Got a Closed Reactor to Sell? Introducing Holtec's Big Adventure
What is a savvy utility to do if it is wrapping up production at a plant that's been running for 40 years, and now faces decades of complex responsibility with no new revenues?
Unload it, of course.
But to whom? The thing isn't making money; indeed, it'll soon start Hoovering cash. Plus the cleanup involves high level radioactive waste, and then monitoring old fuel that was supposed to have a home by now in Nevada, but still doesn't -- and might never. There is a budget, but maybe those socked-away funds won't be enough. Don't forget (particularly since your shareholders won't): reactor decommissioning still hasn't been done very often, every site is somewhat unique, and there are lots of things that could go wrong.
And we're a utility, for goodness sake. We make power that people want and need, and sell it to them. We're not in the cleanup business; and certainly not in the business of babysitting sites waiting sixty years for some of the radioactivity to decay and all the while worrying that the NRC will change the rules on us.
But who can we bring in to take a massive, uncertain, and highly risky liability so it is off our books forever? Who would ever acquiesce to this, let alone see it as an exciting business opportunity?
Holtec to the Rescue(?)
Turns out there is somebody willing to step in to take this bet: Holtec International. In less than a year, Holtec has inked deals to take over six reactors after they shut, comprising roughly 4.4 GW of capacity (see slides 1 and 2 below).1 They are teaming up with SNC-Lavalin, a Canadian engineering firm, to provide needed services and corporate heft. Each of the deals will allow some of the decommissioning employees from the current owner to stay on as well.
Through the purchases (the term is used advisedly since only a nominal sum changes hands), Holtec gets the old reactor, the responsibility to decommission it, some of the site, the Nuclear Decommissioning Trust (NDT) with all of its cash and securities (and contingent on no taxes on funds during the change in ownership), the spent fuel, and the rights to any future claims related to that fuel from the US Department of Energy.2
Holtec will pay themselves and their partners from the assets currently held in the Nuclear Decommissioning Trusts (NDTs). As of the end of 2016, the most recent reports posted by the NRC, those NDTs held $4 billion in cash and securities. Given market movements since then, the current balance is likely even higher;3 plus future earnings on fund investments once the Holtec deal goes through will continue to flow to that pool as well to support Holtec billings.
From the vantage point of the utility's owners, this deal looks pretty good. Holtec claims it is an expert; their specialized skills, they say, will enable them to do the cleanups faster and cheaper, and with less distractions, than the utility itself. And they will take this complex liability off of the utility's hands. Utility managers will be left to focus on their core competency of making and selling electricity.
What could possibly go wrong?
Red Flags a-Plenty
Quite a bit could go wrong, actually. The risks are not being eliminated; merely transferred, but in a way that may increase the chance of funding shortfalls and reduce taxpayer recourse if they occur.
Slide 3 summarizes some of the potential conflicts of interest in the Holtec deal structures. Under present law, surplus funds are supposed to be returned to rate payers. After all, the ratepayers are the kind folk who funded the NDTs to begin with. But that gives Holtec and their partners little incentive to end up with surplus funds. Indeed, Holtec's modeling of funding adequacy related to a pending deal to take over the Pilgrim reactor in MA estimates only $3.6 million will be left at the end. That's less than 0.4% of 2016 ending NDT balance -- not much of a buffer. But the real share is even smaller, since the markets have moved up since 2016, and NDT investments will continue to generate income throughout the cleanup period.
Holtec's near-zero residual is "a cushion that critics say is too small to cover unanticipated expenses, and that could leave Massachusetts taxpayers on the hook for overruns." It is, however, a perfect target if Holtec wants to maximize its share of the NDT.
Since the acquiring firm is often hiring itself or related parties on key aspects of the decommissioning process, it is important to remember that Holtec stands to profit from all stages of the job even if the NDT is fully exhausted or falls short. The concerning incentives listed below do increase the risks of fund depletion. In addition to the contracted work, Holtec will be using its own dry storage casks, and potentially will be moving spent fuel in those casks to a consolidated interim waste storage site they are presently working to get licensed in NM. If the licensing goes through, Holtec would earn additional revenue streams from the waste storage it owns and operates.
