United States Nuclear Regulatory Commission - Protecting People and the Environment

OIG/95A-20 - NRC's Decommissioning Financial Assurance Requirements for Federal Licensees May Not Be Sufficient

Contents


Overview

Office of the Inspector General
U.S. Nuclear Regulatory Commission
NRC's Decommissioning Financial Assurance Requirements For Federal Licensees May Not Be Sufficient
United States Nuclear Regulatory Commission
Washington, DC 20555
April 3, 1996

Memorandum to: James M. Taylor
Executive Director for Operations
From: Thomas J. Barchi
Assistant Inspector General for Audits
Subject: NRC's Decommissioning Financial Assurance Requirements for Federal Licensees May Not Be Sufficient

Attached is the Office of the Inspector General's audit report entitled, "NRC's Decommissioning Financial Assurance Requirements for Federal Licensees May Not be Sufficient." We conducted this review because of the high cost of decommissioning and concerns raised by a General Accounting Office report about the financial condition of the Tennessee Valley Authority (TVA).

On March 1, 1996, we provided a draft of this report to the Deputy Executive Director for Nuclear Reactor Regulation, Regional Operations and Research (DEDO). On March 22, 1996, the DEDO responded to our report, stating that he agreed with our recommendation that the staff reevaluate the basis for allowing Federal power reactor licensees to use a statement of intent for decommissioning funding assurance. The DEDO's comments are contained in Appendix II of this report.

Attachment:
As stated

cc: H. Thompson, EDO
J. Milhoan, EDO
K. Cyr, OGC
J. Hoyle, SECY
D. Rathbun, OCA
J. Blaha, EDO
R. Scroggins, OC
P. Norry, ADM
G. Cranford, IRM
R. Bangart, OSP
W. Russell, NRR
E. Jordan, AEOD
D. Morrison, RES
C. Paperiello, NMSS
J. Funches, ICC
W. Beecher, OPA
T. Martin, RI
S. Ebneter, RII
H. Miller, RIII
L. Callan, RIV
OPA-RI
OPA-RII
OPA-RIII
OPA-RIV
OPA-RIV: Walnut Creek

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Report Synopsis

The U.S. Nuclear Regulatory Commission (NRC) requires all commercial nuclear power plants to undergo "decommissioning" after they are no longer in service. To ensure that licensees will have sufficient funding to decommission their power plants, NRC requires each licensee to provide some form of a financial assurance mechanism. While most NRC licensees must either prepay decommissioning costs, provide a surety guarantee, or establish an external sinking fund, the agency allows Federal Government licensees to use a statement of intent to meet these requirements. Given the high costs associated with decommissioning power plants--one estimate ranges from $200 million to $700 million per unit--the Office of the Inspector General reviewed NRC's basis for allowing Federal licensees who operate nuclear power plants to rely on a statement of intent to meet their financial assurance requirements for decommissioning.

We found that NRC's decision to allow Federal licensees to use a statement of intent to meet decommissioning funding requirements for their nuclear power plants was based primarily on the assumption that the Federal Government would pay the financial obligations of the lone Federal licensee, the Tennessee Valley Authority (TVA), should it be unable to do so. However, based on our review of the U.S. Code and discussions with officials from the Department of Treasury, the Office of Management and Budget and TVA, we believe NRC's assumption is questionable. We also believe the NRC staff responsible for developing and reviewing the rule did not conduct sufficient analysis to determine whether allowing Federal licensees to use a statement of intent was appropriate.

We also found that, although not required, TVA has established a fund dedicated to meet its decommissioning obligations. However, because this is an internal fund it can be used for other purposes. In fact, TVA had at one time temporarily depleted its decommissioning fund.


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Introduction

The U.S. Nuclear Regulatory Commission (NRC) requires all commercial nuclear power plants to undergo "decommissioning" after they are no longer in service. Decommissioning is the safe removal of nuclear facilities from service, and reduction of radioactivity to levels that permit the release of the property for unrestricted use. To ensure that licensees will have sufficient funding to decommission their power plants, NRC requires each licensee to provide some form of a financial assurance mechanism. One purpose of this requirement is to reduce the risk to taxpayers of cleaning up the facility if the licensee cannot pay for decommissioning.

According to the decommissioning rule, issued in June 1988, most NRC licensees must either prepay decommissioning costs, provide a surety guarantee or establish an external sinking fund(1). However, the agency allows Federal Government licensees to use a statement of intent to satisfy decommissioning funding requirements. Using a statement of intent, Federal licensees need only state that adequate funds to support decommissioning will be available when necessary. Since the rule was issued, virtually all power reactor licensees have established external sinking funds. However, NRC's lone Federal power reactor licensee, the Tennessee Valley Authority (TVA), uses statements of intent to meet financial assurance requirements for its six reactors.

