Cost savings from nuclear regulatory reform: an econometric model.

• Author: Canterbery, E. Ray

1. Introduction

   The nuclear-generated power touted in the 1950s as someday being "too cheap to meter" got dismissed in the 1980s as incapable of being both safe and cost effective. Today, less than 20 percent of American's electricity is nuclear-generated, no new plants are planned or on order, and some of the earliest units are scheduled for decommissioning within the next decade. Even so, interest in nuclear power has been revived by increasing energy demands, concerns about global warming, and the uncertainty surrounding oil resources in the Persian Gulf. As a long-term alternative to fossil fuels, atomic energy offers the important advantages of clean air and domestic availability of fuel. But these advantages will count for little unless and until the costs of nuclear power can be seen as reasonable.

   Our premise is that the relevant costs are those of providing safe and environmentally clean electric energy. To the extent that increased costs have resulted from increasingly stringent regulations, they reflect the internalization of external costs. Indeed, the external costs of nuclear power (particularly safety and environmental protection) have been internalized to a greater degree than with most alternative fuel sources used by electric utilities. Nuclear construction costs are properly compared with those of alternative sources only after the latter are adjusted for environmental damage and endangerment, including, as examples, the costs of oil spills, of building double-hulled tankers, and of building off-shore offloading facilities. A shift to nuclear sources could reduce these costs whereas it would increase disposal costs for radioactive materials. We do not estimate any of these environmental costs in this article; each would be a major study in itself. We nonetheless contend that a better understanding of nuclear plant construction costs is pivotal to a balanced evaluation of the merits of uranium relative to other fuel choices.

   Several regulatory reforms have been under consideration. At the federal level, the utilities are currently seeking to streamline and expedite the licensing process in an effort to abbreviate construction durations. Utilities are proposing pre-approved, standardized designs, pre-approved sites, one-stop licensing and legislative-style NRC hearings instead of adjudicatory proceedings. At the state level they propose the elimination of retroactive prudence reviews [11]. Our study provides insights into the effects of these proposals.

   Despite the public clamor over nuclear power costs, the population of related articles in the economic literature is small. In a study by Mooz [5], nuclear construction costs are related to significant regional effects, scale economies and learning effects. Mooz also finds higher costs related to cooling towers in the plant's design. A follow-up study [6], with an expanded data base, confirmed learning effects but failed to find scale economies. Zimmerman [12] examines learning-by-doing effects both for the firm and the industry, with internal learning reducing costs at nearly twice the rate of external learning. He finds that construction costs rise in a one-to-one proportion to duration (construction start date to commercial operation date). Komanoff [3] and Cantor and Hewlett [1] respectively find reductions in overnight costs of 13 percent and 47 percent upon doubling plant size. Both studies nonetheless find scale economies are largely offset by a rise in duration associated with project size.

   A U.S. Department of Energy (DOE) study [2] distinguishes resources costs and "time related" costs, attributing 75 percent of construction cost to increases in the former. Duration, however, adds to resources cost because it increases with (unmeasured) design changes as well as with safety and environmental retrofits required by regulations. DOE finds significantly higher costs for utilities using outside firms for design and engineering than for utilities performing these functions themselves. Thus, internal experience has a positive learning effect. Radlauer, Bauman, and Chapel [9] attribute a shift in construction costs from the pre-1972 era to the post 1971 era to an abrupt change in the regulatory environment.

   Our model has several unique features. (1) The cost data are carefully adjusted to limit the number of remaining explanatory variables, increasing the degrees of freedom and minimizing multicollinearity. (2) Economies of scale for nuclear projects are correctly identified for the first time. (3) Learning effects are detected by an experience variable. (4) A duration variable is introduced to measure the effects of delay. Our findings comprise a bridge across the earlier findings [1; 2; 5; 6; 8; 12].

2. Theory

   The real cost of nuclear power projects has greatly increased since the first plant became operational in 1957. Theory suggests three important contributors to this trend: increased regulatory requirements, changing market conditions, and lengthening construction durations.

   Designed to ensure the reliability and safety of output, regulations since at least the 1960s have tended to be increasingly stringent. Their impact will differ among plants, depending on the efficiency with which each utility and architect/engineer deal with them. We nonetheless can expect that plants completed under later regulatory requirements will tend to cost more than those built earlier.(1) The consequent engineering features (e.g., a cooling tower requirement) may account for a sizable part of the cost differences among nuclear power plant construction projects. However, the cost effects of NRC regulation should not be allowed to mask the effects of mismanagement or incompetence. If poor design or construction work require portions of the plant to be torn out and rebuilt, the resulting delays and increased costs may owe more to poor management than to the NRC. Therefore, project duration is an important cost variable. Unusually lengthy construction indeed may indicate a comparatively inefficient, ineffective, or incompetent project team. A short duration can imply that the team managing and building the plant is particularly effective. Presently, each U.S. plant is unique; however, intuition suggests that the experience variable would have higher values and construction duration would be significantly reduced if the industry were to repeatedly build one or two standard designs.

   Demographics also play a role in nuclear plant costs. A small cost differential is attributable to climate, since very cold or wet weather can impede construction. Urban congestion can also add to plant costs, creating difficulties in the shipping of materials or forcing the imposition of additional safety requirements. Because it is often difficult to isolate the various contributors to these geographically related costs, a categorical variable is sometimes used, capturing the significance of all regional factors combined. A more sophisticated approach - the one we use - is an accounting of known wage and materials cost differentials. When adjusting the plant cost data for inflation (putting all plants into equivalent real terms), we also adjust for regional differences in cost of living and other costs of construction.

   Learning based upon project design...