Free Response to Motion - District Court of Federal Claims - federal

, .:. ' -. ~ " . .. .

,:

" '" '
Case 1:98-cv-00126-JFM Document 791-5 Filed 04/16/2004 Page 1 of 15

" , ..

, "'t

Exhibif4
FRANK C. GRA VES

Rule 26(a)(2)(B~Disclosure of Publications

" During the Last Ten Years
How Competitive Market Dynamics Affect Coal~ Nuclear and Gas Gen~ration and Fuel Use-A 10 Year Look Ahead" (with L. S. Borucki, RP. Broehm, S. Thumb, and M. Schaal), Final Report May 1999, TR~ 111506 (palo Alto, CA:' Electric Power Research Institute

, 1999).

Price Caps for Standard Offer Service: A Hidden Stranded Co~t" (with Pa\ll Liu),
Electricity Journal Volume II ,
Mechanisms for Evaluating
Markets

The

Number 10j December 199~.

the Role of Hydroelectric Generation in Ancillary Service (with RP. Broehm, RL. Earle , TJ. Jenkin, and D. M. Murphy), FiilalReport,
(palo Alto , CA: Electric Power Research Institute, 1998).

November 1998 , TR- 11l707

~?:~7

EnergyMarketImpacts ofE/ectric Industry Restructuring: Understanding Wholesale Power L. Thumb, A.M. Schaal, L.S. Borucki, and R. Broehm), Transmissionand Trading(with Final Report, March 1998, EPRI TR - 108999, GRI -:-97/0289 (palo Alto, CA: Electric Power Research In5titute
One- Part Markets for Electric Power: Ensuring the Benefits of Competition" (with E. Grant Power Systems Restructuring: Engineeringand Read , Philip Q Hanser, and Robert L. Earle Economics M. Ilie, F. Galiana , and L. Fink , eds. (Boston: Kluwer Academic Publishers 1998), pp. 243-280.
Railroad andTelecomrtull1ications Provide Prior Experience in ' Negotiated Rates '" (with
Carlos Lapuerta), Marketing and Rates,

, 1998).
Natural Gas

July 1997.

Regional Impacts of Electric Utility Restructuring on Fuel Markets" (with S. L. Thumb Borucki , and A. M. SchaU), Final Report, April 1997, Vol I (EPRI TR- I07900.;VlIGRI97/0108. 1) andVol2 (EPR! TR- I 07900-V2/GRI-97/01 08.2) (palo Alto, CA: Electric Power Research Institute , 1997).

The Economics of Negative Baniers to Entry: How to Recover Stranded Costs and Achieve Competition on Equal Terms in the Electric Utility Industry" (with William B. Tye), Electric Industry Restructuring, Natural Resources Journal Volume 37, No. 1, Winter 1997.
Capacity Prices in a Competitive Power Market" (with James A. Read), Accounting, Technology Competitive Aspects of the Emerging Industry,

The Virtual Utility:
S. A werbuch and

A. Preston ,

cds. (Boston: Kluwer Academic Publishers, 1997), pages 175- 192.

0046

",'"~ &, ~;,~ ~ . :;, '. . .-.-

, ', '
Case 1:98-cv-00126-JFM Document 791-5 Filed 04/16/2004 Page 2 of 15

: J.. .

Exhibit 4 FRANK C. GRAVES
Rule 26(a)(2)(B)- Uisclosure

ofPublicatioDS

During the Last Ten Years
10.

Stranded Cost Recovery and Competition on Equal Terms" Electricity Journal Volume 9, Number 10, December 1996.

(with WlIlimn B~ Tye),

' n.

1996.
(with Maria Ilie),

A Framework for Operations in the Competitive Open Access Enviromnent" (with Marija Volume 9, Number3, April ElectricityJournal, llie, Lester H. Fink, AlbertM. DiCaprio),
Issue 2,

, 12.

September 1995.

Potential Impacts of Electric Restructuring on F..ucl Use " EPRI

Fuel Insights,

13.

Optimal Use of Ancillary Generation Under Open Access and its Possible Implementation ML T. Laboratory for Electromagnetic and Electronic Sy$tems Technical LEES TR- 95- 006 August 1995. Report,

14.

A Primer on ElectricPoll'er Flowfor Economists and Utility Planners, Power Research Iilstitutc , EPRI Project RP2123- 19, January 1995.

TR- 1O4604,

Electric

15.

