication of its Notice of Inquiry and a public workshop last year, and more recently, with the publication of its interim final rules.  This is a complex rulemaking, and the current public comment period should provide an opportunity to ensure that the provisions in the rule are clear and workable.  The risk of cost increases due to regulatory and litigation delay is a significant concern for investors, and the Department’s final regulations will likely be a critical ingredient in the ability to finance the initial new plants.  One missing element in the Department’s implementing regulations is the methodology for determining the cost to the project sponsor of providing this delay risk insurance.  This will be a component in calculating the overall project cost and in assessing the value and availability of the risk insurance protection.

  With regard to the loan guarantee provision in the Act, the Department of Energy has not yet issued a Notice of Inquiry or proposed regulations designed to implement this provision.  The availability of federal loan guarantees for up to 80 percent of a project’s cost, in conjunction with the production tax credit, offers the greatest potential to reduce the cost of the initial new nuclear plants to levels that are competitive with other baseload generating alternatives.  In addition, for certain financing models for a new nuclear plant, such as ownership by an unregulated generating company or use of a single asset, non-recourse project finance structure, a federal loan guarantee may be required to provide the debt component of the financing.  Further, as is the case with the standby risk insurance, the methodology for determining the cost of the loan guarantee to the project sponsor will be a factor in assessing the availability and value of the loan guarantee.  For these reasons, the Department’s implementation of the loan guarantee provision is likely to be an important component in ensuring the availability of financing for the initial plants.  Given the importance of the loan guarantee provision, the Department may wish to consider an open and collaborative process for the loan guarantee regulations similar to the one it used in developing the standby risk insurance regulations.

  Finally, Mr. Chairman, I wanted to offer a few comments on the NRC licensing process.  Although the standby delay risk insurance provisions are very helpful for the initial plants, it is clear that investor confidence needed to support the financing of a number of follow-on new nuclear units will depend upon the successful operation of the NRC licensing process in these early cases.  Chairman Diaz and his colleagues on the Commission invited me to participate in a Commission meeting last fall with industry representatives to discuss the types and timing of new applications that may be submitted for NRC review.  It was apparent from that meeting that the Commission could well face the need to review a sizable number of new applications of differing types – design certifications, early site permits, and combined licenses – concurrently.  Moreover, the NRC has begun a major revision of its regulations, regulatory guides and standard review plans for new combined licenses at the same time that the industry is preparing its applications.  The potential number of applications, the interaction of the various types of approvals, the potential for duplication of effort, and the need to coordinate the development of new regulations and regulatory guidance with the industry’s license application preparation work all pose substantial challenges.  I am confident that the NRC can and will exercise its independent health and safety responsibilities.  But if this process is to work smoothly and efficiently, we will need stability and continuity within the NRC, active management involvement by the Commission and the senior NRC staff, and close coordination between the NRC staff and the industry.  The NRC will also need sufficient resources to conduct its reviews in an efficient and timely manner.

  Mr. Chairman, again, thank you for the opportunity to testify today, and this completes my testimony.                                         

     
  

• The Honorable Nils Diaz

  Chairman

  Nuclear Regulatory Commission

  Read statement

  Witness Panel 1

  The Honorable Nils Diaz

   

   

  STATEMENT SUBMITTED
  BY THE
  UNITED STATES NUCLEAR REGULATORY COMMISSION
  TO THE
  COMMITTEE ON ENERGY AND NATURAL RESOURCES
  UNITED STATES SENATE

  
  CONCERNING
  NUCLEAR POWER PROVISIONS
  ENERGY POLICY ACT OF 2005

   

  PRESENTED BY
  DR. NILS J. DIAZ
  CHAIRMAN

   

   SUBMITTED: MAY 22, 2006Introduction

   Mr. Chairman and Members of the Committee, it is a pleasure to appear before you today to discuss, on behalf of the Commission, the U.S. Nuclear Regulatory Commission’s programs for new reactor regulation.  We appreciate the support that we have received from the Committee, and we look forward to working with you in the future.  We would also like to take this opportunity to thank Congress for the additional budgetary support that was provided last year.  These resources are allowing the Agency to achieve earlier completion of safety and security programs and to begin structuring the Agency for reviewing new reactor applications.  On a personal note, Mr. Chairman, I am grateful for the opportunity to serve this great country of ours for almost 10 years, first as a Commissioner and then as Chairman of the best nuclear regulatory agency in the world, and during extraordinary times.  It has been my privilege to have worked with you to better serve the well-being of our people.

