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

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, Economic Sequence Model for Plainti~

including

when spent fuel is accepted, and when and at

what cost acceptaIice slotS are bought and sold-

Table 2

Economic Sequence Model Results Yankee Atomic Electric Company

1998
Spent Fuel Acceptance (MJ1J) (Economic Sequence Model Result),
122.4

1999,

2000,

2001

2002,

2003

InitialAllocation of Slots (MTU) (According to OFF) ,
Market Price of Slots
($OOOIMTU)

19.

18.

17.

122

Cost of Required Slots ($ Millions) (PV =$15.4 M)
Revenue from OFF Slots Sold ($ Millions) (PV = $3. 6 M)

14.

2.4

. 0.

- . All costs and revenues from slots are zero from year 2002 folWard , as market price of slots goes to zero in 2002 and remains

mum.

The model results show that overall , facilities with smaller amounts of Must-Move spent fuel

(typically ~mall shut~own pools and operating reactors with full pools) tend , to acquire earlier
acceptance slots. The larger shutdown facilities have their spent fuel removed relatively later, closer

to the time when cumulative acceptance slots catch up with cumulative Must-Move spent fuel.

SPENT FUEL ACCEPTANCE ANALYSIS-BREACH WORLD

In principle , the same kind of economic sequencing analysis performed above could be applied to
the Breach World , albeit with a different set of inputs regarding the program start date and
acceptance rate , and with appropriate adjustments to spent fuel inventories and discharges

torefIect

the later time ,period. Howevcr the. data- on .which:such ~ Breach World.analysis :w.ould. ha.veto ,

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based is extremely speculative. Most obviously, the program s acceptance rate is highly uncertain
(particularly the st8rt date). The existence of a viable swap market for acceptance slots-critical to achieving an econonlica1ly efficient reallocation of slots-is doubtful. The results of such a Breach

World analysis would have to be deemed highly uncertain, so much so that it would be difficult to
. have reasonable

confidence in them.

One of the most critical and also most uncertain factors in the Breach World is the date at which . ' DOE will begin accepting spent fuel. Obviously, a later start date implies correspondingly later

acceptarice, all else equal. However, a later start also allows more Must-Move spent fuel to
accumulate by the time the program begins. The resulting !ncreased competition f~ravailable slots

would likely push any particular Purchaser s acceptance back still further. DOE has recently
projected a program start date of2010 , though even this late date is by no means assured.
, In my analysis of the Non-Breach World , with program operation beginning in 1998 , the backlog of Must-Move spent fuel could be eliminated within a few years. However, by 2010 , the volume of

Must-Move spent fuel is considerably larger. To illustrate the situation in the Breach World , Figure
4plots cumulative Must- Move spent fuel. This cumulative demand for spent fuel removal reaches
18,000 MTU by 2010 , and continues to grow at an average rate of approximately 3,000 MTU/year
for the next 20 years. A 2010 program start with the same annual acceptance as in the Non-Breach

World, also illustrated in Figure 4 , cannot catch up with this need. The cumulative amount of Must-

Move spent fuel is significantly in excess of the cumulative acceptance through the year 2030 and

beyond. A later start date would only make the situation worse, and even a start date several years
earlier would not solve the problem. Absent a much

higher acceptance rate in the Breach World, it

is not possible for the supply of spent fuel acceptance slots to keep pace with demand.

0017
16

Civilian Radioactive Waste Management System Requirements J5;;c~me
- Radioacth~e Waste Manage..nent

, Revision 05,

Office of Civilian

S. Department- of Energy, Januaryt999.

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Figure 4

Supply and Demand for Acceptance Slots Breach World
80,000

60, 000

Possible Breach World
Acceptance Rate
t;)

~ 40,000

Total Must-Move

20, 000

\0,
.....c

"I:t
.....c .....c
.....c

In addition to this, DOE' s failure to accept spent fuel on any schedule approaching its initially