Hierarchical Control and Pricing of Frequency Quality and Network Security Under Open Proceedings ofNSF Transmission Access" (with M. Ilic: A. Zobian, and P. R. Carpenter), Washington, DC, October 1994. Workshop on Infrastrutures in Power Systems,
Estimating the Cost of Switching Rights on NaturalGas Pipelines" (with James A. Read,
Jr. and Paul R. Carpenter),

1().

The Enel'gyJournal

Volume 10, Number 4, October 1989.
(with Paul R. Carpenter),

17.

Demand- Charge GICs Differ from Deficiency- Charge GICs
Natural Gas,

August 1989.

18. 19.

What Price Unbundling?" (with P.

Carpenter),

Natural Gas

June 1989.

Planning for Electric Utilities: The Value of Service" (with James A. Read , Jr. ), in Moving Toward Integrated Value- Based Planning, Electric Power Research Institute, 1988.

0047

, -

Case 1:98-cv-00126-JFM

Document 791-5

Filed 04/16/2004

Page 3 of 15

PUBLICLY AVAILABLE REDACTED VERSION

2003 ExPERT ' REPORT ON DAMAGES ' INCURRED BY YANKEE ATOMIC

DUE' TO

, TJIE DEPARTMENT OF ENERGY' S. ' " PARTIAL CONTRACT BREACH

Prepared by

Kenneth T. Wise, Ph.

The Brattle Group 2000 Powell Street , Suite 1200
Emeryvil1e~ CA 94608

510.596. 1767 Voice 5LO. 596.i768 Fax office~brattle. com

March 28, 2003

0048

,,'

, .,
Case 1:98-cv-00126-JFM

,;. ..' . .

~.'

' .. .. . ... .... .. : ..

..:...... '-..,..

...,...... ~......,.... ..y. . .; ~",. .. . ., ~. ;: , ," ' ., '' ...
' . ''
'

., . .'

.

.-',

:,'

Document 791-5

Filed 04/16/2004
it'

Page 4 of 15

PUBLICLY AVAILABLE REDACTED VERSION
TABLE: OF CONTENTS

, SECTION I.
SECTION II.

INTRODUCTION.. ,
THE NEED FOR AN UPDATED REPORT. . . . 0 , , '0 . .0 . . . . . . . . . ,

. .. l' ,

SECTION ill.

ANALYSISOFDAMAGES.,...,....
ORGANIZATION OF DAMAGES

sEcTIoN IV.

~PENDIXA:
A,pPENDIXB:

DOCUMENTS CONSIDERED
RESUME OF KENNETH T. WISE

Li)

The Brattle Group

0049

, '" .-,. .'

,,

,'
Document 791-5 Filed 04/16/2004
a..

' ,

Case 1:98-cv-00126-JFM

Page 5 of 15

PUBLICLY AVAILABLE REDACTED VERSION
SECTION
INTRODUCTION
otWashiIigton: D~c. h:ounsel")has askech~eto update

my calculation ofllie : economic damagesthatY~eeAtomicPowerCompany("Yank:eeAtonric )hash1currOOandwillincUr ..a Iesu1t of th~ u. s. Department of Energy's ("DOE" ) partial breach of its contractual obligations '
p1irsuaIit to a 1983 contract between ~e parties.

Spriggs and Hollih~orth

: of economic damages for

section II of this report explains the need .for this ' update. Subsequent sections addreSs the various Yank.~ Atomic s past and future , activities. The background and analytic.
s3mt as iri my original 1

framework for the calculation of diunages are the

report reviews my methodology. S~on N repOrts the fesults of my Calculations by the type of activity , per!onned by Yankee Atomic. , In fonning my opinIons, I have considered the ~terns ~ed in Appendix A
The Brattle Group

report.l Section ill of this

is being compensated for my work in this matter at an hourly rate of $410.

Appendix B contains a copy of my resume, which includes a list of my publications during the last ten years

and my testimony during the 'last four years. ,

SECTION ll.

.THE NEED FORAN UPDATED REPORT

This update is necessary in light of events that have increased past costs and will increase future costs beyond those anticipated in the 1999 company budget:- ' Additionally, the pas~ge of time allows a
, substantial dollar ,amount of what were future cost estimates to be replaced by realized past costs. Yankee

, to me in 1999.
SECTION ID.
A.NALYSIS OF DAMAGES

Atomic has quantified the impactof these changes ill budget infonnation similar,to the infonnation pwvided

Damages in this case are calculated by comparing costs that Yankee Atomic has incurred and will incur

to costs that Yankee Atomic would have incurred absent the breach. The net annual cash flows are adjusted to det~nnine the present value of damages, To adjust past cash flows to present values, one applies an appropriate interest rate, However, in this case, Counsel h~ instructed me not to apply interest

I, The framework

involves the comparison between costs inclUTed in the actual world and costs that would, have been incurred but for the breach of contract. ltalso includes the non- breach fuel removal date of January 1999 , as presented in the expert report of Frank C, Graves.