In August 1995, the General Accounting Office (GAO) issued a report(2) which raised concerns about TVA's financial condition, noting a debt of $26 billion and a high level of non-producing nuclear assets. GAO believes TVA's financial condition threatens its long-term viability, and could place the Federal government at risk. Given the high costs associated with decommissioning power plants--TVA's estimates range from $200 million to $700 million per unit--the Office of the Inspector General (OIG) reviewed NRC's basis for allowing Federal licensees who operate power reactors to rely on a statement of intent to meet their financial assurance requirements for decommissioning.

To understand the basis for NRC's decision, we discussed the reasoning behind the rule with NRC officials responsible for implementing decommissioning policy in the Office of Nuclear Reactor Regulation (NRR) and the Office of General Counsel (OGC), and reviewed the assumptions and conclusions made during rule development. We also discussed decommissioning requirements with senior TVA officials, the licensee most affected by the rule. Additional details on our objective, scope, and methodology are described in Appendix I. We limited our review to power reactor licensees.

On February 8, 1996, NRC announced plans to issue an Advance Notice of Proposed Rulemaking to amend decommissioning financial assurance requirements in response to restructuring and deregulation of the electric power industry. The proposed rule changes would more clearly define "electric utility" and require licensees to report periodically on the status of their decommissioning funds. As it is currently written, the rule change does not address the use of a statement of intent by Federal licensees.


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Findings

We found that NRC's decision to allow Federal licensees to use a statement of intent as financial assurance to meet decommissioning funding requirements for their nuclear power plants was based primarily on the assumption that the Federal Government would pay TVA's financial obligations should the utility be unable to do so. However, based on our review of the U.S. Code and discussions with officials from the Department of Treasury, the Office of Management and Budget (OMB) and TVA, we believe the basis for NRC's assumption is questionable. We also believe NRC staff did not sufficiently evaluate the implications of allowing Federal licensees to use a statement of intent to satisfy decommissioning funding requirements.

We also found that, although not required, TVA has established a fund dedicated to meeting its decommissioning obligations. However, because this is an internal fund, it can be used for other purposes. In fact, TVA had at one time temporarily depleted its decommissioning fund, though it subsequently replaced the amount it collected from its ratepayers to meet decommissioning expenses.


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NRC's Decision Assumed Federal Backing

As stated in the preamble to the 1988 rule, the Commission was concerned that an internal fund would not provide reasonable assurance that decommissioning would be carried out in a manner which protects public health and safety for two reasons. First, the Commission believed there was not reasonable assurance that internal reserves could be effectively protected and legally secure from the claims of creditors in the event of a bankruptcy. Second, because an internal reserve fund is not dedicated solely to supporting decommissioning, a utility may use the funds for unrelated purposes. Accordingly, for commercial licensees, NRC eliminated the internal reserve as a possible method of providing decommissioning funds.

In contrast, NRC's final rule allows Federal licensees to use a statement of intent because:

"...there is reasonable assurance that the appropriate government entity, which has the power of taxation, will provide adequate funding in the future to decommission the facility in a manner which protects public health whereas this is not necessarily the case with private organizations even if they are currently adequately capitalized."

Agency officials told us that NRC allowed the use of a statement of intent based primarily on the assumption that the Federal Government would pay for any unmet decommissioning obligations of the lone Federal licensee, TVA, should it be unable to do so. We were told that this assumption was derived from the "AAA" rating that commercial rating services assigned to TVA's bonds. However, NRR officials told us they did not review the commercial rating services' basis for these bond ratings.

We asked OGC staff to provide its analysis of the appropriateness of allowing Federal licensees to use statements of intent. In response to our inquiry, OGC staff stated that at the time the rule was developed it was not asked, and, therefore, did not provide, specific guidance regarding the application of financial assurance requirements to TVA. OGC's response did not address the issue of whether it was appropriate for Federal licensees, such as TVA, to be allowed to use a statement of intent.


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Federal Backing of TVA Obligations is Questionable

Based on reviews of the U.S. Code, and discussions with officials from Treasury, OMB and TVA, we believe that it is questionable to assume the Federal Government will pay for any of TVA's unmet decommissioning costs. Section 831n-4 of Title 16 of the U.S. Code states that bonds issued by TVA are not obligations of the United States, nor are they guaranteed by the United States Government. The Deputy Assistant Secretary for Government Financial Policy at the Department of Treasury confirmed this policy and stated that the U.S. Treasury may not back TVA's bonds or other obligations. Likewise, an OMB official expressed doubt that the Federal Government would guarantee payment of TVA's bonds, and stated that OMB's Office of General Counsel would have to provide OMB's position on this issue. TVA officials also told us that no other Federal entity guarantees TVA's obligations incurred through operating its power system.


