Free Motion in Limine - District Court of Federal Claims - federal

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Document 816-3
QUALIFICATIONS.
I am Director, Chairman and President of

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Case 1:98-cv-00126-JFM
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PROTECTED MATERIAL DISCLOSED ONLY IN ACCORDANCE WITH 10 BE UNITED STATES CqURT OF FEDERAL CLAIMS PROTECTIVE ORDER
REPORT OF DANIEL R. FISCHEL RE: YANKEE ATOMIC ELECTRIC CpMPANY V. UNITED STATES

Lexecon Inc. , a consulting firm

that specializes in the application

of

ecoRomics

to

a variety

of

legal and regulatory issues. I am

also the Lee and Brena Freeman Professor

of

Law and Business at The University of Chicago
of The University of

law School. I have

served previously as Dean

Chicago taw School

. Director ofthe Law ~nd Economics Program at The UniversityofChicago I,.aw School and as
Professor of Law and Business arThe University o(Chicago Graduate School of

Business.
of

Both my research and my teaching have concerned the economics

cOrporate

Iaw.

I also have lectured widely in this area. I have published ~pproxihiately

forty

articles in leading legal and economics journals and am coauthor, with judge Frank Easterbrook
of the Seventh Circuit Court of

Appeals
otall

of

the book

The Economic Structure

of

Corporate Law
the United

(Harvard University Press). Courts

levels , including the Supreme Court

of

States, have cited my articles as authoritative.

See , e.

Central Hank v. First Interstate Bank
Edgar v.
of

. 114 S

Ct.1439 (1994);

~icl~c. ~. Levinson , 485 U. S. 224 , 246 n. 24 (1988); and
624 , 643 (1~82). My curriculum vitae , W~i ch contains a list

MITE Co

457 U. S.

my publica-

tions , is attached hereto as Exhibit A.
I have served as a consultant or adviser on economic issues

among

others, the United States Securities and Exchange Commission , the National. Association

Securities Dealers , the New York Stock Exchange , the Chicago Board
States Department of

of

Trade , the United

labor

, the United States Department

of

Justice , the Federal Deposit

Insurance Corporation ,

the Resolution Trust Corporation , and the Federal Trade Commission.

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I am a member of the American Economics Association and the American
Finance AssoCiation. ' I am also a member of the Board of Directors of the Center
for

the Study

of the Economy ' and the State at The University of Chicago , and former Chairman of the

American ' Association of law

Schools ' Section on

law and Economics. I have testified as an

expert witness in multiple proceedings in federal and state courts across the country, as detailed
in Exhibit A. My billing rate

is $1 000 per hour.

II.

INTRODUCTION AND SUMMARY OF CONCLUSIONS.

:5.

. In 1982. Congress enacted the Nuclear Waste Policy- Act (" NWPA" ) Which

created aerogram for the permanent disposal of ~pent nuclear fuel ("SNF" ) and high-level
radioactive waste ("HlW") generated by domestic commercial nuclear power plants. Complaint

) 1'( 9. Pursuant to the NWPA , the Department of Energy (" DOE"

entered into a contract in 1983

with , plaintiff Yankee Atomic Electric Company ("Yankee Ator:nic ) ~hich provided that the
Government would accept and dispose permanently of Yankee Atomic s SNF and HlW in return
for the payment of fees by Yankee Atomic.

., 1I1I 1 & 10. DOE entered into contracts with the

owners of other commercial nuclear power plants (referred to in the standard-form contracts as

Purchasers ) at about the same time. Among other things, these ' contracts provided that DOE
would begin acceptance of nuclear waste by January 31
1998.

, 1'( 10. I understand that the

Court has found that DOE partially' breached Yankee Atomic s contract by failing to commence

acceptance by the January 31 , 1998'deadline.