The Brattle Group

0050

..
Case 1:98-cv-00126-JFM

,,
Document 791-5

''
Filed 04/16/2004 Page 6 of 15

PUBLICLY AVAILABLE REDACTED VERSION
to past costs~ To dete~e the present value offuturecash flows, one discounts them back to the present by using a discoUnt rate that reflects the time value of money and the risk of the Cash flows at issue.
In calculating econon:llc dainages I have done the followmg..

Used an ~tion rate of2.5 percent for future costs , excePt where such costs' are fixedhy
, cq,

ntract. 2 '

Used an after-tax risk-ftee dis~ount rate for future costs
other coststh3t would not be variable~
In ~o

3 '

set

by fixed price contracts and

scenarios, used

e~ther an after- taX risk -~

discount rate or It risk-adjusted discount

rate for all other future costs.
If the projected costs at issue in this case are viewed as certain or coiiservatively low because , as suggested by ~nt experience, future events are likely only to increase rather than to decrease costs; then a risk -free
tate is appropriate or conseIVatively high.

A risk-adjusted discount rate is most COllllIlOnly applied to

projected cash-flows
of costs. These Costs

fiom profit-seeking investmen!S. In this case, the only relevant cash-flows consist

, especially because they are not affected by variations in the operation of an ongoing business, would have much lower risk than returns on egwties. Nonetheless , other things equal, these costs , can be expected to exhibit a small degree of coITelation wi1b economic factors that affect asset prices.
that event,

a: ~a:i1 risk-adjustment factor is appropnate.4 In the ' following text, I provide present valueS as

ofJanuaxy 2003 resulting from the application of a risk-adjusted discount rate, I also present results using
an after-tax risk-tree discount rate in Tables IB , 3B

, and 4,

' The

inflation rate I used was based on the Blue Chip Economic Indicators CONSENSUS Forecast;

Future fixed-price cash flows are discounted at the Treasury Strip rate of the same duration. I used

return.
((l- beta).riskftee

combined state and federalmarginal corporate tax. rate of39.2 percent to calculate an after-tax. rate of

4 ' My analysis detennines the risk-adjusted discount rate following the ' Myers-Ruback
of

method

(risk-ftee rate + market risk premium)) and using a 0. 25 and a market risk premium of 8.5 percent
beta.

rate-(l- taxrate) +

beta

The Brattle Group

0051

: --"'" ' , \ /

,~)

,''

"'
Case 1:98-cv-00126-JFM Document 791-5 Filed 04/16/2004

,'

Page 7 of 15

PUBLICLY AVAILABLE REDACTED VERSION
SECITON Iv.
ORGANIZATION OF DAMAGES

, Forpmposes of presentation" damages have been grouped into three categories: wet poolstorage of spent
: nuclear fuel and' high level radioactiye waste (collectively, spentfuel'.); Independent Spent Fuel Storage
, chissifiC4 as p

Installation("ISFSI') constmction; and ISFSloPeration. Within each of these categ~ries damages can be ast damages, future DQE-independent damages, ilnd' future DOE~daIit damages.s In' , this report, DOE-independent , damages are those committed damages associated with wet storage or ISFSI construction that 'will occur regardless of when the DOE commences acceptance of spent fuel. DOE-dependent~ damages are committed arid continuing damages, the ~ount of which depends upon
, when DOE completeJy removes the spent fuel.6

,

WEr POOL STORAGE OF NUCLEAR SPENT FuEL

The wet pool past damages include incremental operating costs. Through 2002 , Yankee Atomic inCUITed costs operate the wet pool after the non-breach fuel-out date of January 1999.

of_to

, Yankee Atomic will incur future DOE-independent damages due to the need to operate the pool ii12003?
The present value of these estimated costs is

Therefore, the total present value of wet pool damages

is~.

ISFSI CONSTRUCTION
But for the failure of DOE to accept and remove Yankee Atomic s spent fuel in accordance with the contract, Yankee Atomic would not have incurred costs related to the design and construction of the .. ISFSL ISFSI construction costs through 2002 were

Past damages include actual costs through 2001 and estimated totals for 2002.
6, DOE-dependent damages

include conunitted costs related. to the tennination of the ISFSI, in additi,?n to other annual ISFSI operating costs,
Yankee Atomic expects to transfer the spent fuel ITom the pool to the ISFSI in the middle of2003,

T 0 compute damages I have deducted from the past ISFSI coI!Struction costS
spent fuel from the wet pool to DOE absent the breach. This offset totals

the cost of transferring the

the estimated cost

in 2002 dollars of transferring fuel ITom the ISFSI to DOE.