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TVA Has Established an Internal Decommissioning Fund

TVA officials told us that TVA is committed to meeting its decommissioning obligations. For example, TVA began a decommissioning fund in 1977, before NRC imposed the requirement on commercial reactors. TVA's ratepayers have contributed $108 million to the fund which, through investments, had appreciated to about $261 million, as of January, 1996.

TVA's decommissioning fund is an internal fund and, therefore, unlike other NRC licensees, TVA can use the fund at its discretion. For instance, in September 1993, TVA sold the investments in the decommissioning fund, completely depleting the fund. TVA realized a gain on the sale and eventually replenished all the funds collected from its ratepayers to support decommissioning.


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Conclusions

NRC staff based their decision to allow Federal licensees who operate power reactors to use a statement of intent to meet financial assurance requirements on the assumption that the Federal Government would back TVA's financial obligations should the utility be unable to do so. Based on our review of the U.S. Code and discussions with officials from Treasury, OMB and TVA, we believe there are questions as to whether the Federal Government will back TVA's debts and obligations. In other words, NRC based a general rule for Federal licensees on a specific assumption, that the Federal Government would back TVA's obligations. However, we found this assumption to be questionable.

In addition, when addressing decommissioning requirements for Federal licensees, NRC staff did not thoroughly (1) examine TVA's bond restrictions and ratings, or (2) evaluate the implications of relying on a statement of intent to meet Federal licensees' decommissioning obligations. Therefore, we question the agency's basis for allowing Federal licensees to use a statement of intent to meet decommissioning requirements.


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Recommendation

We recommend the staff re-evaluate the basis for allowing Federal licensees who operate power reactors to use a statement of intent for decommissioning financial assurance. If NRC continues to believe that such an approach is appropriate, then the Commission should document its analysis, particularly agreements and commitments made by the Federal Government to guarantee Federal licensees' financial responsibility for decommissioning.


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Agency Comments

The Deputy Executive Director for Nuclear Reactor Regulation, Regional Operations and Research agrees with our recommendation that NRC staff reevaluate the basis for allowing Federal power reactor licensees to use a statement of intent for decommissioning funding assurance. He stated the agency will conduct this reevaluation in the context of an overall review of NRC's decommissioning funding assurance and financial qualification regulations. His comments are contained in Appendix II.


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Objective, Scope, and Methodology

To understand NRC's decision to allow Federal licensees who operate nuclear power reactors to use a statement of intent to fund decommissioning requirements, we interviewed NRC staff responsible for implementing decommissioning policy and requirements, monitoring the TVA power plants, and conducting financial analyses. We also pursued various legal issues with NRC's Office of General Counsel. We interviewed staff at the U.S. General Accounting Office, the director of Standard & Poor's Rating Service, the Department of Treasury's Deputy Assistant Secretary for Government Financial Policy, and a budget examiner with the Office of Management and Budget. Finally, we interviewed senior TVA officials in Chattanooga, Tennessee to obtain their perspectives regarding decommissioning funding and TVA's use of a statement of intent. This audit was conducted according to generally accepted government auditing standards between December 1995 and February 1996. We did not assess the adequacy of NRC's internal management controls.


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Agency Comments on Draft Report

United States Nuclear Regulatory Commission
Washington, DC 20555
March 22, 1996

Memorandum to: Thomas J. Barchi,
Assistant Inspector General for Audits
Office of the Inspector General
From: James L. Milhoan
Deputy Executive Director for Nuclear Reactor Regulation, Regional Operations and Research
Subject: Comments on Draft Report - NRC's Decommissioning Financial Assurance Requirements for Federal Licensees May Not Be Sufficient

As requested in your memorandum to me dated March 1, 1996, the Office of Nuclear Reactor Regulation (NRR) has reviewed the subject report. We agree with your recommendation that the staff reevaluate the basis for allowing Federal power reactor licensees to use a statement of intent for decommissioning funding assurance. We will conduct this reevaluation in the context of an overall review of NRC's decommissioning funding assurance and financial qualification regulations. The staff will complete this review as part of an action plan to address electric utility restructuring. The plan was submitted to the Commission on January 6, 1996. We also have attached several specific comments.

Attachment: As stated

Contact: Robert Wood, NRR
(301) 415-1255


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NRR Comments on Draft Inspector General (IG) Report - "NRC's Decommissioning Financial Assurance Requirements for Federal Licensees May Not Be Sufficient"

1. Page 4. The IG report states, "We also believe NRC staff did not sufficiently evaluate the implications of allowing Federal licensees to use a statement of intent to satisfy decommissioning funding requirements."

NRR response: TVA has a large, exclusive franchise area that has been granted by the Federal government since TVA's formation in 1933. The area includes all of Tennessee and portions of several other states. This franchise virtually guarantees that TVA will receive extensive revenues from the sale of electricity (at rates which it has the power to set) for the foreseeable future. Even in the remote case where TVA defaulted on its bonds, revenues from electricity sales would not cease. The Federal franchise should ensure that TVA will remain in the business of selling electricity even if TVA encounters financial difficulties at some future time. Bond holders might suffer losses, but it does not necessarily follow that decommissioning funds would not be paid from such revenues. The above factors were considered in the staff's evaluation of TVA's use of a statement of intent.