Yankee Atomic claims that as a result of the partial breach , it has been

forced to incur and will incur substantial additional costs to continue to store its nuclear waste on

site. Complaint , mI 23 & 25. One of plaintiff' s experts , Mr. frank C. Graves , claims that ~had
DOE commenced acceptance of spent fuel by January 31 , 1998 with a reasonable aggregate

acceptance rate , it should and would have completed removal of spent fuel from Plaintiff's facility by January 1999. "
Frank C.

Graves Expert Witness Report rGraves Report" ' at 3. Mr.

Graves admits that " (i)n order to achieve removal by this date , Plaintiff would need to swap

removal slots with other Purchasers " but concludes that sufficient exchanges would have

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. occurred; (!t a net cost~f$11. 8million to Yankee Atomic.

., at 3-4. Based on the~e

conclusions , another one of plaintiff's e)(perts, Dr. K enneth T. Wise, has 'opined that Yankee
, At?mic s " minimum d~J)1&ges " are $70. 6.
Expert.

Report on Damages Incurred by Yankee

" Atomic pue to Th~ Department of Energy s Partial Contract Breach Prepared by Kenneth T.
Wise, Ph. D

("Wise Report" ), at 7. This figure represents the sum of the estimated incremental

costs of on-site storage through 2010 that Yankee Atomic will incur in the "Breach World" but
does not include the $11. 8-million net cosHor'the slots that Mr. Graves claims Yankee Atomic

would have incurred in'the: ~Non.,.Breach Worlq"

., at 7-8"

Ihav~beenasked by the PepartmentofJlJsticeto analyze plaintiff's
damage claim from an,econopljc persp~ctive. 10 connection withl1)Y ~nalysis, ~ haVe be~n
assisted by member$.,

0.1 I,.exeqon s

profession~1 staff. Exhibit B

lists the materi ~IS w.e have

reviewed. ;J3ased oo this review and analysis, andmy knowledgeand ~xperience , I have

, reached two principal conclusion~:
The claimed damages do not result from DOE' s failure to commence

disposing SNF and HlW by January 31
. Plaintiff' s

1998.

damage claim is speculative because it depends 00 assumptions the DOE sholM have implemented a tnat ~bo~t future events , assumes particular schedule for the disposal of Purchasers ' SNF ~nd HLW, assumes failed th~t DOE woljld accept Greater Than Class G. CGTCq" ) w~st~ and "

fuel" under this acceptance schedule, and assumes that exchanges of"
, all~qation slots between program participants would minimize aggregate atreactor storage costs.

I elaborate upon and exph~in the bases for these conch.isions in thereniainder of this

report.
, . THEClAIME D DAMAGES DO NOT RESULT FROM DOE' S FAiJ-uru; TO COMMENCE O I$POSING SNF AND HlW BY JANUARY ~1, 1998~ , ' ,
, Yankee Atomic s only generating plant was a nuclear facility in Rowe,
Massachusetts which was permanently shut down in 1991. Complaint, 1m
7 & 22.

III.

Yankee

Atomic s claimed damages consist of the costs associated with storing its nuClear waste on site
until at least 2010. Yankee Atomic s Pre-TrialSrief of Legal Points and Authorities Relied Upon

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Pre" Trial Brief), at 7- 8.

The claimed damages do not result from DOE' s failure to commence

disposing SNF a nd HlW by January 31, 1998, because if DOE had started disposing SNF and
HlW by January 31, 1998, but did not dispose of all of

plaintiff's nuclear waste prior to 2010

then plaintiff still would have to store nuciear waste on site through: 201 d and still wouid have

incur most of the costs that it claims as d~mages.

1 In other words, the claimed damages do not

result from the partial breach of contract found by the Court.
PLAINTIFF'S" DAMAGE CLAIM IS SPECULATIVE

IV.

As described above, plaintiff's damage . Claim consists of the estimated

itlcterhental'costs

alan-site storage through

2010 that plaintiff w0uld have avoided if it had been

able to dispose of all of its nuclear waste by 1999, as Mr. Grc)ves concludes it w0'uldhave.. .

Tti~refore" p(aintiffs damage claim depends critically 6n Mr. Graves ' conclusion. However, Mr.