The Brattle Group

0052

Case 1:98-cv-00126-JFM

Document 791-5

Filed 04/16/2004

Page 8 of 15

PUBLICLY AVAILABLE REDACTED VERSION
AdditioQal DOE-independent damilges ~th 2004 to completeISFSI

conStruction.
a presen,t value of
will

incurred In 2003 and' '

ISFSIOPERATION

When ISFSI construction is completed,' Yarikee Atomic will need to operate the ISFSI until the DOE removes the , spent fueL ISFSI operation includes the annual costs, to inaintain th~ company after completion of plant dismantlement and decommissioning, the annual costs to maintain tb.e ISFSI, and the co~tted costs' to dismantle and decommission the ISFS19 The total present value of these future '
damages depends upon the date of DOE compl~teTemoval

of spent fueL

Myooderstanding is that the DOE will not comnience acceptance ofSp~nt fueJ' fiom. any utility until at least the year 2010. 10 If the 6 month process to remove all sperit tilel from the ISFSI commences in 2010, the

present value of damages relate4 to future ISFSI operation and ISFSI dismantlement and decommissioning

will be

MJNIMUM DAMAGEs

If the DOE begins removal of spent fuel from the ISFSI in 20.10 and completes the removal within 6 month period, Yankee Atomic will incur damages related to the breach contract by the DOE; This ' total includes $ in past damages in fu~ DOE-independent damages that have been and will be incurred in 2003 and 2004, and $ in future DOEdependent damages. This figure is a conservatively low estimate of damages because DOE is unlikely to
connnence spent fuel acceptance by 2010 and is also unlikely to remove Yankee Atomic s spent fuel within 6 months of the program start-up date. If DOE commences acceptance later or removes the spent fuel,

over a longer period, then Yankee Atomic s damages will be greater because' of the additional ISFSI
operation costs. The rninimmn damages resulting fiom a single removal campaign starting in 2010 are

summarized in Tables , lA and IB using a risk~adjusted discount rate and a risk-ftee discount rate respectively. Annual damages for this scenario in constllt and present value dollars are presented in Tables 2 , 3A

, and 3B.

In the absence of the breach , there would have been administrative and insurance costs through conclude the company s activities. These costs are netted out in the calculation of damages.

20qS

10 As stated in my original report , DOE reports and Mr. Graves ' report are the sources of

understanding. '
0053

The Brattle Group

,-

, "' ,'

,,-

Case 1:98-cv-00126-JFM

Document 791-5

Filed 04/16/2004

Page 9 of 15

PUBLICLY AVAILABLE REDACTED VERSION
DAMAGESFROMADDmONALDELAY ,
, Based on the

same analysiS descnDed above, I have calculated. the additional damages that Y ~ee Atomic will incur if' DOE, intact, delays the initial date of a complete spent fuel removal campaign ~yond 201 0: : For every additional year that the spent ~el is ,not removed" Yankee Atomic will sustain about , in additional damages at a reasonably constant rate in constant mid- 2002 dollars. The incremental remains onsite after the removal date Yankee Atomic will incur for each additional year that the spent

~l

~ges

that would result from a' single removal campaign initiated in 20\0 are shown in Table

4.

DAMAGE EFFECfS.oF SWAP PuRcHASEs AND SALES
, As' explained

in the expert report of Frank C. , Graves, Y ankee Atomic would have both sold andacquITed fuel removal rights in, the non-breach world. Yankee Atomic would have realized net costs ftom these If this amount were included, the total minimum damages transactions with a present value of$ for Yankee Atomic would be

Loss OF USE DAMAGES

lhave no new opinions

pn

the loss of use darllages to add to those stated in my 1999 report

The Brattle Group

0054

\-....../
, '

PUBLICLY AVAILABLE REDACTED VERSION

, Table

Case 1:98-cv-00126-JFM

Yankee Atomic Damages Assumes Si~gle Removal campaig~ in 2010
(Present Value January 2003 Dollars using a Risk-Adjusted
Discount Rate)

, Future
' Future

Document 791-5

Item ISFSI Construction ISFSIOperations Wet Pool Related

DOE~IndependentDamages DOE-Dependent Dam ages Past Damag~~_ ..,..:,.,., (Committed) (Committed &ContiIlJll.ng)

Totai

Total'

Notes: (I) The analysisrelies on budget information provided by Yankee Atomic. (2) The analysis assumes a single campaign to remove an Yankee Atomic fuel in 2010.,

(3) Past costs include actual costs through 2001 and estimated totals for 2002. (4) No interest is applied.to past cos.ts.

