Nuclear power's promise? Lower rates - someday
By Loren Steffy
Sept. 27, 2007
For all my criticism of deregulation, I can't ignore the poetic justice bestowed on our electricity markets this week.
NRG Energy, a partner in the South Texas Project nuclear plant, filed the first application for a new reactor in 30 years. It wants to build two at the site near Bay City.
STP, of course, is a monument to the nuclear fiasco of the 1970s, a steel-reinforced tribute to cost overruns, construction delays and a kaleidoscope of federal regulations that made the idea of building a new nuke, well, radioactive.
The deregulation we have today was born, in part, from the outrage over the runaway costs of STP and its North Texas counterpart, Comanche Peak. Frustrated lawmakers argued that ratepayers shouldn't have to foot the bill for the confluence of poor project management and cumbersome regulation.
We've forgotten about that amid all the other promises that were made - promises that have failed to materialize, such as lower bills for consumers. So it's worth remembering that Houston-area customers paid dearly - and are still paying - for STP.
Back when STP was built, the old Houston Lighting and Power expected to recoup its cost from customers. But the bill for STP grew so huge that HL&P realized it would never earn back its investment.
These "stranded costs," as the industry called them, presented a conundrum under deregulation.
When HL&P split in three, CenterPoint inherited the stranded costs. Ultimately, those costs were included in the more than $2 billion that CenterPoint was allowed to recover from ratepayers as part of deregulation.
They are now factored into the costs retailers pay for electricity transmission and then, in turn, pass on to us. The stranded costs have helped make Houston's electric rates the state's highest and among the highest in the nation.
A hefty wager
This time, though, it will be different.
NRG's investors, not ratepayers, will assume the risk for the new nukes. If they're a flop, if construction falls behind schedule, if the government meddles, it's not our problem.
"We don't have ratepayers paying for plants anymore," said Brett Perlman, a power industry consultant and a former member of the Public Utility Commission. "That's one of the benefits of the market."
Make no mistake, NRG knows our market is structured to its advantage. The company is betting that the nukes will produce power at a lower cost than the prevailing market rate, tied to the price of natural gas.
It's a hefty wager - as much as $6.75 billion by some estimates. Building a new reactor still requires lengthy regulatory approval, and construction costs run more than 40 percent higher than those of a conventional coal plant, according to the U.S. Energy Information Administration.
But federal tax incentives and promises from Washington of a streamlined approval process have made the gamble more attractive. And fuel costs are cheaper, especially compared with natural gas. If gas prices rise - and they're three times higher than they were six years ago - NRG is looking at a lucrative return on its investment.
"It's a vote of confidence in the market," Perlman said. "Here we have the first market where a nuclear plant is being built, and it's in Texas, and it's a merchant plant."
And the poetic justice? NRG is building the new plants adjacent to STP, that monument to everything that didn't work in the old days.
"Here you have two regulated units that ratepayers paid for - and are still paying for - and right next to it you will have two units that shareholders paid for," Perlman said.
Benefits of deregulation
The benefits of deregulation have been elusive, but the prospect of building generating capacity without risk to ratepayers is definitely one of them. It's a benefit we can lose sight of as we wrestle with the risk that we as customers have taken on - the tedious task of sorting through an array of retail offers, wary of hidden fees and other surprises.
NRG's plan, if it reaches fruition, may encourage other companies to follow. Eventually, if nukes become the dominant method of generation in Texas, wholesale rates might actually drop to reflect the lower generating cost.
That would mean that in, say, 50 years or so, consumers may actually see the lower prices they were promised.
Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at firstname.lastname@example.org. His blog is at http://blogs.chron.com/lorensteffy/.
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