Legally, the acquiring firm has an obligation to complete the decommissioning even if the NDT fund is exhausted. Practically, however, Holtec and friends are creating a network of single-asset LLCs on each deal that ensures little recourse by taxpayers back on the parent companies if Holtec's assumptions prove incorrect and the projects run out of cash. The insulation of corporate entities from both the parent firms and the original utility can be seen in the post-closure organizational chart submitted by Entergy in its November 2018 application to the NRC to transfer its license at Pilgrim to Holtec.
There are performance concerns as well. The Nuclear Information and Resource Service (NIRS), an NGO, reported that Holtec acknowledged the special casks it is planning to use for dry storage and transport have no Plan B if they crack, though Holtec viewed it as non-issue since they were not expecting cracking to be a problem.
There is also the issue of how to scale up quickly in an industry where poor hires or inadequate project controls can trigger expensive and dangerous problems. Six reactor deals in less than a year is a rapid clip. It is true that the deals still require NRC approval, and there are timing differences in when the work flow will start. Nonetheless this is a significant reach for the firm and managing that growth won't be easy.
Holtec International is privately held, making financial information sparse. The website Glassdoor, which tracks employee reports of recruitment, compensation, and work environment for potential job applicants, lists the firm as generating between $100 million and $500 million per year. A Holtec company presentation says revenues are "over $500 million" per year. In comparison, at a 5% return (reasonable since the NDTs receive favorable tax treatment on earnings) on the $4 billion in assets held in the NDTs would generate investment earnings of $100 million per year as well -- equal to the lower-end estimate for Holtec's entire operating revenues. An 8-year drawdown of the NDTs (the cleanup period Holtec is saying they will follow) implies a spend rate of $500m/year, equal to the high end of current operating revenues.
There are other partners, timing differences, other possible investment outcomes, etc. -- but the core fact remains that these projects will stretch Holtec's capabilities. Even good firms do not always perform well under such conditions. And if they were operating in an area where delays and failure had no public consequences, these growing pains wouldn't matter much. Dismantling radioactive installations, shipping them across the country, and managing the various wastes and residuals for long periods of time is not one of those inconsequential areas.
Then there is the little problem of SNC-Lavalin. The firm has had multiple fraud, corruption, and bribery scandals in the past, including one that recently threatened the tenure of Canadian Prime Minister Justin Trudeau. The firm also holds the dubious honor of being barred from World Bank contracts for ten years back in 2013 due to bribery, at that point (and maybe still) the Bank's longest debarment ever.
More oversight is needed
Thankfully, efforts are being made within Massachusetts to fully vet at least one of these deals. The Pilgrim Watch citizens group has petitioned the NRC to be allowed to intervene in hearings about the deal, as has the Massachusetts Attorney General. (There is also good coverage of this issue at a hearing organized by EESI last week, and accessible here).
Whether these interventions will be allowed, and even if allowed, whether they will materially change the deal structure to better protect the interests of rate payers and taxpayers, remains to be seen.
However, the dollars are large, the costs of an incomplete or poorly-executed decommissioning even larger, and the non-arms-length transactions pervasive in the deal structure very worrying. As this idea of selling closed reactors to move the decommissioning risks off the utility balance sheet seems to be ramping up, now is the time to properly vet the incentive structure, backstop financial protections, and ensure adequate oversight on all of these deals.
- 1Holtec is not the only firm in this space, though they have dominated the more recent deals and seem to be establishing a structure that more fully insulates the original owner from future claims should there be shortfalls in decommissioning funds.
- 2DOE foolishly took on all of the financial and operating risks to build and operate a nuclear waste repository. They also laid out a date certain. Not surprisingly, this little venture hasn't been simple, and it hasn't gone well. DOE is way behind schedule. Way behind, in that pretty much it is not moving right now. The utilities sued DOE and won, and now DOE has to compensate all of them for their waste management storage and management costs, in addition to still being on the hook to build and operate the original repository it promised.
- 3NDTs are not all stock, and tend to be fairly conservatively invested. However, as a reference point, the S&P 500 index has risen by roughly 25% between the end of 2016 and mid-May 2019.