' announced plans threatens overall confidence in the program. This is likely to mak~ significant
numbers of Purchasers unwilling to swap away their allocated OFF acceptance slots at any price, or
at least demand a premium well in excess of their actual avoidable cost. This reluctance would

interfere strongly with the development of an ' efficient , effective exchange market for acceptance
slots. At the very

least, the fact that the quantity of Must-Move spent fuel constantly and

significantly exceeds the cumulative supply of acceptances dictates that the price of any available
swaps could be quite high indefinitely. Further, some Purchaserp with no immediate need for spent

fuel removal (no true Must- Move situation) might choose to use rather than swap their OFF slots
or even try to " swap up" for earlier removal , as insurance agalnst further DOE performance failure.

Thus, the trading dynamics would be considerably more complex in the Breach World-so much

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so that the Economic Sequence Model is not an appropriate tool for evaluating swaps in the Breach

World.

VI.

CONCLUSION

I have described an economic analysis andprojection of the government' s (and the swap market' s) ,

perform~ce in the Non-Breach . World, using economic efficiency principles , t1iat prioritiZe '
acceptance to minimize avoidable costs. This analysis allows me to specify with reasonable certainty .

the date at whichPlaintitI's site would have been free of spent fuel , and to identify the costs of
obtaining the acceptance slots necessary to achieve this. 1)1at analysis shows that Yankee Atomic
would have its spent fuel removed in 1999.

contrast , such analysis is speculative and more difficult in the Breach World , becaus

e: of the

substantial unresolvable uncertainties about overall program performance and the existence and
performance of a market for exchanges of acceptance slots. Thus ,
in the

Br~ach World it isnot

possible to develop a reasoI)ably accurate estimate of when or at what cost the PlaintitTs sites will

be free of spent fuel. Any given set of assumptions could of course be mechanically analyzed, but
there is so much uncertainty surrounding these assumptions that one could not rely on the results.

VII.

QUALIFICATIONS

I have 19 years experience in assisting utilities in the design and implementation of long-range
planning, investment, and operating policies , and I assist their counsel with regulatory compliance
and policy' review.
This work has involved market design and

performance evaluation, capacity

expansion and network modeling, investment and contract prudence reviews , estimation of marginal

costs, design and pricing of new services , and financial simulation and valuation techniques. I have

testified on the economics of electric and gas industry restrucfuring before the FERC ' and State
regulatory commissions on numerous topics , including market entry, antitrust, retail and wholesale
transmission access ,

power contract interpretations, service unbundling, new services , and cost of

capital. lam the author of several papers on approaches to and impacts of restructuring of the

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Coo

electri~ and gas industries intheU. S., and am a member of professional societies formathematics, .
electrical engineering, energy economics, and ~ce.

I received an M.S. with a concentration in
in MatheinatiCs from

finance from the M.I.T. Sloan School of Management in 1980, and a RA
. Indiana University in 1975.

My experience and qualifications to offer the opinions included in this'

report are set out in greater detail in Exhibit 3 of this report.

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VlII.

COMPENSA TION

The BraIlle Group

is being paid $325 per hour for my time working on this matter~

IX.

, OTHER EXPERT TESTIMONY

Exhibit 4 lists the cases in which Ihave testified as an expert at trial or by deposition
preceding four years and my publications for the last ten years. Respectfully submitted,

within the

'M..L c!June 30, 1999
Frank Graves

0021

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Exhibit 1

List of Data and Documents Considered in Forming Opinions
S. Department" of Energy ContractNo. DE- CR-01-83NE44428 , Contract for Disposal of Spent Nuclear Fuel and/or High-LevelRadioactive Waste (June 22

1983).

Musion Plan for the Civilian Radioactive Waste Managem~nt Program,
:. DOFJRW-

0005.

S. DOE, June 1985,

OCRWMMission Plan Amendment June 1987, US DOE,DOFJRW-0128.

Drafl1988 Mission Plan Amendment,
Nuclear Waste Policy Act of

June 1988 ,

US DOE, DOElRW- 0187.

1982, as presented in 42 USC Chapter 108 - Nuclear Waste Policy,

1/6/97.