Graves ' conclusion is' speculative- because it depends on a series oftnterrelated assumptions
about future events , the " non- breach world" aggregate acceptance schedule , exchanges GTCC

and failed fuel. Each of these critical a ssumptions is discussed below. '
AssulT\ptions , about Futur~ Events

10.

A portion of the claimed damages consists of " other continuing costs " that

plaintiffs experts claim plaintiff will incur u~til its nuclear wast~is accepted and removed; and

plaintiffs experts assume that this will not occur until at least

2010.

Wise Report, at 5-6.

This

portion of plaintiff' s claimed damag~~ is speculative because it depends on future events.

1. Plaintiff' s damage claim depends on the assumption that all

plaintiff' s nuclear waste would of h~ve been removed because plaintiff's experts as9ume that the costs of storing nuclear waste do not vary with the amount of inventory at the site; : See Gnaves Report, note 5 and Charles W. Pennin gtbri Expert Witness Report, at 2- 3& 6-7 . Wh en a dry storage system (known as' an in~ependent spent fuel storage installation or " ISFSI" ) is used to, store nuclear waste; the number of dry storage canisters will vary with theamountof inventory. Id. However, the initial and decommissioning costs of dry storage canisters are relati vely low.
Ide

2.

oreover, if plaintiff were to recover the claimed damages and did not incur these costs , the

difference between plaintiff' s projected costs and plaintiffs actual costs would be a windfall

to the plaintiff.

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Assumptions about the " Non- Breach" Aggregate Acceptance Schedule
11.

Plaintiff's damage claim assumes not only that DOE

shc:mld have started

disposing of fuel by January 31, 1998 but also t~at DOE should and would have continued to

dispose specified amounts of nuclear fuel at specified dates thereafter. The assumed amounts
are set forth in Table i of the Graves Report, Which shows an assumed acceptance rate of

200 Mru in 1998 and 1999, 2:000 MTUin2000 and 2001, ~, 700 MTU in 2002 and 3000 MTU
in each subsequent y~ar. '

Ecpnomic Efficiency
12.

Pla intiff's eXperts claim that this assumed " non- breach world" aggregate

acceptance schedule is ecohomieally effident arguing that a slower acceptance rate would
impose additional unnecessary storage requirements and costs on Purchasers. " Graves
Report, at 8; John W. Bartlett Expert Witness Report (" Bartlett Report" ), at 9. However their

analysis does not establisti' that'the assumed " rion-breachworld" aggregate acceptance
schedule would' 6e economically efficlent, beeause it does not take into account how the

assumed agceptcih6eschedule wouid affect other relevant costs. As Dr. Bartlett notes:

The total cost to utilities of storing and disposing of spent fuel. . . can be divided into three parts. , One is the program costs -- the sum of the fees each contracting utility has or will pay to the government for the services specified in the Stan dard 9ontracts. ' A. second is ~t-reactor spent fuel storage costs -- ' tbe sum of the co~ts each contracting utility has or will incurstoring spenHueiprior to it being, aC(:~epted by the government. A third is loading costs -~ the sum of the costs eachc~mtraCtirigi.Jtility will incur loading spent fuel into casks provided by the government pursuantto, the Standard Contracts for transport to a government

facility. (Bartlett Report, at 2-

3)

Plaintiff' s experts have not shown that the assumed acceptance schedule minimizes the sum of

program ,costs, at-reactor storage costs and loadingcosts.

3 In fact , plaintiff' s experts ' reports do

not provide any analysis of how the assumed acceptance schedule would affect program costs
and loading oosts~

3. In

order to show that a proposed acceptance schedule was socially efficient , one would also have to take into account external , societal costs, such as the costs associated with

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Alternative Acceptance Rates
13.
Article IV.

b of the contractprovides that " beginning not later than July

1 t 1987, DOE shall issue an ~nnual capacity report for planning purposes. . . (setting) forth the
projected annual receiving capacity for the DOE facility(ies) . . . . "
Article IV. B.5. a

of the contract

provides !.hat "beginning on f\pril1, 1991 .. DOE shall issue an ~nnual acceptance priority ranking

for receipt of SNF and/or HlW at the DOE repository. .

