By Brian Schimmoller, Associate Editor
Hindsight is 20/20; but in some instances hindsight can be blind, or at least heavily clouded. The raging debate in the electric utility industry over stranded cost recovery has the potential to threaten the orderly–if that is possible–transfer to a deregulated electric environment. Many individuals, companies, “think tanks” and other entities are castigating electric utilities–large or small, public or private–for their attempts to recover the costs associated with constructing nuclear power plants and entering into long-term power purchase agreements as long as 20 years ago.
In a recent analysis, entitled “Power Plants: The Stranded Generation,” Frank Clemente from Pennsylvania State University evaluates the issues surrounding the decisions to sink billions of dollars into energy investments. Professor Clemente concludes that the current debate over stranded costs fails to place past utility decisions into the proper historical context. It neglects the powerful technical, economic, social, psychological and political factors that dominated U.S. energy actions in the turbulent early 1970s, when most of these stranded costs were originally incurred.
Numerous events conspired in the early 1970s to set the stage for today`s stranded cost recovery dilemma. Electricity demand was projected to continue rising5 to 10 percent per year. The 1973-1974 oil embargo opened Americans` eyes to the threat foreign oil dependence posed to U.S. economic prosperity and national security. Concerns over the availability of natural gas pushed energy planners to consider alternate fuel sources for electricity generation. In 1972, in fact, the Bureau of Natural Gas stated, “The emergence of a natural gas shortage during the past two years marks a historic turning point–the end of natural gas industry growth.” In 1978, Congress passed the Power Plant and Industrial Fuel Use Act, which prohibited the construction of new gas boilers and restricted the use of gas in existing facilities.
According to Clemente, the electric utility industry`s “obligation to serve” greatly influenced its decision-making processes. President Nixon told Congress in 1973, “The major alternative to fossil fuel energy for the remainder of this century is nuclear energy.” The Commerce Energy Advisory Panel stated, “Failure to exploit nuclear to the fullest may result in electric power shortages in the decades immediately ahead.” With politicians, energy experts, business leaders, “think tanks,” the press and local leaders loudly calling for the development of power plants–mostly nuclear–to satisfy America`s thirst for electricity and reduce its dependence on foreign energy, many utilities made the plunge. Almost 50 percent of all nuclear plants ever ordered in the United States were ordered between 1972 and 1974.
In hindsight, it is clear that many of the underlying assumptions that fueled the energy crisis mentality in the 1970s were faulty. Natural gas reserves are apparently ample for many years to come. U.S. foreign oil dependence is now at an all-time high, but the country has demonstrated that it is willing to accept the costs of this dependence, through military intervention if necessary.
Clemente takes certain individuals and entities to task for their contradictory positions regarding nuclear investment and stranded cost recovery in the 1970s vs. the 1990s. For example, in 1978, the Heritage Foundation stated, “Without nuclear power, we will be unable to maintain the level of economic growth necessary to insure that all Americans will have an opportunity to fulfill the promise of the American Dream.” In 1997, the Heritage Foundation has decided that “further stranded cost recovery is difficult to justify.”
The instances of apparent contradiction are somewhat beside the point, however. What is important to the matter of stranded cost recovery is the level of emphasis placed on historical events, and the justification for past actions taken in the face of these events. As Clemente concludes, “Now that technology, legislation and the international climate have all changed, the opponents of stranded cost recovery would punish utilities that heeded society`s cryfor assistance in achieving national security, energy independence and economic prosperity.” S