Nuclear Waste
Waste Policy,

Policy Amend17l ~nts
1/6/97.

Act of 1987, as presented in 42 USC Chapter 108 - Nuclear

Report to Congress on Reassessment of the
November 1989, US DOE, DOElRW- 0247.

Civilian Radioactive Waste Management Program,

Annual Capacity Reports
1992 Acceptance Priority Ranking,

S. DOE, Annual series of reports , 1987 - 1994.

May 1993, Revision I , U. S. DOE, DOFJRW-0419.
Annual Capacity Report,

Acceptance Priority Ranking

S. DOE, March 1995.
S. DOE, June 1995 , DOFJRW- 0431-Rev. 1.
Revision OS, U. S.

Spent Fuel Storage Requirements 1994-2042

January 1999.

Civilian Radioactive Waste Management System Requirements Document

DOE,

ViabilityAssessmentof a Repository at YuccaMountain,

US DOE, December 1998, DOFJRW-0508.

Analysis of the Total System Life Cycle

Cost of the Civilian Radioactive Waste Management

Program
..;;c~

S. DOE , December 1998, DOElRW-0510. S. DOE, June 1989, DOElRW- 0239.
Report

The DOE Position on the MRS Facility,

0022

MRS Systems Study Task

The Role and Functions of Surface Storage of Radioactive
PacificNorthwest

Moterful in the Federal Waste .Mallagel11em, .5ystem
MRS System Study Summary R~port,

Laboratory, Apr. 1989.

S. DOE. June 1989. DOElRW-0235.

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Spent

Fuel Acceptance Scenarios Devoted to Shutdown Reactors:

Preliminary Analysis,

P~ific

Northwest Laboratory, October 1989.
J~W. Doman (WESTONlRogerS& Associates) and T.E. Tehan (pacific Nuclear), "Significance of

Campaigned Spen~ Fuel Shipments.

August 17, 1993~ Civilian Radioactive Waste Management System Throughput Rate Analysis, Prepared for U. S. Department of Energy, Prepared by System Analysis, Civilian Radioactive Waste
Management SystemManag~ment and Operating Contractor.

Gottlieb, Peter and W. Bailey III, F. Emami, L. M. Ford, andJ. F. King, ThroughputStudy-for the Civilian Radioactive Waste Management System," from the Proceedings of the High Level 1992. Radioactive Waste Management Conference, Las Vegas , NY, April 12 -

McKee, RW. and H. D. Huber, "Determination of Cost Ef'fective Waste Management System Receipt Rates," Pacific NorthwestLaboratory, from the Proceedings of the High Level Radioactive Waste Management Conference , Las Vegas, NY, Apri128- May 3, 1991
Letter from DanielDreyfus, OCRWM Director, to Dr. Andrew Kadak, President and CEO of Yankee Atomic, d~ted September 28, 1995.

S. Commercial Spent Fuel Inventory; data on historic and projected spent fuel inventory and discharges , provided by NAC International (spreadsheet U. S. Commercial Spent Fuel Inventory .xls)
Memorandum provided by NAC International on ISFSI inventories as of 1/31/98 (ISFSI.doc).

Deposition of Nancy Slater

April 21 ,

1999.

Johnw' Bartlett Expert Witness Report
James

Malone Expert Witness Report
F.

Ivan

Stuart Expert Witness Report

Expert Witness Report ofKenl1eth

T.

Wise

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Exhibit 2 Inputs for Economic Sequence Model
, Assumption
(1) Cask

Data'
10.

Units
MTU

Size: '

(2) GE Moms WetO&M Costs per year:

800 000

(3) WetO&MCosts per year:
(4) Dry O&M Costs per year:

000 000
500 000
461 000

(5) Dry Fixed Setup:
(6) Dry Decommissioning Cost:

240 000
887; 000

($)/cask
($)/cask

(7) Variable Cask Costs:
(~) Crane Upgrade Threshold:

30 MetricTons

(9) Small Crane Upgrade Cost:
(10) Large Crane Upgrade

500 000
.5

Cost:

500 000
1.3%

Notes:
(11 J'

Real Discount Rate:

(I): Expert Report ofJames P. Malone. (2): Connecticut Yankee Atomic Power Company. (3) - (10): Expert Report of James P. Malone.
Kenneth T. Wise.