   The NRC is dedicated to the mission mandated by Congress - - to ensure adequate protection of public health and safety, promote the common defense and security, and protect the environment - - in the application of nuclear technology for civilian use.  We are committed to exercise this mandate with a regulatory framework that is effective, predictable, and that continues to meet the changing demands of the country.  To achieve this goal, we have made preparations and continue to put in place the infrastructure needed to review the announced new reactor licensing and certification work, including the 13 announced combined license (COL) applications beginning in 2007.  I would like to highlight our current and anticipated new reactor regulatory activities, a new system for licensing reviews, and new human capital and space planning initiatives designed to meet the new challenges posed by the dynamic nature of today’s nuclear arena.  The continued safe and secure operation of the current fleet of operating nuclear power plants remains the Agency’s top priority; therefore, the new reactor licensing activities are being carefully planned to ensure the continued safe operation of these facilities.

  New Reactor Licensing Workload

   The Commission’s Strategic Plan establishes a fundamental objective to:

  Enable the use and management of radioactive materials and nuclear fuels for beneficial civilian purposes in a manner that protects public health and safety and the environment, promotes the security of our nation, and provides for regulatory actions that are open, effective, efficient, realistic, and timely.

  Consistent with this objective and our statutory responsibility, the NRC has been conducting reviews of Early Site Permit (ESP) and Design Certification (DC) applications, and is developing an efficient infrastructure to conduct the review of anticipated combined license (COL) applications in the future. 

   As a result of the passage of the Energy Policy Act of 2005 and concurrent developments in U.S. energy demands, the NRC is preparing for an increased number of potential COL, ESP and DC applications.  The Energy Policy Act incentives for new reactor construction established a highly dynamic environment in which new nuclear power plants are being seriously considered to meet future generation capacity, the need for which is expected to increase by the year 2015.  Last year at this time, the NRC had been notified of three potential COL applications in the next few years.  Today, the number of expected COL applications is 13 for a total of 19 units, and the number of applications is expected to increase in the near future.  Some of these applications are expected to reference reactor designs already certified by the NRC, while others are expected to reference designs that are currently under NRC review.  We also expect to be conducting reviews of additional ESP applications, or equivalent environmental reviews.  We are preparing to review and act on applications anticipated to be submitted in the 2007-2008 time frame, and are organizing accordingly.  We continue to assess our resource needs, which have increased significantly, in light of the very substantial increase in the number of anticipated COL applications and related work.  The attached graph 1 shows the anticipated work schedule based on industry submittals, public  announcements, and expected but as yet unannounced applications.

  Current New Reactor Licensing Activities

   Current new reactor licensing activities are expected to follow the processes established under 10 CFR Part 52.  Part 52 establishes the framework to review ESP, CD, and COL applications.

   The Commission recently proposed a revision to 10 CFR Part 52, to clarify it and enhance its usability.  The proposed amendments incorporate the lessons learned from previous regulatory reviews, to enhance regulatory predictability at the COL stage.  Furthermore, in the Part 52 rulemaking, the Commission is soliciting comments on an approach that would facilitate amendments to design certification rules after the initial certification.  With such a provision, a detailed standard certified reactor design would be able to incorporate additional features that are generic to the design and thereby encourage further standardization.  Also, changes to the limited work authorization process are being considered to expand the ability to initiate site preparation work in advance of COL issuance.  The Commission plans to issue the final rule by January 2007.