Pursuant to these

reqLlirements DOE

published both an acceptance priority ranking (" APR" ) and an' annual capacity report ("ACR"

1991. The 1991 ACR projected waste acceptance rates for SNF of 400 MTU in 1998 , 600 MTU

in 1999 af.1c;1900 MTU in each year from 2000 though 2007, for a 10.,year total of 8 200 MTU.
1991 Annual Capacity Report, Table 2. 1 (Bates No. HOOO02365). This acceptance schedule
also is consistent with DOE accepting no more than 10; 000 MTU
prior to 2010.

., at 4 (Bates

No. HOOO02364).
14.
The 1991 ACR applied the waste acceptance rates to the 1991 APR

resulting , in iridivid ual Purchaser allocations ~ased on an oldest fuel first (" OFF") priority.

See

1991 Annual Capacity Report, Table 3. 1 (Bates No. IiOOO02369). Even

with

the acceptance

schedule plaintiff's experts assume , an OFF priority allocation would not allow Yankee Atomic to
dispose of all of its nuclear waste before 2007.

See Exhibit C. Under plaintiff' s proposed

acceptance rate, the aggregate amount of fuel accepted by 2007 woul~ total 24 100 MTU.
Because only 10, 000MTU would be accepted by 2910 at the acceptance rate projected in the

1991 ACR, an OFF priority allocation using this acceptance rate would not allow Yankee Atomic

continued)

4.

potential accidental discharges of radioactive material.

understand that the 1987 amendments to the NWPA authorized DOE to site , construct and operate a single Monitored Retrievable Storage (" MRS" )facility, and provided that no more than 10, 000 MTU of nuclear waste could be stored at the MRS facility until a permanent repository began to operate. I also understand that DOE had announced prior to issuance of the 1991 ACR that it did not anticipate that the permanent repository would began operating until at least 2010.

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- 75 M ~eover, even if the exchange market functioned

to diSpoS ~ of its nuclear waste before 201 0.

to minimize aggregate storage costs as Mr. Gra~ls

has assumed, plaintiff would continue ,

to

store fuel through 2010 under the acceptance ra~es projected in the 1991 ACR because
according to Mr. Graves ' calculations, the amount of " Mus~- Move" fuel generated by discharges
from operating reactdrs (Le. , discharges in excess of spent fuel pool capacity) exceeds 10, 000

MTU by 2010.

See Graves Report, Figure 1. Therefore , if the 1991 ACR acceptance rate had

been achieved , plaintiff would not avoid the additional storage costs on which its damage claim

is predicated.
Assumptions about Exch~mges
15.
Article V. E
of the contract provides Purchasers with

the " right

tb

exchange

approved delivery commitment schedules with parties to other contracts with DOE for disposal
ofSNF and/orHLW;

provided however , that DOE shall inadvance , have the righfto approve or
Plaintiff'

disapprove, in its sole discretion , any such exchanges. "

s damage claim " assume(s)
of

that suc h swaps would approach the efficient economic allocation

slots

, the

aUocation of

slots which minimized the aggregate on-site storage costs of all purchasers). Graves Report, at

13. Mr. Graves ' conclusion that all of Yankee Atomic s SNF and HLW would have been
removed by 1999 in the " Non- Breach World" depends on this assumption. However, this
assumption is both speculative (because there is no way ' to kno\Nwith certainty how the market
would function) and irhpla usible for several reasons.
16.
exchanged under the contract.

First , only approved delivery commitment schedules (" DCSs ) can '

See Article

V. E.

Moreover, under .the

contract, DOE is only'

required to project receiving capacity for 10 years following the projected commencement of

5. With an

OFF priority, Yankee Atomic s allocation would total 56. 1 MTU%rough ~d07. Mr.