(II): Expert Report of

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Exhibit 3 Qualifications of Frailk C. Graves
FRANK C. GRA VES

Principal

Mr. Graves assists utilities in the design and implementation oflong~range planning, investment, and

operating policies, and he assists their counsel with regulatory compliance and policy review. has extensive experience with capacity expansion and network modeling, investmentand cOntract , prudence reviews, estimation of marginal costs, design and pricing of new services. and financial simulation and valuation techniques. He has testified on the economics ofrestrUcturhig for ret8ll and wholesale transmission access, power contract interpretations, service unbundling, market entry, and new services before the FERC and State regulatory coJ1!ll1issions. He received an M.s. v.ith a concentration in finance from the M. LT. Sloan School of Management in 1980 , and a B.A. in Mathematics from Indiana University in 1975.

REPRESENTATIVE CONSULTING EXPERIENCE

Mr. Graves has assisted several utilities in forecasting market prices, revenues, and risks for generation assets being shifted from regulated cost recovery to competitive deregulated wholesale power markets. Such studies have facilitated planning decisions, such as whether to divest generation orretain it, and have been used as the basis for quantifying stranded costs associated , with restrUcturing' in, regulatpry hearings. Me. Graves work i~ this area has helped several utilities develop longtenn , planning models for managing their generation assets in a competitive market.
A major concern associated with electric utilityindustiy
restrUcturing is whether or

not generation markets will prove adequately competitive to allow complete deregulation of generation prices. Because of the state-dependent nature of
transmission transfer capability between regions , itselfa function of generation use, the extent of viable competition in the generation market can vary significantly and may be susceptible to market power abuse by dominant suppliers. Mr. Graves leading an engagement to develop market monitoring procedures on behalf of one of
the largest ISOs in the U. , to detect and discoUfClge any market manipulations that

would impair competition.

Many utilities find the prospects for participation in overseas power markets
appealing, because of the similarities to re.gulatoQ'
contra~tiQg and pricing that

they

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Frank C.

Graves

Principal

have experienced in the U. S., prior to restructuring. Howevet itis clear that there are many new risks associated with operations in a foreign country, related to the stability of its currency, its macroeconomy, its foreign investment policies, and even its political system. Mr. Graves has assisted fmns facing these new dimensions to
assess theJ;'isks,
identify strategic tidyantages,

and choose an appropriate, risk.;.

adjusted hurdle rate for the market conditions and contracting terms they willface.
The value of hydroelectric generation assets in a competitive power market is heavily dependent on operating practices that astut~ly shift between real power and ancillary services markets, while still observing a host of non-electric hydrological constrlUnts. Mr. Graves has lead studies for several majorhydro generation owners in regard forecasting of market conditions and cottesponding hydro schedule optimization. He 'has also designed , transfer pricing procedtires that create an internal market for diverting hydro assets from real power to system support services fmns that do not yet have explicit, observable market prices.

The natural gas pipeline industty is wedged between competitive gas production and competitive resale of gas delivered to end users. In principle, the resulting basis differentials between locations around the pipeline ought to provide efficient usage and expansion signals, but traditional pricing rules prevent the pipeline companies

from participating in the marginal value of their own services. Mr. Graves has worked to develop alternative pricing mechanisms and service mixes for pipelines
that would provide more dynamically efficient signals and incentives.
The glut of generation capacity that helped usher in electric industry restructuring in the US lead to asset devaluations in many places, even where no retail access was
allowed. In some cases ,

this has lead to bankruptcy, especially of a few large rural electric cooperatives. Mr. Graves assisted one such coop with its long term fmancial
modeling and rate design under its-plan of reorganization, which was approved.

