B-136015, MAY 7, 1958, 37 COMP. GEN. 733

B-136015: May 7, 1958

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IS NOT CONTRARY TO THE PROVISIONS OF SECTION 111 OF THE ACT OF AUGUST 21. 1958: REFERENCE IS MADE TO THE GENERAL MANAGER'S LETTER OF APRIL 29. REQUESTING OUR ADVICE AS TO WHETHER THE SALE OF STEAM UNDER THE SECOND ROUND OF THE COMMISSION'S POWER REACTOR DEMONSTRATION PROGRAM ON THE BASIS SET FORTH IN HIS LETTER IS IN CONFORMITY WITH THE REQUIREMENTS OF SECTION 111 (A) (1) OF PUBLIC LAW 85-162. - (A) THERE IS HEREBY AUTHORIZED TO BE APPROPRIATED TO THE ATOMIC ENERGY COMMISSION. SUBJECT TO THE FOLLOWING CONDITIONS: (1) ARRANGEMENTS FOR PROJECTS SPONSORED UNDER THE SECOND ROUND OF THE COMMISSION'S POWER REACTOR DEMONSTRATION PROGRAMS BY COOPERATIVES AND PUBLICLY OWNED AGENCIES UNDER WHICH THE REACTOR IS FINANCED IN MAJOR PART BY THE COMMISSION AND IS TO BE OWNED BY THE FEDERAL GOVERNMENT.

B-136015, MAY 7, 1958, 37 COMP. GEN. 733

ATOMIC ENERGY COMMISSION - SALE OF POWER - FLEXIBLE V. FIXED RATES THE SALE OF STEAM UNDER THE SECOND ROUND OF THE ATOMIC ENERGY COMMISSION'S POWER REACTOR DEMONSTRATION PROGRAM TO RURAL ELECTRIC COOPERATIVES AND PUBLICLY OWNED UTILITIES ON THE BASIS OF A FLEXIBLE PRICE WHICH AMOUNTS ESSENTIALLY TO THE COST SAVED BY REASON OF NOT HAVING TO GENERATE INTERRUPTIBLE STEAM IN THEIR OWN PLANTS, IS NOT CONTRARY TO THE PROVISIONS OF SECTION 111 OF THE ACT OF AUGUST 21, 1957, 71 STAT. 409, WHICH AUTHORIZED THE PROGRAM.

TO THE CHAIRMAN, UNITED STATES ATOMIC ENERGY COMMISSION, MAY 7, 1958:

REFERENCE IS MADE TO THE GENERAL MANAGER'S LETTER OF APRIL 29, 1958, REQUESTING OUR ADVICE AS TO WHETHER THE SALE OF STEAM UNDER THE SECOND ROUND OF THE COMMISSION'S POWER REACTOR DEMONSTRATION PROGRAM ON THE BASIS SET FORTH IN HIS LETTER IS IN CONFORMITY WITH THE REQUIREMENTS OF SECTION 111 (A) (1) OF PUBLIC LAW 85-162, 71 STAT. 403.

SECTION 111 (A) (1) OF PUBLIC LAW 85-162 PROVIDES AS FOLLOWS:

SEC. 111. COOPERATIVE POWER REACTOR DEMONSTRATION PROGRAM.--- (A) THERE IS HEREBY AUTHORIZED TO BE APPROPRIATED TO THE ATOMIC ENERGY COMMISSION, IN ACCORDANCE WITH THE PROVISIONS OF SECTION 261 A. (2)OF THE ATOMIC ENERGY ACT OF 1954, AS AMENDED, THE SUM OF $129,915,000 FOR USE IN A PROGRAM NOT TO EXCEED $149,915,000, SUBJECT TO THE FOLLOWING CONDITIONS:

(1) ARRANGEMENTS FOR PROJECTS SPONSORED UNDER THE SECOND ROUND OF THE COMMISSION'S POWER REACTOR DEMONSTRATION PROGRAMS BY COOPERATIVES AND PUBLICLY OWNED AGENCIES UNDER WHICH THE REACTOR IS FINANCED IN MAJOR PART BY THE COMMISSION AND IS TO BE OWNED BY THE FEDERAL GOVERNMENT, SHALL BE CARRIED ON BY DIRECT CONTRACT BETWEEN THE COMMISSION AND THE EQUIPMENT MANUFACTURER OR ENGINEERING ORGANIZATION WITH RESPECT TO THE DEVELOPMENT, DESIGN, AND CONSTRUCTION OF THE REACTOR AND RELATED FACILITIES, AND BY DIRECT CONTRACT BETWEEN THE COMMISSION AND THE COOPERATIVE OR PUBLICLY OWNED ORGANIZATION WITH RESPECT TO THE PROVISION OF A SITE AND CONVENTIONAL TURBOGENERATING FACILITIES, THE OPERATION OF THE ENTIRE PLANT INCLUDING TRAINING OF PERSONNEL, THE SALE BY THE COMMISSION OF STEAM FROM THE REACTOR COMPLEX TO THE COOPERATIVE OR PUBLICLY OWNED ORGANIZATION, AND OTHER RELEVANT MATTERS. SALE OF STEAM BY THE COMMISSION UNDER CONTRACT WITH THE COOPERATIVE OR PUBLICLY OWNED ORGANIZATION SHALL BE AT RATES BASED UPON THE PRESENT COST OF, OR THE PROJECTED COST OF, COMPARABLE STEAM FROM A PLANT USING CONVENTIONAL FUELS AT SUCH LOCATIONS. PROJECTS COVERED UNDER THIS SUBSECTION SHALL BE OPERATED UNDER CONTRACT WITH THE COMMISSION FOR SUCH PERIOD OF TIME AS THE COMMISSION DETERMINES TO BE ADVISABLE FOR RESEARCH AND DEVELOPMENT PURPOSES BUT IN NO EVENT TO EXCEED TEN YEARS. UPON THE EXPIRATION OF SUCH PERIOD THE COMMISSION SHALL OFFER THE REACTOR AND ITS APPURTENANCES FOR SALE TO THE COOPERATIVE OR PUBLICLY OWNED AGENCY AT A PRICE TO REFLECT APPROPRIATE DEPRECIATION BUT NOT TO INCLUDE CONSTRUCTION COSTS ASSIGNABLE TO RESEARCH AND DEVELOPMENT. IN THE EVENT THE COOPERATIVE OR PUBLICLY OWNED AGENCY ELECTS NOT TO PURCHASE THE REACTOR AND ITS APPURTENANCES, THE COMMISSION SHALL DISMANTLE THEM.

IN ITS REPORT ON THE BILL, THE JOINT COMMITTEE ON ATOMIC ENERGY HAD THIS TO SAY WITH RESPECT TO THE MEANING OF THE LANGUAGE CONCERNING THE SALE OF REACTOR STEAM:

STEAM WOULD BE SOLD TO THE COOPERATIVE OR PUBLIC ORGANIZATIONS AT RATES BASED UPON THE PRESENT COST OF, OR THE PROJECTED COST OF, COMPARABLE STEAM FROM PLANTS USING CONVENTIONAL FUELS AT SUCH GENERAL LOCATIONS. "COMPARABLE" STEAM IS MEANT STEAM OF THE SAME REGULARITY AND RELIABILITY, AND OF THE SAME TEMPERATURE AND PRESSURE AS THAT OBTAINED FROM CONVENTIONAL SOURCES. BY "COST" IS MEANT COST TO THE COOPERATIVE; THAT IS TO SAY, THE ASCERTAINED VALUE OR CHARGE FOR STEAM WHICH THE COOPERATIVE PAYS OR WOULD PAY FOR STEAM OF A COMPARABLE DEGREE OF INTERRUPTIBILITY.

THE ABOVE ARE ONLY GENERAL PRINCIPLES WHICH, OF COURSE, WILL REQUIRE ADAPTATION TO THE CIRCUMSTANCES OF EACH CONTRACTUAL SITUATION (S. REPT. 791, P. 19; H. REPT. 978, P. 19).

