Nationalizing Responsibility for Nuclear Waste Management

The willingness of the federal government to assume responsibility for this technically and politically challenging enterprise in return for a small (0.1 ¢/kWh) surcharge on nuclear power is an often-overlooked but quite important subsidy. Through nationalization, a very large and uncer- tain fixed cost has been shifted to a very small and predictable variable cost. In terms of operational risk, federally run nuclear waste management entails one of the most valuable subsidies granted to the nuclear sector. National ownership gives rise to three subsidy areas of concern. First, there is no

required return on nearly $100 billion in invested taxpayer capital (section 7.2.1.1), and great risk that the fees charged on current operations will prove inadequate even to finance the repository on a break-even basis (section 7.2.1.2). A third issue involves a lack of precision in how the military and commercial shares of totals costs are allocated (section 7.2.1.3). Though not quantified, his- torical assessments of the commercial costs have decreased since 1980.

Although the NWF surcharge was created by the Nuclear Waste Policy Act of 1982, government responsibility started earlier. In a detailed evalua- tion of subsidies to nuclear energy initiated by the EIA in 1980, analyst Joseph Bowring noted that, “Government responsibility for ultimate waste dis- posal removes significant uncertainties from those investing in nuclear power production” (Bowring 1980: 63). U.S. civilian reactors generate about 2,000 metric tons of highly radioactive spent fuel per year (Holt 2009: 19), with additional materials coming from fuel-cycle facilities.

In recent years, most discussion about the NWF has focused on the large amount of money sitting in its trust account and whether these funds have been spent well or fast enough. The collected amount is quite large: through FY2009, $31 bil- lion had been credited to the fund from industry, the defense sector, and accrued interest (Cawley 2010). Of this total, about $23.6 billion remained unspent. In looking at this surplus, some analysts have concluded either that there is no subsidy to nuclear waste management or that the fund bal- ance should actually be used to offset subsidies received in other forms (MISI 2008: 16; Bezdek and Wendling 2007).102

These conclusions err in two respects. First, the NWF, like the Social Security Trust Fund and many others, is accruing funds over a long period

102 They note that, “Federal disbursement for nuclear energy is shown as negative because through 2003 the Nuclear Waste Fund had accumulated a $14-billion surplus” (Bezdek and Wendling 2007: 48).

of time to pay for a very large and uncertain future liability. Thus the adequacy of funds collected must be evaluated on an actuarial basis against the present value of these expected liabilities. Large current surpluses may still generate insufficient funds for the future, indicative of fees that are too low (and hence a source of subsidy) rather than too high. In fact, the DOE’s own assessments of fee adequacy note that funding for the entire enter- prise between 2046 and 2133 will be dependent on investment earnings, given that it assumes the last fee payments from utilities will arrive in 2046 (OCRWM 2008a: 1).

Second, the very structure of the NWF and associated federal services constitute an enormous subsidy to the nuclear power sector even if there are no additional funding shortfalls. In essence, the program nationalizes responsibility for nuclear waste management, providing it as a government service to private industry on, at best, a break-even basis.103 Ancillary subsidies from this decision—ranging from the tax-exempt status of the federal enterprise to the uncompensated risk-bearing by the taxpay- er—greatly reduce the financial cost of nuclear waste management to the private sector.

7.2.1.1. Break-Even Operation of Repository: No Return on Invested Capital

The repository is a complex and expensive under- taking, yet is to be operated on a break-even basis. This results in lower prices for waste management services than should apply because there is no return on investment to reward the providers of capital (i.e., taxpayers) for putting so much money at risk for so long.

The value of this subsidy can be estimated using comparable returns on investment (ROIs) from private firms in the nuclear industry. Based on capital actually invested in the repository to date, an ROI equal to that earned by lower-risk

nuclear power leader Exelon (5.12 percent over 2005–09 period, according to Thompson Reuters—a figure lower than the 7.85 percent average ROI for the electricity sector overall), and an 80 percent civilian share of total costs, the sub- sidy from the nuclear waste repository operating on a break-even basis is substantial. Even assum- ing all cost estimates for the repository are correct, nuclear plants would need to charge an extra $700 million to $1.2 billion per year, equal to roughly 0.08 to 0.15 ¢/kWh. Thus, applying even low-end return hurdles for government provision of long-term nuclear waste services would result in the industry’s contribution to the NWF almost doubling or more.

This subsidy will escalate sharply as the capital invested in the facility grows. The DOE estimates the total system life-cycle cost of the facility at $96.2 billion (OCRWM 2008b: 1). The civilian share of ROI on invested capital (in 2007$) reach- es $2 billion per year by 2033, $3 billion per year by 2053, and continues to rise. This approach will tend to understate the true subsidy since the capital risk for operating an already-built nuclear facility (i.e., the Exelon ROI proxy) is significantly lower than trying to build and manage a nuclear waste repository. Appropriately using ROIs much higher than 5.12 percent would result in com- mensurately higher subsidies to nuclear.