   NRC’s licensing reviews are supported by regulatory guides and standard review plans.  The NRC staff is reviewing and revising the regulatory guidance documents associated with new reactor licensing.  These guidance documents include a planned combined license application regulatory guide which contains the information that COL applicants need to provide in their applications, and an update of pertinent standard review plan (SRP) sections for use by NRC staff reviewing COL applications.  The Draft Regulatory Guide, which has been the subject of numerous public meetings and workshops, will be formally issued for comment in June 2006.  The NRC staff estimates that the final regulatory guide will be completed by December 2006, to support prospective applicants who are planning to submit COL applications in late 2007 and 2008.  This schedule is consistent with the schedule for the promulgation of the revised Part 52 rule.  Complementary to the COL application regulatory guide, the NRC staff is updating the standard review plan to support the anticipated new site and reactor licensing applications.  The staff is working with the industry to complete the standard review plan updates by the Spring of 2007. 

   To date, the NRC has received three ESP applications, focusing on environmental implications and emergency preparedness, for sites in Virginia, Illinois, and Mississippi which currently have operating reactors on them.  The NRC staff has prepared safety evaluation reports for all three sites, and has issued draft environmental impact statements for public comment for two of the sites and has issued a final environmental impact statement for one of the sites.  The agency will complete its remaining regulatory reviews in an effective, efficient, timely, and predictable manner.  I note that additional work is being performed in connection with one application that was recently significantly revised and resubmitted by the applicant.  Adjudicatory proceedings associated with the ESP applications are currently ongoing.  From our experience with the ESP reviews, we have identified numerous lessons learned, for both the NRC and industry, that will be used to improve the staff’s new reactor licensing process in the future and will be implemented prior to the next ESP application, expected during the summer of 2006. 

   The agency’s work on new reactor standardized design certification has also intensified.  Three designs were previously certified:  General Electric’s Advanced Boiling Water Reactor,  Westinghouse’s AP600, and System 80+ designs.  The NRC recently certified the Westinghouse AP1000 reactor and codified it in the NRC’s regulations, as Appendix D to 10 CFR Part 52.  The NRC is currently reviewing the General Electric Economic Simplified Boiling Water Reactor (ESBWR) design certification application and is on schedule with respect to its review.  The NRC is conducting pre-application activities for AREVA’s U.S. Evolutionary Power Reactor (EPR) design whose design certification application is expected in 2007.  The NRC is also conducting limited pre-application work for the Pebble Bed Modular Reactor (PBMR) and the International Reactor Innovative and Secure (IRIS), and is expecting additional design certification applications in the future. 
   
   To effectively review multiple COL applications in parallel, the staff is planning to implement a design-centered review approach.  We believe this approach is crucial to achieving effective, efficient, and timely reviews for multiple applications.  This approach is founded on the concept of “one issue-one review-one position for multiple applications” to optimize the review effort and resources needed to perform these reviews.  The NRC staff would use a single technical evaluation for each reactor design to support reviews of multiple COL applications for the same technical area of review, assuming that the relevant components of the applications are standardized.  The design-centered approach will focus its reviews by:  1) using standardization and coordination of approaches and applications; 2) requiring complete and high-quality applications; 3) increasing the use of the DC rulemaking to codify issue closure; and 4) using single technical evaluations to support multiple COL applications.  In addition, to achieve consistency of the staff reviews, the process for implementing the design-centered review program will require a multi-layered project management team for each design, and will use dedicated technical review resources.  The plans and schedules of these reviews include an increased level of detail and integration to achieve the requisite level of control and documentation.  The benefits of this approach would be enhanced by the full participation of multiple entities in ensuring that pertinent components of the applications are standardized.  A schematic representation of the sequencing and use of the design-centered review approach is shown in graph 2.  Significant efficiencies are expected to be gained through the use of the design-centered approach. 