A NUCLEAR REACTOR CANNOT, AT PRESENT, BE CONSIDERED A RELIABLE OR FIRM SOURCE OF STEAM DURING THE EARLY PERIOD OF ITS OPERATION. CONSEQUENTLY, SUCH STEAM CANNOT BE RELIED UPON BY A GENERATING COMPANY FOR PRODUCTION OF POWER TO SUPPLY ITS FIRM LOAD DEMAND. TO THE EXTENT SUCH INTERRUPTIBLE STEAM IS USED TO SUPPLY A DEMAND FOR FIRM POWER, THE COMPANY MUST HAVE AN ALTERNATE AND RELIABLE SOURCE OF STEAM. IN OTHER WORDS, INTERRUPTIBLE STEAM PRODUCES ONLY INTERRUPTIBLE POWER, AND ITS VALUE DEPENDS ON THE VALUE OF SUCH POWER. THE LARGER A POWER COMPANY'S SYSTEM AND LOAD IS, THE MORE FLEXIBILITY IT HAS IN THE USE OF INTERRUPTIBLE POWER. CONVERSELY, THE SMALLER THE COMPANY'S LOAD, THE MORE DIFFICULT IT IS TO MAKE USE OF INTERRUPTIBLE POWER.

THE PRICE CHARGED A PURCHASER OF ANY PRODUCT ORDINARILY IS GREATER THAN THE SELLER'S COST OF PRODUCTION. IT MIGHT THUS BE ARGUED THAT PARTICIPANTS IN THE SECOND ROUND SHOULD PAY RATES FOR REACTOR STEAM SOMEWHAT HIGHER THAN THE COST OF PRODUCING SUCH STEAM IN A CONVENTIONAL PLANT. ON THE OTHER HAND, ORGANIZATIONS ENGAGED IN THE GENERATION OF ELECTRIC POWER FROM STEAM INCLUDE STEAM BOILERS AS AN INTEGRAL PART OF THEIR GENERATING FACILITIES, AND IT IS THEREFORE OBVIOUS THAT, IF A POWER COMPANY HAS BOILER CAPACITY TO PRODUCE STEAM TO GENERATE SUFFICIENT POWER TO MEET ITS FIRM LOAD DEMAND, THERE WOULD BE NO SOUND ECONOMIC BASIS FOR IT TO PAY MORE FOR PURCHASED STEAM TO MEET THAT LOAD THAN ITS OWN COST OF STEAM PRODUCTION.

THE COMMISSION'S POWER REACTOR DEMONSTRATION PROGRAM IS AN EXPERIMENTAL PROGRAM. THE CONCEPT ADOPTED BY THE COMMISSION IN THE THREE ROUNDS ANNOUNCED TO DATE HAS BEEN ONE OF PARTNERSHIP BETWEEN THE COMMISSION AND THE PARTICIPANTS IN THE CONSTRUCTION AND OPERATION OF REACTORS IN ORDER TO LEARN MORE ABOUT THE TECHNICAL AND ECONOMIC FEASIBILITY OF NUCLEAR POWER. THIS CONCEPT IMPLIES PARTICIPATION BY NONGOVERNMENTAL ORGANIZATIONS IN WHAT IS ESSENTIALLY RESEARCH AND DEVELOPMENT WORK. BY REASON OF THEIR USUAL SMALL SIZE AND LIMITED CAPITAL IT IS AT LEAST QUESTIONABLE WHETHER RURAL ELECTRIC COOPERATIVES AND MOST PUBLICLY OWNED ELECTRIC UTILITIES ARE IN A POSITION TO COMMIT THEMSELVES TO ANY FINANCIAL RISKS TO ENGAGE IN RESEARCH OF THIS NATURE. THIS APPEARS TO HAVE BEEN ONE REASON FOR THE ENACTMENT OF SECTION 111 (A) (1) OF PUBLIC LAW 85-162, WHICH PROVIDES FOR COMPLETE GOVERNMENT FINANCING OF REACTOR CONSTRUCTION UNDER THE SECOND ROUND. IT WAS BROUGHT OUT IN THE HEARINGS ON THAT LAW THAT THE RURAL ELECTRIFICATION ADMINISTRATION, UPON WHICH MOST RURAL COOPERATIVES MUST DEPEND FOR CAPITAL LOANS, WOULD NOT APPROVE LOANS TO ENABLE COOPERATIVES TO PARTICIPATE IN DEMONSTRATION PROJECTS WITHOUT ASSURANCE, IN EFFECT, THAT THE POWER TO GE GENERATED WOULD COST THE COOPERATIVE NO MORE THAN POWER GENERATED BY CONVENTIONAL SOURCES. CONGRESSIONAL APPROVAL OF PROJECTS UNDER THE SECOND ROUND, SUBJECT TO THE CONDITIONS SPECIFIED IN SECTION 111 (A) (1), MUST BE ASSUMED TO HAVE BEEN GIVEN WITH KNOWLEDGE OF THIS FACT, AND WE BELIEVE THIS IS SIGNIFICANT IN CONSTRUING THOSE CONDITIONS.

