In the ongoing discussion/debate on global warming, alternatives to traditional energy sources are being considered, such as wind, solar, and wave. Even nuclear energy, after decades of virtual inactivity, is being reexamined. Supporters of nuclear energy no doubt noticed President Obama’s favorable reference to nuclear energy in his recent State of the Union Address.
Michael Thompson, an attorney specializing in energy law and specifically the nuclear power industry, has assisted Masuda, Funai in monitoring developments in this area, especially as it might impact Japanese companies and their subsidiaries which are prominent in the nuclear power area. Michael noted a fascinating development in connection with a proposed nuclear power plant in Texas.
On January 29, a state court judge in San Antonio ruled, in response to a motion for summary judgment, that the city’s municipal utility, CPS Energy, would not lose its investment of $400 million if it withdrew from a construction project for a new nuclear plant on the Texas Gulf Coast. As background, CPS and its partners, NRG Energy Inc. (NRG), a publicly traded company headquartered in New Jersey, and Toshiba Corp. began the venture, called the South Texas Project 3 & 4, in order to construct two Advanced Boiling Water Reactors (ABWR) at an existing site near Bay City, Texas, ninety miles southwest of Houston. CPS cited increasing costs as its reason for considering withdrawal.
The two existing nuclear reactors at the site, STP 1 & 2, began commercial operation in 1988 and 1989, and are jointly owned by CPS (40%), the City of Austin (16%), and NRG (44%). The construction of the new 1350 megawatt nuclear plant was announced in 2007, and the application for a combined construction and operating license from the Nuclear Regulatory Commission was filed in November of that year. This application was notable because it was the first application for a new nuclear plant filed in the United States since the Three Mile Island incident in 1979.
An affiliate of Toshiba’s, Toshiba America Nuclear Energy Corp. (TANE), was chosen by the NRG and CPS as the prime contractor in an Engineering, Procurement, and Construction Agreement (EPC). Under the EPC, TANE is compensated on a time-and-materials basis until the federal license is granted, at which time the EPC becomes a lump-sum turnkey arrangement with performance and schedule guarantees. The Japan Steel Works, Ltd. of Hokkaido, Japan, is manufacturing the key large components.
The plans for the new reactors were in part motivated by financial incentives in the Energy Policy Act of 2005 signed into law by President Bush. It provided for loan guarantees for new plant construction, a 1.8¢ per KwH production tax credit for electricity generated by new nuclear plants, and federal insurance for regulatory and litigation delays. All of these incentives were limited in amount and extended only to the first few nuclear plants constructed. STP 3&4 (the proposed new nuclear plant), as the first application filed after the act, is currently a front runner for all incentives.
CPS filed the lawsuit last December alleging that NRG and Toshiba conspired through “fraudulent, defamatory and illegal conduct” to “manipulate project costs for their collective benefit.” Among other relief, CPS asked for $32 billion in punitive damages. Toshiba was subsequently dropped from the suit by CPS purportedly to prevent the suit being transferred from state court to federal court, which CPS felt would cause delays.
The ruling on January 29, which ironically came a the day after NRG was added to the S&P500 index, denied a motion for summary judgment filed by NRG seeking clarification of its contractual rights against CPS. District Court Judge Larry Noll ruled that CPS would not forfeit its investment but that its ownership could be diluted if it failed to continue contributing to the engineering, procurement, and construction costs. The judge urged the parties to negotiate a settlement to the dispute.
So it would be a favorable result for all parties if another investor could be located to replace CPS’ investment in the nuclear plan. Tokyo Electric Power Company (TEPCO) has in the recent past expressed an interest in investing in the South Texas Project. TEPCO operates two advanced boiling water reactors (similar to the plants under construction in Texas) at its Kashiwazaki Kariwa facility in Japan, the world’s largest nuclear power plant, and has acted as a technical advisor on the project for three years. So TEPCO has familiarity with the technology of the proposed nuclear plant. (Kashiwazaki Kariwa had an interruption in its operation, but resumed operation of its advanced boiling water reactors after the plant sustained earthquake damage in 2007.)
Accommodating another investor could raise some legal issues under the Department of Energy loan guarantee program. In a conference call with analysts on the 29th, NRG CEO David Knox said the Department of Energy loan applications are not transferable and “the only two people in the world right now that can get a DOE loan in connection with [the] STP 3 & 4 project are NINA and CPS.” But Knox acknowledged that a third investor could be brought in indirectly through the sale of an interest in the entity (NINA) that holds Toshiba’s interest and NRG’s interest in the nuclear facility. Other legal issues remain, such as use of common facilities at the existing site, which according to Knox requires the agreement of all three current owners.
With the revival of nuclear power in the United States, the role of foreign investors, particularly from countries that have continued to develop nuclear power, has been a source of speculation and debate. With the possible investment of TEPCO, it will be interesting to see how this continues to develop.