2. Page 5. The IG report indicated that the staff assumed that the Federal government would pay for any unmet decommissioning obligations of TVA and that the assumption was based on the "AAA" rating that commercial rating services assigned to TVA's bonds.

NRR response: As indicated to our response to item 1, above, this statement is largely correct. We recall that the staff used other considerations, such as TVA's unique Federal franchise status as well as financial risk as reflected by TVA's bond ratings. From the period when the decommissioning rule was being developed and promulgated in the early 1980s until now, TVA has consistently maintained an "AAA" bond rating or equivalent from the major rating agencies. The staff is aware of no other power reactor licensee who currently has or has consistently maintained an "AAA" rating, the highest rating given by rating agencies. Moody's Public Utility Manual, which the NRR staff uses to determine licensee ratings, defines "Aaa", its version of an "AAA" rating, as follows:

Bonds which are rated AAA are judged to be of the best quality. They carry the smallest degree of risk and are generally referred to as `gilt edge.' Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. (See Moody's, p. viii.)

The rating agencies do not give "AAA" ratings cavalierly. They have large staffs devoted to providing investors and others with reasoned judgments on the long-term financial risks associated with bonds issued by rated organizations. Notwithstanding the lack of a formal Federal obligation to pay, the NRR staff interpreted TVA's ratings over time as also reflecting TVA's franchise position and as providing significant assurance of TVA's long-term implicit Federal backing.

3. Page 9, regarding the IG report recommendation.

NRR response: NRR believes that the IG report's recommendation is reasonable, in view of the GAO report, and will review this policy as part of the general review of the decommissioning and financial assurance regulations to be undertaken as part of the action plan submitted to the Commission on February 6, 1996.


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U.S. NRC Functional Organization Chart

[ Figure 1: The U.S. NRC Functional Organization Chart]


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Major Contributors to This Report

William D. McDowell
Team Leader

Lindley R. Higgins
Senior Management Analyst


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Glossary: Office of the Inspector General Products

Investigative

1. Investigative Report - White Cover

An Investigative Report documents pertinent facts of a case and describes available evidence relevant to allegations against individuals, including aspects of an allegation not substantiated. Investigative reports do not recommend disciplinary action against individual employees. Investigative reports are sensitive documents and contain information subject to the Privacy Act restrictions. Reports are given to officials and managers who have a need to know in order to properly determine whether administrative action is warranted. The agency is expected to advise the OIG within 90 days of receiving the investigative report as to what disciplinary or other action has been taken in response to investigative report findings.

2. Event Inquiry - Green Cover

The Event Inquiry is an investigative product that documents the examination of events or agency actions that do not focus specifically on individual misconduct. These reports identify institutional weaknesses that led to or allowed a problem to occur. The agency is requested to advise the OIG of managerial initiatives taken in response to issues identified in these reports but tracking its recommendations is not required.

3. Management Implications Report (MIR) - Memorandum

MIRs provide a "ROOT CAUSE" analysis sufficient for managers to facilitate correction of problems and to avoid similar issues in the future. Agency tracking of recommendations is not required.

Audit

4. Audit Report - Blue Cover

An Audit Report is the documentation of the review, recommendations, and findings resulting from an objective assessment of a program, function, or activity. Audits follow a defined procedure that allows for agency review and comment on draft audit reports. The audit results are also reported in the OIG's "Semiannual Report" to the Congress. Tracking of audit report recommendations and agency response is required.

5. Special Evaluation Report - Burgundy Cover

A Special Evaluation Report documents the results of short-term, limited assessments. It provides an initial, quick response to a question or issue, and data to determine whether an in-depth independent audit should be planned. Agency tracking of recommendations is not required.

Regulatory

6. Regulatory Commentary - Brown Cover

Regulatory Commentary is the review of existing and proposed legislation, regulations, and policies so as to assist the agency in preventing and detecting fraud, waste, and abuse in programs and operations. Commentaries cite the IG Act as authority for the review, state the specific law, regulation or policy examined, pertinent background information considered and identifies OIG concerns, observations, and objections. Significant observations regarding action or inaction by the agency are reported in the OIG Semiannual Report to Congress. Each report indicates whether a response is required.

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Notes:

1. An external sinking fund is established and maintained by periodically setting funds aside in an account segregated from licensee assets and outside the licensee's administrative control.

2. Tennessee Valley Authority: Financial Problems Raise Questions About Long-Term Viability, GAO/AIMD/RCED-95-134, August 1995.

Page Last Reviewed/Updated Thursday, March 29, 2012