THE TWO PROPOSED ARRANGEMENTS AS TO WHICH OUR OPINION IS SPECIFICALLY REQUESTED ARE THOSE BETWEEN THE COMMISSION AND THE RURAL COOPERATIVE POWER ASSOCIATION OF ELK RIVER, MINNESOTA, AND THE CITY OF PIQUA, OHIO. BOTH ARRANGEMENTS PURPOSE TO CHARGE FOR INTERRUPTIBLE REACTOR STEAM A FLEXIBLE PRICE WHICH AMOUNTS ESSENTIALLY TO THE COST SAVED BY RCPA AND PIQUA BY REASON OF NOT HAVING TO GENERATE SUCH STEAM IN THEIR OWN PLANTS. IN OTHER WORDS, IT IS CONTEMPLATED BY THE ARRANGEMENTS THAT THE COST TO THE UTILITY OF POWER GENERATED FROM REACTOR STEAM WOULD BE NO LESS OR NO MORE THAN THAT OF POWER GENERATED FROM STEAM PRODUCED IN THE PARTICIPANTS' OWN PLANTS. IN BOTH CASES, BECAUSE THEIR NEED FOR FIRM POWER INCLUDES THE POWER EXPECTED TO BE GENERATED FROM REACTOR STEAM, THE PARTICIPANTS HAVE CONVENTIONAL SOURCES OF STEAM WHICH CAN BE USED WHEN REACTOR STEAM IS NOT AVAILABLE. THE FIXED CHARGES ON THESE CONVENTIONAL STEAM BOILERS MUST CONTINUE TO BE BORNE BY RCPA AND THE CITY OF PIQUA, WHETHER REACTOR STEAM IS AVAILABLE OR NOT. CONSEQUENTLY, THE CHARGES PROPOSED TO BE MADE FOR REACTOR STEAM DO NOT INCLUDE ANY FACTOR FOR SUCH FIXED COSTS WHICH WOULD NORMALLY ENTER INTO THE PRODUCTION COST OF, AND THE USUAL CHARGE FOR, STEAM PRODUCED FROM CONVENTIONAL FUELS. THE ARRANGEMENTS DO PROVIDE, HOWEVER, FOR INCLUSION OF SUCH A FACTOR IN THE CHARGE FOR REACTOR STEAM, FROM THE TIME WHEN RCPA OR THE CITY OF PIQUA HAS POWER LOAD REQUIREMENTS IN EXCESS OF ITS OWN PLANT CAPACITY, PROVIDED THE REACTOR HAS THEN BECOME A DEPENDABLE SOURCE OF STEAM.

