Entergy's Power Struggle

 | Mar 15, 2013 | 3:30 PM EDT
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Exelon (EXC) recently announced that it is struggling to find profits in the nation's largest fleet of nuclear plants. Now Entergy (ETR) has announced it is also struggling. But in Entergy's case, it is more than profits. Entergy is finding that state and federal governments have become one of its biggest challenges.

Entergy's newest challenge is its Palisades nuclear plant in Michigan. Everyone agrees there is no nuclear safety issue associated with Palisades. In fact, industry experts argue there is no issue at all. But the Nuclear Regulatory Commission (NRC) just announced that Entergy needs to address a costly maintenance issue.

According to Reuters: "Entergy must deal with a potential issue with the metal in the reactor vessel at its Palisades nuclear plant in Michigan by 2017 or shut the reactor, the NRC said [last] Friday. The NRC said the plant is safe but estimates that by 2017 the metal in the aging reactor vessel could reach a regulatory limit for handling something called pressurized thermal shock due to years of radiation, temperature and pressure stresses."

Industry watchers believe NRC inspectors are on the wrong track. The science, engineering and decades of operating experience suggest the NRC is relying on old information. Worse, it appears NRC's regulations are not keeping up with the science. (For those inclined to learn more about the technical issues and the radiological effects on metallurgy, industry watcher Will Davis offers detailed explanations here and here.)

From an investment viewpoint, Entergy faces a difficult decision. It either retires Palisades 15 years early, or engages the NRC in negotiated rulemaking. But it may be too late. The NRC's regulatory process is slow and regulatory changes benefiting Palisades may arrive too late. In addition, engaging the NRC to update its rules could be costly. The NRC is a fee-for-service agency. The regulated must pay the regulator to regulate. Since Entergy is the party seeking a change in existing rules, Entergy may have to pay NRC's internal costs to examine, consider and possibly change current rules.

The nuclear power industry may help. Because the answer to the Palisades question could affect other reactors, it is in the industry's interests to achieve any regulatory outcome. If the expected outcome is achieved, a number of perfectly good nuclear power plants will remain in the nation's fleet. If the outcome is unfavorable, other Pressurized Water Reactors could retire early. Entergy will likely decide to work with the NRC and resolve the Palisades issue. It is consistent with its general approach toward managing critical assets.

When it comes to its merchant fleet, Entergy has a history of aggressiveness. Look at Entergy's history with state regulators. Right now, it is in a tug-of-war with Vermont. Entergy owns Vermont Yankee, near Brattleboro. Even though New England is capacity short and has chronic energy supply challenges, Vermont wants Vermont Yankee closed. Doubling down on the decision, the state arranged a deal with Canadian utilities to import power to replace Vermont Yankee's production. Nevertheless, Entergy continues to operate Vermont Yankee.

Entergy is simultaneously tangling with New York, where it owns the Indian Point plant. Even though New York City and southern New York State are capacity short, New York Governor Andrew Cuomo wants Indian Point closed. Like Vermont, New York plans to import power from Canada. The state believes foreign power can replace Indian Point's local production. Like the Vermont case, Entergy refuses to roll over for New York. Indian Point is a solid asset with 20 years of energy production remaining.

Entergy also owns Pilgrim Nuclear Power Station near Plymouth, Mass. There has been in-state tension about the need for nuclear power from that facility. The plant will soon face new economic challenges because of a large wind farm planned nearby. Entergy's Pilgrim unit will have to sell power into the deregulated power markets alongside the local wind power producer. While wind producer supplies the same power market, it bypasses market prices with state-subsidized deals. In the end, the state rigged the deal to favor wind at the expense of nuclear and other producers.

Entergy faces every challenge imaginable. Simultaneously, it faces outdated federal regulations, hostile states and declining power markets. But when it comes to declining power markets, Entergy is not alone. Natural gas, coal and renewable energy are all challenged. Exelon, Calpine (CPN), NRG Energy (NRG), Atlantic Power (AT) and Dynegy (DYN) have all reported lower revenues and lower gross margins.

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