With license in hand, Southern (SO) is ready to build the nation's first generation-III nuclear power plant. While this does not signal any nuclear renaissance, it does provide the nation with badly needed generation. The challenge will be for Southern to build Plant Vogtle's additions on time and on schedule.
The reality is that cost and schedule will be difficult to achieve. In fact, the probability that Southern's two 1,154-megawatt units will be operating by 2016/2017 and will have a final cost of $14 billion is about zero. Of course, the best available estimate is being used to forecast the project's outcome. History has taught us 110 times before, however, that utility estimates for nuclear power plants include dozens of assumptions.
If one of those assumptions is wrong, the estimate is wrong. Remember, the Vogtle project is an attempt to build a first-of-its-kind nuclear power plant.
The question is how far off are Southern's estimates? The answer is nobody knows. And, if anyone claims they know, they're lying to you.
I built cost and schedule estimates for several nuclear projects. Each estimate took months and a team of approximately 100 planning engineers, schedulers, estimators, cost engineers and project accountants to build an integrated cost estimate for a single-unit nuclear plant.
Based on this experience, there are two important lessons investors should consider. The first lesson is that Southern should be viewed as Plant Vogtle's construction managers. Yes, of course The Shaw Group (SHAW) has the engineering, procurement and construction (EPC) contract to build these units for Southern. But one of the biggest lessons learned during the last build was that the owners had fiduciary responsibilities to manage the construction process and not rely solely on their EPC contractors. After all, the Nuclear Regulatory Commission (NRC) issued the construction permit to Southern, not Shaw. It's Southern's shareholders who are making the investment, and Southern's management better have its hands firmly on the project's controls.
This is a lesson that the industry learned during the last build. So, if Southern signals that the company subordinated its management responsibilities to Shaw, that would be the signal for investors to sell their shares.
The second lesson is that the owner should have a full staff of quality-control engineers reporting directly to Southern's CEO. There are several reasons why Southern needs to manage quality control. First, rework is one of the most expensive activities that project planners consistently underestimate (who plans for failure?). The nuclear construction industry has been plagued by rework issues. Look no further than Europe. Olkiluoto 3 and Flamanville 3 are Europe's new generation-III nuclear plants. The construction work at these plants is years ahead of Vogtle. In some of the more difficult areas, they experienced rework rates exceeding 25%.
Rework costs owners 3x more than the original estimate: The cost to build it, the cost to tear it down and the cost to build it again. If the rework is on the project's critical path, the overall schedule must slip.
Southern needs to manage quality control because the NRC's relationship to the project is through the licensee, not the contractor. The NRC has the authority to issue costly stop-work orders to the licensee. If the project is shut down by the NRC, and it frequently happened during the last build, it will cost owners approximately $2 million a day for each day construction is delayed. A proactive relationship with the NRC is cost-effective and good management.
It's not just the NRC. Southern and its partners will have to live with the plant long after their EPC contractor leaves. Operators want to be assured that there were no short cuts or defects, because they will have to fix them.
Progress Energy (PGN) is learning this lesson with its Crystal River 3 nuclear plant. Progress and its insurers are incurring huge costs to fix a problem originating from the plant's construction. Having Southern's team work closely with the EPC contractor will help avoid Crystal River-type problems.
If history is any guide, investors should expect smooth sailing in the first half of the construction process -- everything should look hunky-dory because this is the easiest part -- the second half is when the challenges emerge. Work packages will become progressively more difficult, and tasks will require higher skills to complete. Progress will slow down.
Investors should anticipate the challenges and be patient. Most importantly, expect a cost overrun. This is a first-of-a-kind, and a small cost overrun will not be fatal.