" Graves ' data show that Yankee Atomic has anSNF inventory of 127.41 MTU.
6. To minimize aggregate storage

discharges from operating reactors in exce~s of spent fuel pool capacity would have to

costs under plaintiff' s model. " Must- Move " fuel generated by

built. :

be

moved first , because if this fuel is not move~, an additional storage facility would have to be

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- 8t~e' initial DOE fa cility, and utilities are not required to submit DCS' s for the full 1
IV.

operation

of

years.

See Article

and Article v.B. 1. Purchasers could not exchange allocations that

had not been projected, requested, and approved

17:

Second, if GTCCcan not be inclu ded in DCSs and failed fuel might not

be accepted in the year stated on a DCS, jhen Purchasers would have little incentive to engage
in exchanges (because exchanges would not eliminate the need f?r on-site storage).

18.
and/orHLW (Le., exchanges

Third, Article V. E.

provides for bilateral exchanges

of

like amounts of SNF

of

DCS' s for equal MTUs between Purchasers), not the " last- bid

auction procedure" that

Mr.

Graves refers to in his report (at page 14). One cannot assume that

a market with bilateral exchanges in-kind will produce the same results as a market with a lastbid auction ,procedure. A large number of bilateral exchanges would be required to achieve the
same result and, in ,each exchange, there would be bargaining and the attendant possibility'

expropriation by purchasers with desirable allocations. Moreover, a market with bilateral
exchanges in- kind does not produce as much information as ' a market with a last-bid auction
i::~.

procedure. Economists have recognized that sequential, bilateral trading is not the most

efficient way to organize a markee
19.
Fourth, Article V. E.
of

the contract also provides that Purchasers must

submit exchange requests to DOE for approval and gives DOE the discretion~o disapprove

proposed exchanges. Economists also have recognized that a requirement for government
approval discourages trading.

See , e. , Stavins Transaction Costs and Tradeable Permits

7. ' See, e. , Hahn & Noll

Barriers to Implementing Tradable Air Pollution Permits: Problems egulatory Interactions, " 1 Yale J. on Regulation (1983) 63; 74;, Stavins Transaction of Costs and Tradeable Permits, 29 J. Envir. Econ. & Management , (1995) 133 , 135, note 5 the trading process (leads) to some initial trades that ("the sequential and bilateral nature preclude better trades from being carried out subsequently ), and Atkinson & Tletenberg, Emis sions Trading, " 21 J. of Market Failure in Incentive;.Based Regulation: The Case 28 (" the type of bilateral , sequential trading Environmental Econ. & Management (1991) 17, that occurs under the bubble policy results in substantially smaller cost savings than would be expected from the more sophisticated , but uncommon, cost-effective trading process that analysts have historically presumed to exist. It

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- 9145. 8 I understand that DOE might disapprove

29

J. Envir. Econ. & Management,

(1995) 133,

exchanges for many reasons, including differences in ~tbrage cask requirements and

transportation requirements that potential exchanges would generate.

20.

The actual behavior of Purchasers to date does not support Mr. Graves

some allo ~tion assumption EVm though man~ Purchasers currently have tradable DCSs and
utilities (such as Yankee Atomic) have actively solicited exchange proposals,

no exchanges

be' greater have ' occurred. In his report, Mr. Graves argues that the incentive to exchange' would
' the " Non- Breach Wo'i1d. " Graves Report '

t11- 13 & 17 .:19. Ho~ever, eve~ ifthis were true , it

would not establish th~t the exchanges that would occur in the Non-Breach World would
minimize aggregate on-site storage costs and allow Yankee Atomic ' to dispose of all of its

nuclear waste by 1999.

21.

Mr. Graves ' conclusion regarding the net cost to plaintiffof exchal1ging

DCSs is also questionable because, for the reasons stated above, one cannot know with
certainty whether exchanges would occur and what the terms of exchanges Which did ocCur

would be.