THE LEGISLATIVE HISTORY OF SECTION 111 (A) (1) OF PUBLIC LAW 85-162, AS STATED IN THE GENERAL MANAGER'S LETTER, CONTAINS SOME INDICATIONS OF AN INTENT THAT THE RATE TO BE CHARGED FOR REACTOR STEAM SHOULD BE THE "ASCERTAINED VALUE" OF OR THE "COMMERCIAL RATE" AT WHICH COMPARABLE STEAM COULD BE PURCHASED FROM OTHERS. THE VALUE OR COMMERCIAL RATE FOR INTERRUPTIBLE STEAM IS, WE BELIEVE, SOMEWHAT SIMILAR TO THE VALUE OR COMMERCIAL RATE FOR INTERRUPTIBLE OR "DUMP" POWER. THE GENERAL MANAGER'S LETTER STATES IT TO BE THE COMMISSION'S CONCLUSION THAT THERE IS NO "COMMERCIAL RATE" FOR INTERRUPTIBLE STEAM. BASED ON OR KNOWLEDGE OF RATES CHARGED FOR INTERRUPTIBLE POWER, WE BELIEVE THIS TO BE A CORRECT STATEMENT. MOST INTERRUPTIBLE POWER IS SOLD ON THE BASIS OF NEGOTIATIONS BETWEEN THE PARTIES, AND THE RATE CHARGED MAY DEPEND MORE UPON THE BARGAINING POSITIONS OF THE RESPECTIVE PARTIES THAN UPON THE COST OF PRODUCTION OR OTHER NORMAL FACTORS. THE LEGISLATIVE HISTORY ALSO CONTAINS REFERENCES TO A FIXED PRICE FOR REACTOR STEAM. SEE, FOR EXAMPLE, THE COMMENTS BY SENATOR ANDERSON AND REPRESENTATIVE HOLIFIELD AT PAGES 13682 AND 12985 OF THE CONGRESSIONAL RECORD FOR AUGUST 9, 1957.

BECAUSE OF THE LIMITED RISKS WHICH COOPERATIVES AND PUBLICLY OWNED ELECTRIC UTILITIES CAN AFFORD TO ASSUME IN CONNECTION WITH POWER REACTOR DEMONSTRATION PROJECTS, IT SEEMS UNLIKELY THAT THEY WOULD BE WILLING TO PAY MORE FOR REACTOR STEAM TO REPLACE STEAM WHICH COULD BE PRODUCED IN THEIR OWN PLANTS THAN THE ANTICIPATED SAVING RESULTING FROM SHUTTING DOWN THEIR OWN BOILERS. FOR THE SAME REASON, IT APPEARS IMPROBABLE THAT THEY WOULD AGREE TO ANY GREATER FIXED RATE. UNDER SUCH CIRCUMSTANCES, THE SALE OF STEAM AT A FLEXIBLE RATE, AS PROPOSED, WOULD AVOID BOTH THE RISK OF LOSS AND THE POSSIBILITY OF A WINDFALL TO THE CONTRACTOR.

THE ENACTMENT OF SECTION 111 (A) (1) OF PUBLIC LAW 85-162 DEMONSTRATES THE INTENT OF THE CONGRESS TO PERMIT PARTICIPATION IN THE SECOND ROUND BY COOPERATIVE AND PUBLICLY OWNED UTILITIES. HAVING REGARD FOR THE TESTIMONY TO THE EFFECT THAT THE RURAL ELECTRIFICATION ADMINISTRATION WOULD NOT APPROVE PARTICIPATION BY COOPERATIVES WHICH WOULD EXPOSE THEM TO FINANCIAL RISK, AND IN THE INTEREST OF EQUALITY OF TREATMENT FOR PUBLICLY OWNED ORGANIZATIONS, IT IS OUR OPINION THAT ARRANGEMENTS FOR THE SALE OF REACTOR STEAM ON THE BASIS PROPOSED WOULD NOT BE CONTRARY TO THE PROVISIONS OF SECTION 111 (A) (1).

HOWEVER, IN ORDER TO FULFILL THE PURPOSES OF THE POWER REACTOR DEMONSTRATION PROGRAM, WE BELIEVE IT IS IMPORTANT TO PROVIDE FOR THE MAXIMUM USE OF REACTOR STEAM, IN ORDER TO SECURE THE GREATEST POSSIBLE OPERATING EXPERIENCE. WE NOTE IN THE CASE OF THE PROPOSED ARRANGEMENT WITH RCPA THAT RCPA IS OBLIGATED TO UTILIZE REACTOR STEAM TO THE FULLEST EXTENT POSSIBLE "CONSISTENT WITH SOUND UTILITIES PRACTICE.' IF RCPA IS TO INCUR NO LOSS BY REASON OF ITS PURCHASE OF REACTOR STEAM, WE BELIEVE IT WOULD BE PREFERABLE TO SPECIFY MORE DEFINITELY THE CONDITIONS UNDER WHICH IT MAY REFUSE TO UTILIZE SUCH STEAM.