  New Reactor Construction Oversight

   To prepare for the construction of new reactors licensed in accordance with 10 CFR Part 52, a new construction inspection program (CIP) is being developed. The new CIP builds on the lessons learned from the construction of the existing fleet of operating reactors.  The CIP comprises four different parts, early site permit inspections; pre-combined license (Pre-COL) inspections; inspections, tests, analyses and acceptance criteria (ITAAC) inspections; and non-ITAAC Inspections.  These inspections will cover all aspects of new plant construction and operation from early site preparation work, through construction, to the transition to inspections under the reactor oversight process (ROP) for operating reactors.  Half of the associated inspection procedures are in place and the remaining procedures are under development and are scheduled to be in place well before the start of on-site construction activities.

   Successful implementation of the CIP will require four main functions:  1) day-to-day inspections at the construction site by resident construction inspectors; 2) on-site inspections by specialist inspectors; 3) off-site inspections (e.g., vendor inspections); and 4) documentation of inspection results and public notification of the successful completion of the ITAAC.  ITAAC are part of the combined license and define specific requirements to be met prior to operation.  To gain staff efficiencies and facilitate knowledge transfer, all construction inspection management and resources will be located in a single region which will schedule all construction inspectors nationwide. 

   The NRC performed an initial assessment of the existing ROP for use with new reactor designs which confirmed that the overall ROP framework could be used, including utilizing performance indicators and the significance determination process for evaluating inspection findings.  The Construction Inspection Program will specifically address each new reactor to be built, detailing the steps that will be employed to integrate that plant into the ROP as it transitions from the construction phase into the startup and operations phase.

  Multinational Design Approval Program (MDAP)

   The NRC is working with international regulators on a multinational design approval program intended to leverage worldwide nuclear knowledge and operating experience in a cooperative effort to review reactor designs that have been or are being reviewed and approved in other countries.  The first stage of the MDAP has already begun.  It involves enhanced cooperation with the regulatory authorities in Finland and France to assist NRC’s future design certification review of the US EPR.  Follow-on stages of the MDAP could foster the safety of reactors in participating nations through convergence on safety codes and standards, and other technical matters while maintaining full national sovereignty over regulatory decisions.  Preliminary work to more fully develop the framework for consideration of a Stage 2 is underway at the NRC and the Organization for Economic Co-operation and Development’s Nuclear Energy Agency.

  Challenges to Success

   The NRC recognizes that many challenges for new reactor licensing activities exist.  Key challenges include effective communication between the NRC and the applicants, and the interrelationship between the technical review and the associated adjudicatory process.  To successfully complete the reviews within the anticipated schedule, continuous clear, effective, and timely communication between the NRC and the applicant must occur.  Delays in providing or responding to requests for information must be avoided and any modifications to the application need to be conveyed immediately so that products can be appropriately coordinated.  In addition, the technical review and adjudicatory process for the application are interrelated and both are required for the final decision making process.  Multiple products are also needed to maximize the early resolution of issues  leading to a final determination, including an ESP, DC and COL.  An applicant may decide to submit a license application in a manner different from the originally contemplated sequence, such as choosing not to apply for an ESP prior to applying for a COL or selecting a design that has not been certified through rulemaking.  In such cases, the technical review and adjudicatory process performed for an ESP or DC review will need to be included in the COL review and could challenge the predictability of the process and the application review schedule.  To meet these challenges, we have implemented organizational changes in our legal and technical organizations, recruited personnel, and are developing an integrated planning tool to assist in coordinating the applicant schedules. 

   The NRC has completed substantial preparation activities and executed reviews of supporting elements for COL applications.  We continue to incorporate the lessons learned from current reviews into the regulatory process to create a stable and predictable regulatory process.  As such, the NRC is preparing to conduct thorough and timely reviews of ITAAC and, therefore, the use of the Energy Policy Act Risk Insurance Program, due to NRC delays should not be necessary.  As noted previously, when COL applications are submitted, they should be high quality, essentially standardized applications that contain the safety case and other required components in the level of detail that will support staff review and the adjudicatory process.  Anything less may challenge the predictability of the licensing process.