Testimony on cost of service was provided.
Power plants often provide a significant contribution to the property tax revenues of the townships where they are located. A common valuation policy for such assets has been that they are worth at least their book value , because that is the foundation
for their cost recovenr under cost-Qf-:o.s.enric.e

.utility. rate.making.

Howev.er,

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Frank C. Graves Principal
of these assets..

restrUcturing throws away

that guarantee, requiring reassessment'

" Traditionaias$e~sment tests, e.

based on the replacement costs of comparable '

assets. can be extremely misleading, because they do not consider marketconditions. Utility property tax asses$ments must be based on sound concepts of how value is
captured in competitive power markets, requiring careful education and presentation totax ,assessment boards. Mr. Graves has testified on such matters OIi behalf of the

wrters of a small, out -of-market coal unit in Massachusetts. Much attention has been payed to horizontal market power in the electric generation industry, but less so to the possibility of vertical market power, whereby sufficient

control of an upstream market creates competitive advantage in a downstream market. It is possible for this. problem to arise in fuels, in settings where the likely
marginal generation are dependenton one or a very few fuel suppliers who also have

economic interests in the local generation market. Mr. Graves hasanaIyzed this problem in the context of the California gas and electric markets an~ filed testimony to explain the magnitude and manifestations of the problem.
Overseas markets for energy services provide intriguing investment prospects for s. electric and gas utiJities , but the type and degree of risk involved is generally unfamiliar. Mr. Graves has assisted several developers of power plants and energy infrastructure with adjusting their investment criteria for different international environments. Generally, political risk indexes and relative bond yields are not sufficient indicators of when, why, or how much of a higher discount rate for project valuations may be necessary.

The impacts of transmission open access and generation competition on utility
financial health are well documented. In contrast, the effects on fuel use have been largely ignored, though there are many reasons to believe that relative fuel use will change , due to revised dispatch, repowerings and retirements, changes in expansion mix, and altered load shapes and load growth under more competitive pricing.. For EPRI , Mr. Graves has contributed to a stQdy thatlprojects changes in fuel use within and, between ten large power market regions spanning the country under different scenarios for the pace and success of restructuring.

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Frank C. Graves , Principal

Several states

moving rapidly on implementing retail access for electric utilities. ,

Mr. Graves has worked with the executive conunitteesofseveral
designing, a regulatory

utilities in

strategy for" influencing this transition and developing comprehensive business strategies and integrated planning tools, for service unbundling ~d pricing, incentive ratemaking , corporate reorganization, , market , forecasting, asset valuation and risk management.
Stranded costs , and, out-of.market contracts from ' restructuring can affect
municipalities and cooperatives as well as tnvestor-ownedutilities.

Mr. Graves has

assisted , one debt.financed utility in an evaluation of its , possibilities for reorganization, refinancing, and ie-engineering to improve financial he~th and to
lower rates. Sale and leaseback of generation ,

fuel contract renegotiatiOri, targeted

downsizing, spinoff of transmission, and new marketirigprograms were among the many' components of the proposed new business plan.
Regulatory and legal approvals of utility mergers require evidence that the combined

entity \\ill not have undue m~kct power and ~hat it will crea~ operating s)':1cr6ies that produce benefits for electric customers. Mr. Graves has assisted several utilities in evaluating potential mergers and acquisitions. He has identified ways in which transmission constraints reduce the number and type of suppliers, creating a risk of
anti competitive impacts unless structural , ownershil?, and pricing adjustmentS are put

in place. He has also determined which benefitS can be attributed to a merger and which can be accomplished without forming the combined organization.
Mr. Graves has lead a gas distribution company in the development of an incentive ratemaking system to replace all aspects of traditional cost of service regulation. The base rates (for non-fuel operating and capital costs) were indexed on a price-cap basis (RPI-X), while the gas and upstream transportation costs allowances were tied to optimal average annual usage of a reference portfolio of supply ~d transportation contracts. The gas company will also make numerous adjustments to itS rate design, g. designing new standby rates so that customer choice will not be distorted by pricing inefficiencies.
0";'"