1O It is possible

that the exchanges which did occur would occur at

terms

unfaVorable

8. In 1981, the State of Wisconsin implemented Cl program designed to allow for the limited the oxygendemandoria part of
trading of marketable ' discharge permits tocontrcilbiological Fox River. Hahn f,::conomic Prescriptions for Environment Problems: How the Patient ectiveSi3 (1989) 95 97. Th.~ actua!trading Followed the DocU:Ws;Orders " J. Econ.. ~, at 98. The program s disappOInting and cost savings of this program were minima. results havebeen-:attributed to certain features anne' market structure that also exist here: limited permit trading between small numbers of market participants , subject to regulatorY approval. Id. ' Also , see , Tripp & Dudek Institutional Guidelines forDe' sigining Successful Transferable Rights Programs, " 6 Yale J. on Re ulation (1989), 369 387 (" the rights to pollute are not freely tradeable under the Fox River program, which impairs the value of the

rights
9. Mr. Graves asserts

that " swaps of acceptance slots would aUow purchasers (and not insignificantly, DOE also) to realize substantial savings in cost and efficiency as compared with the initial alloCation of acceptance slots under OFF." Graves Report, at 3. However, even.if this were .tl'Ue; iLwould not be sufficient to establish that Purchasers would propose the necessary sequence of exchanges or that DOE would approve the exchanges as they Were proposed. Both Purchasers and DOE wouldhav~ to evaluate each exchange on its own merits. DOE would not be able to rely on Mr, Graves ' assumption that a series of bilateral exchanges would ultimately result in an allocation that allowed them to obtain substantial savings in cost and efficiency" because it would have noway of knowing

whether all ofthe necessary exchanges would be proposed.

10. The price of exchanges could also be affected by other factors not taken into account by Mr.

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to plaintiff, and that the exchanges would cost plaintiff more than Mr. Graves assumes.

r:~

course,

any

such additional costs would offset plaintiffs storage costs savings.
Failed Fuel

Assumptions about GTCC Waste a nd
22.

I underst~nd that plaintiff has both failed fuel and GTC~ waste on

its

site. 11 Under these circumstances, piainYff will incur the costs
fuel and GTCC waste are

of

on-site storage untiritsfailed

removed from its site. Therefore , plaintiffs damage calculations

necessarily ass'ljme that its failed fuel and GTCC , wast~ would also be accepted by DOE under

the assumed schedule discussed above. This assumption, is speculative because the contract
does not require DOE~o do this. ,
The In~errelationshi between Assum tions

23.

Plaintiffs assumptions

are

interrelated in several respects. First, plaintiff'

e~erts ' conclusion that the proposed acceptance sched~le would minimize at-reactor storage
costs depends on their assumptions about exchanges , GTCC waste a!1d failed fuel:
if

the

exchange market did notfunction as plaintiffs experts assume, or DOE did not accept GTCC
waste and failed fuel as plaintiff's experts assume , then there would be no way to know \yhether

the assumed acceptance schedule would minimize at-reactor storage costs. Second

, Mr.

Graves ,~nalysis of the demand for allocatjonslots (which determines the ' allocation schedule in

his economic sequence mod ~I) depEm?Sonthe assumed " non- breach 'JVorid~

~cceptanc~

schedule and the assumption that DOE would accept GTCCwaste and failed fuel under the
non,. breach world" acceptance schedule. The interrelationship between these

assumptions

continued) , Graves economic sequence model" such as Purchasers ' abilityto shut-down plants prior to
the end of

their currently licensed lives; and Purchasers ' ability to , obtain extensions of the
of

licensed lives

11. I understand that GTCC waste is a form of low- level radioactive waste that contains concentrations of certain radioactive nuclides that exceed the concentration limits established by the Nuclear Regulatory Commission for Class C waste. Failed fuel is SNF and/or HLW that does not meet the General Specifications for such fuel as set forth in

their nuclear plants. ,

Appendix E of the contract.

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makes plaintiffs damage clC1im
entire model would fall apart.

a

house,of cards: if anyone of the assumptions is incorrect, the

Daniel R. Fischel

March 1, 2002

011