Filed 04/16/2004

(5) Future variable costs discolmted at a ~isk-adj?sted rate,

Page 10 of 15

The Brattle' Group

C" ,

PUBLICL YA V AILABLE REDACTED VERSION

Table IB ' Yankee Atomic Damages
Assumes Single Removal Campaign in 2010
(present Value January 2003, Dollars using a Risk-Free Disc~unt Rate)

Case 1:98-cv-00126-JFM

Future

Item

Past

ISFSI Construction

Fut\1re D9E-Independent Damages DOE- Dependent Dama ges (Committed & Continuing) Damages (Committed) ' , ,o...." .."

Total

ISFSI Operations

Wet Pool Related

Document 791-5

Total

Notes: '

Filed 04/16/2004

(I) The analysis relies on budget infom1ation pr~vided by Yankee Atomic. (2) The analysis assumes a single campaign to remove all Yankee Atomic fuel in 201Q. and estimated totals for 2002. 2001 .. (3) Past costs include actual costs through (4) No interest is applied to past costs. (5) Future variable costs discounted ,at a risk- fre~ rate.

Page 11 of 15

The

Brattle Group

:*;r

PUBLICLY AVAILABLE REDACTED VERSION
Case 1:98-cv-00126-JFM

Table 2
Yankee Atomic': Com 11Iltted and Continuing D amages Assumes Slngle Government Campaign to Remove All Yankee Momlc Fuel In 2010 ,
(Fulure Damag.. In Constanl mld- ZOOZ Dolla,,)

Year

Document 791-5

-.l

Item ISFSI Construction ISFSI Operations Wet Pool Related

Tolal

Pre1999
ZooO
ZOO 1 ZOOZ ZO03 ZO04 ZOOS

201Hi

ZO01

Z008

2009

ZO10

ZOl1

, ZO11'

Total

Filed 04/16/2004 Page 12 of 15

The Brattle Group

(,::"
, " -..,

PUBLICLY AVAILABLE REDACTED VERSION
Case 1:98-cv-00126-JFM

, Table,3A '
Yankee Atomic. Committed and Continuing Damages
Assumes Single Government Campaign to Remove All Yankee Atomic Fuel in 2010
(present :Value January' 2003 00110" ' uslnc a Rlsk~AdJusted Discount Rate)

Year

Item ISFSr Construction ISFSIOp.rations W.t Pool R.lat.d
1999,

Total
1000

Pre- I999
2001 1001

2003

1004

1005

1006'

2007

1008 '

, 1009

1010

1011

1011

Document 791-5

U1

00

Total

Filed 04/16/2004 Page 13 of 15

The Brattie Group'

PUBLICLY AVAILABLE REDACTED VERSION
Case 1:98-cv-00126-JFM

Tablif3B ,
Yan.kee Momlc - Committed and Continuing Damages ,
Assumes Single Government Campaign to Remove All Yankee Aromlc Fuel In 2010
(PreseniValue January 1003 Dollars using a RIsk-Free Dlscouql Rate)

Year

ltell1 rSFS! Conseruc';on

To"e'
1999
%000
%001 %00%

Pre- 1999
%003 %004

, 1005

006 '

%007

lG08

2009

1010 '

, 2011

1011

Document 791-5

tit

ISFSI Operations We, Pool Related

To!:!)

Filed 04/16/2004

';~d

Page 14 of 15

The Br~ttle Group

, ,

, (~~_
' '

.. ,

PUBLICLY AVAILABLE REDACTED VERSION

Table 4
Yankee AtoIl1ic - Committed and Continuing

Damages
Pres ent Value
January 2003 Dollars
, (Risk-Free

Case 1:98-cv-00126-JFM

Estimates of Damages Depending on I~itiatlon ()f Fuel Removal' ,
Total Dama
Present Value January 2003 Dollars

Year ofFu~1

Incremental Dama Constant , mid- iO02
Dollars

Removal
2010
2011

Constant inid-20Q2 Dollars
usted)

2012
2013 '

Document 791-5

2014 2015
201'6

2017 2018 2019 2020

Filed 04/16/2004

*Note: Past costs in nominal dollars. Future-costs in constant mid- 2002 dollars, '

Page 15 of 15

The Brattle Group