As a means of reducing supply

for power contracts that grant the righthutnot.thc,obligation to take power at 's'ome

0028

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Frank C. Graves Principal

future date at a predetermined price, in exchange Cor an initial optionpremiiun payment. Mr. Graves has assisted several of these utilities in the development of valuation models for comparing the asking prices to fair market values for option contracts. In addition, he has helped these clients develop estimates of the critical option valuation parameters, such as trend, volatility, and correlations of the future
prices of electric power and the various fuel indexes proposed for pricing the optional power. Training seminars on options valuation methods were also presented.
The ability to recover sunk costs of generatism assets under open transmission access,

is of great concern to utilities. Mr. Graves has assisted one electric, utility in the design and implementation ora method for forecasting probable capital recOvery levels in the regional power market over the coming decade. The approach involves,
calculating a fixed cost contribution per kWh based on the marginal customer s value oflost load an~ the hourly loss ofload probability, coupled with iterative adjustments
to the quantity and mix of generation reserves in

the regional pool based on the implied financial viability of each generating unit at the forecasted market prices.

Mr. Graves!las participated as afacilitator and advisor to one electric utility' s task force on transmission strategy formulation and service pricing. Of particular concern were how much to unbundle and where ' to draw the line between generation and transmission functions. The efficiency and cost recovery merits of "nonconforming" ra~es (not based on embedded cost of service) were weighed against the potential regulatory controversy. Straw-man alternatives reflecting time- or location-of-use in rate design were mocked up for assessment of competitive position and customer
impact. The need to revise existing interconnection contracts to achieve

comparability of service was also evaluated.

An electric utility with several out-of-marketindependent power contracts wanted to determine the value of making those plants dispatchable and to devise
negotiating strategy for restructuring the IPP agreements. Mr. Graves developed a

range offorecasts for the delivered price of natqral gas to this area of the country through the year 2000. Alternative ways of sharing the potential dispatch savings were proposed as incentives for the IPPs to renegotiate their utility contracts.

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FrankC. Graves

Principal
For an electric utility considering the converSion of some large oil-fired units to
natural gas, Mr. Graves conducted a study of the advantages of alternative means obtaining gas supplies and gas transportation services. A combination of monthly and daily spot gas supplies, interruptible pipeline transportation over sevei-alroutes, gas storage services , and "swing" (contingent) supply contracts with gas marketers was shown to be attractive. Testimonywas presented on why the additional services ora local distribution company would be unneeded and uneconomic.

A power engineering

firm

entered, into.

a contract to provide '

operations and

maintenance services for a cogenerator, with incentives fees, tied to the , unit' availability and operating cost. When the fees increased due, to changes in the electric utility tariff to which they were tied , a dispute arose. Mr. Graves provided analysis and testimony on the avoided costs associated with improved cogeneration performance under a variety of economic scenarios and under several alternative
utilitY tariffs.

For a division of a large telecommunications firm, Mr. Graves assisted i~ a cost benchmarking study, in which the costs and management processes for billing, service order and inventory, and software development were compared to the
practices of other affiliates and competitors. Unit costs were developed at a level far more detailed than the company normally tracked , and numerical measures of drivers that explained the structural and efficiency causes of variation in cost performance were identifie~. Potential costs savings of 10- 50 percent were estimated, and procedures for better identification of inefficiencies were suggested.

Mr. Graves has helped several pipelines design incentive pricing mechanisms for recovering their expected costs and reducing their regulatory burdens. Among these have been Automatic Rate Adjustment Mechanisms (ARAMs) for indexation operations and maintenance expenses , construction-cost variance-sharing for routine capital expenditures that included a procedure for eliciting unbiased estimates of future costs, and market-based prices capped at!eplacement costs when near-term future expansion was an uncertain but probable need.
On behalf of the Electric Power Research Institute cEPRI), Mr. Graves has written a primer on how to definc.an.d, measurethe cost , of dectric utility transmission

0030