   The NRC understands and accepts its role in new reactor licensing, the success of which depends on many factors, most notably the submittal of high quality applications by the industry.  With the continued support of Congress, we will carry out our responsibilities and meet the challenges ahead.

  Human Capital and Space Planning

   As you know, the NRC’s ability to accomplish its mission depends on the availability of a highly skilled and experienced work force.  In a recent ranking of the Top 10 Federal Work Places by the Partnership for Public Service and American University’s Institute for the Study for Public Policy Implementation, the NRC was designated one of the top three places to work in the Federal government.  In addition, the NRC was ranked first by people surveyed who are under 40 years of age.  The Commission is very proud of these rankings and strives to improve the quality of the work environment for NRC employees.  Nonetheless, the NRC continues to be challenged by the substantial growth in new work at a time when increasing numbers of experienced staff are eligible to retire.  To address these challenges, the agency has developed human capital strategies to find, attract, and retain staff with critical-skills and has developed a space acquisition plan to accommodate these additional employees. 

   The NRC is aggressively recruiting a mixture of recent college graduates and experienced professionals to meet the agency’s emergent work activities.  The current projection is that over 400 additional FTEs will be devoted to new work by FY 2008.  The Commission is striving to hire approximately 350 new employees in FY 2006 to cover the loss of personnel and to support growth in new work.  To date during this fiscal year, we have already succeeded in recruiting and hiring almost 300 new employees toward this goal.  Our aggressive efforts to recruit, hire, and develop staff will continue throughout Fiscal Year 2007 as we prepare for receipt of the first COL applications.  The agency expects to have a critical hiring need for at least the next five years.

   The NRC closely monitors its voluntary attrition rate including retirements, which has historically been below six percent, and will continue to monitor this rate because it could increase as industry competition for skilled individuals increases and as eligible staff retire.  The agency uses a variety of recruitment and retention incentives to remain competitive with the private sector.  We continue to experience success utilizing the provisions of the Federal Workforce Flexibility Act of 2004 and the Energy Policy Act of 2005.  The NRC has budgeted for continued and increased use of these recruitment and retention tools in the coming years. 

   Our steady growth and accelerated hiring program have exhausted available space at our Headquarters buildings.  We have developed and are implementing strategies to obtain adequate space to accommodate our expanding work force.  We are creating additional workstations within our Headquarters buildings, including building workstations in conference rooms, and are moving our Professional Development Center off-site to use the space it currently occupies for new employees.  We are also seeking additional office space in the immediate vicinity of our headquarters complex to support the expected growth of the agency.

   The NRC will be continually challenged to maintain adequate infrastructure and the  personnel needed to accomplish its mission.  However, with Congress’ help, the Commission is poised to meet these challenges successfully through the ongoing human capital planning, implementation, and assessment process, the space planning program, and the various tools provided by the Energy Policy Act of 2005.

  Conclusion

   The Commission continues to be committed to ensuring the adequate protection of public health and safety and promoting common defense and security in the application of nuclear technology for civilian use.  To that end, the Commission is dedicated to ensuring that our agency is ready to meet the expected demand for new reactor licensing.  NRC’s Part 52 processes are safety focused and are stable, efficient, and predictable.  We have taken action to clarify Part 52, to ensure a clear regulatory and oversight framework; to reorganize the Agency and put in place the processes to ensure timely review; to meet the NRC’s human capital and office space needs, and to seek additional funding as necessary.  The Agency is prepared to meet the challenge associated with new reactors while maintaining strong oversight of the current operating reactors.  I am convinced that the Agency has the technical and legal know-how to make the right decisions in a timely manner. 

   I appreciate the opportunity to appear before you today, and I look forward to continuing to work with the Committee.  I welcome your comments and questions.