While it might seem strange to have a govern- ment entity tax itself to pay the same government, the approach makes good sense from the perspec- tive of energy-market neutrality and is widely applied in other areas. Television shows airing on a network pay for ad space on that network to promote their show, and public-transit authori- ties pay for ad space on their own vehicles. In all these cases, the rates are set to reflect the scarcity value and opportunity cost of the resources being consumed.

The core reality is that operating the repository as a tax-free entity requiring no return on capital has the effect of reducing the price to the nuclear sector for dealing with its wastes. Because nuclear power’s competitors have no such options, com- petitive distortions are introduced.

7.2.1.2. Underestimating the Cost of the Repository

It is not at all clear, however, that the DOE’s expec- tation of how much it will cost to build and oper- ate the repository even on a tax-exempt break-even basis will be realized. The costs of “megaprojects” normally run well beyond their original estimates. The fact is that the billions invested in the planned repository at Yucca Mountain may well be lost entirely due to performance issues. A recent deci- sion by the Obama administration not to proceed with that site is an indication of this concern.

In estimating the subsidy to nuclear power, costs are allocated between civilian and military sec- tors, based on their respective contributions of spent nuclear fuel. The cost assessment in July 2008 esti- mated that more than 80 percent of the repository is linked to the civilian sector (OCRWM 2008b: 2). That analysis estimated total life-cycle costs (in con- stant 2007$) had grown by more than a third, from $69.7 billion to $96.2 billion.

While the DOE believes the current fund is adequate, attempts to have it adjust automatically for inflation have failed (see, for example, GAO 1992). Stanford economist Geoffrey Rothwell also believes that the waste fee is low by a factor of three, given what he anticipates will be very high cost escalation in the nuclear power sector. He believes that the fee should be boosted from 0.1 ¢/kWh to 0.3 ¢/kWh as early as possible in order to boost the solvency of the fund (Rothwell 2005), an increase of 0.2 ¢/kWh. In theory, annual or other periodic reviews can address such problems. But that can work only if there is sufficient operating life remaining at reactors when financing shortfalls

are discovered so that the contribution rate may be appropriately adjusted. If large numbers of new reactors are not built in this country, it is quite possible that shortfalls will be discovered only as many of the existing fleet’s reactors are retiring or already closed—at which point collecting higher surcharges will not be possible.

In its evaluation of fee adequacy, the DOE’s Office of Civilian Radioactive Waste Management (OCRWM) evaluated 28 scenarios and concluded that collections would be sufficient so long as a single repository (rather than two) were required, and that funds could be deployed as needed for the stated mission of the Nuclear Waste Trust Fund. To avoid having to build a second repository, the DOE assumed that Congress would overturn exist- ing limits on the total tonnage allowed for disposal at the Yucca Mountain site (OCRWM 2008b: ES2). Since that report was published, the Obama administration has announced its intent not to use the Yucca Mountain site. In any case, most analysts believe that a significant number of new reactors would bring the required number of repositories, wherever their location, to at least two.

As noted above, all calculations that the OCRWM performs on fee adequacy have embed- ded within them the idea that waste management should earn no profit for taxpayers, despite its great risk and despite the fact that no other energy resources require similar services. Nor do the OCRWM’s calculations assume that taxpayers earn a return on capital for invested taxpayer funds. An energy-neutral approach to costing would assume not only that the waste-receiving entities set fees to earn operational surpluses but also that they pay taxes on those surpluses.

Based on the Rothwell estimate for shortfalls, and net nuclear generation in 2008, our high esti- mate assumes a subsidy of $1.6 billion per year from underestimating the true cost of the tax- exempt, break-even repository. Our low estimate is zero, assuming current fees are adequate.

7.2.1.3. Long-Term Reduction in Commercial Share of Total Costs

The share of total costs attributed to the commer- cial sector has also varied substantially over time. The most recent fee-adequacy assessment notes a rising commercial share (from 72.2 to 80.4 percent of the total) between 2001 and 2007 (OCRWM 2008b: 33). This rise is attributed to expecta- tions of increasing amounts of spent nuclear fuel. However, over a longer timescale it is the defense share that has actually grown: from 14.9 percent with one repository in 1990 (OCRWM 1990: 13) to 19.6 percent in 2007 (OCRWM 2008b: 33). Clearly there is substantial uncertainty associated with some of the core assumptions of the model. The trend is worth watching; with estimated life- cycle costs of the facility at $96 billion, each 1 percent shift in responsibility saves the commer- cial sector nearly $1 billion in life-cycle fees. The 4.7 percent drop between 1990 and 2007 shifts $4.5 billion in life-cycle fees from the commercial to the military sector. As additional research would be needed to evaluate whether any portion of this shift is not based on changes in waste flows, we have not ascribed any subsidy to existing or new reactors from this item.

7.2.2. Subsidies Related to One-Time