WALL STREET UTILITY GROUP

The Energy Policy Act of 2005: The Implications

for Nuclear Energy

22 September 2005

Today’s Briefing

Major elements of Energy Policy Act of 2005Frank L. (Skip) Bowman

President and CEO, Nuclear Energy Institute

Risk management: Understanding the nuclear licensing processMichael J. Wallace

Executive Vice President, Constellation Energy Group

President, Constellation Generation Group

Industry response to the 2005 energy legislationMarvin S. Fertel

Senior Vice President, Nuclear Energy Institute

Major Elements of the Energy Policy Act of 2005

Frank L. (Skip) Bowman President and CEO

Nuclear Energy Institute

Implications for Nuclear Energy

Positions nuclear energy firmly as one of the cornerstones of U.S. energy supply

Provides substantial investment stimulus for new nuclear plant construction

Provides investment protection for first plants Establishes long-term vision for nuclear energy

in U.S. by authorizing robust R&D program Provides appropriate recognition of nuclear

energy within DOE

Major Nuclear Energy Elements

Investment stimulus for new nuclear power plant construction Loan guarantee authority for technologies that reduce

emissions Production tax credit for new nuclear power plants

Investment protection for new nuclear power plants

20-year renewal of Price-Anderson Updated tax treatment of decommissioning trust

funds Substantial R&D authorization

Stimulus for InvestmentIn New Nuclear Plants

Loan guarantees for up to 80% of project cost Higher leverage, lower debt cost reduces overall

project cost by approx. $200 – $300 million

Production tax credit of $18 per MWhr for new nuclear capacity through 2021, subject to 2 limitations: $125 million per 1,000-MW per year 6,000-MW eligible, allocated among available

capacity Treasury Department/IRS rulemaking: Feb. 2006

The Value of Leverage

ESBWR AP1000

Debt/Equity Ratio

50/50Equity = 15%Debt = 8%

80/20Equity = 15%Debt = 5.5%

50/50Equity = 15%Debt = 8%

80/20Equity = 15%Debt = 5.5%

WACC 11.5% 7.4% 11.5% 7.4%

Overnight Cost

$3.0 billion $3.0 billion $2.2 billion $2.2 billion

Financing Cost

$853 million $580 million $626 million $425 million

Total Cost $3.85 billion $3.58 billion $2.83 billion $2.63 billion

Cost Saving due to Higher Leverage

$273 million $200 million

Note: $2,000/kW overnight capital cost; 51-month construction; 3-month start-up

New Generating Capacity: Estimated Power Costs($/MWh)

$39

$46

$49

$55

$57

$68

$0 $10 $20 $30 $40 $50 $60 $70 $80

Combined Cycle Natural Gas ($6.00/MMBtu)

Nuclear ($1,500/kW)

Pulverized Coal

Nuclear ($1,500/kW with 80% Loan Guarantee)

Nuclear ($2,000/kW with 80% Loan Guarantee)

Nuclear ($2,000/kW)

Protection of Private Sector Investment

Insurance protection against delays during construction and until commercial operation caused by factors beyond private sector’s control

Coverage: $500 million apiece for first two plants, $250 million for next four

Covered delays: NRC licensing delays, litigation delays

Major covered cost: Debt service Final rules: August 2006

New Tax Treatment for Decommissioning Funds

Legislation updates tax treatment of nuclear decommissioning trust funds to reflect competitive electricity markets Until now, tax treatment based on regulated, cost-of-

service business model

Repeals “cost of service” limitation: Allows all companies to establish qualified decommissioning funds and make deductible contributions

Allows companies to transfer monies in nonqualified funds into qualified funds and claim deduction Accretive to earnings

Long-Term Vision for Nuclear Energy

Creates robust R&D portfolio ($2.95 billion authorized) Nuclear Power 2010

$1 billion program cost-shared 50/50 with industry Complete design/engineering on two advanced

designs, test and validate new licensing process

Next Generation Nuclear Plant $1.125 billion Hydrogen production

Creates Assistant Secretary for Nuclear Energy at DOE

Understanding the Nuclear Licensing

Process

Michael J. Wallace Executive Vice President

Constellation Energy Group President, Constellation

Generation Group

Construction Permit

Application *10-30% of design

complete

Construction Permit

Application *10-30% of design

complete

Construction (design as you

build)

Construction (design as you

build)

Operating License Proceeding *

Completed plant idle during proceeding

Operating License Proceeding *

Completed plant idle during proceeding

Operating License Issued *

Operating License Issued *

OperationOperation

* Opportunity for intervention, hearings and delay

In this sequential process, regulatory reviews were overlapping: Process was

inefficient, unpredictable and invited abuse.

Overview of the Old “Two-Step” Licensing Process

Early Site Permit (ESP) *

Early Site Permit (ESP) *

ConstructionConstruction ITAAC Met **ITAAC Met **

OperationOperation

* Opportunity for public comment

** Opportunity for hearing, but threshold very high

Combined Construction

and Operating License (COL)*

Design >90%

Complete

Combined Construction

and Operating License (COL)*

Design >90%

Complete

Design Certification *

Design Certification *

In this process, all regulatory reviews (site, reactor design, construction/operating license) are completed before major capital investment

at risk. Potential for delay significantly reduced.

Overview of the New Licensing Process

ITAAC: A KeyRisk-Management Tool

ITAAC = Inspections, Tests, Analyses, Acceptance Criteria

ITAAC are quantitative indicators* that allow ... NRC to verify plant is built to specifications Project developer to prove plant is built to

specifications ITAAC are formally incorporated into COL If ITAAC are met, no grounds for hearings, no delay

after COL is issued

* For example, an ITAAC might specify that a certain pump will deliver a certain flow rate, or that a valve will close in a specified time.

The Process Leading to Commercial Operation

Project developer notifies NRC 180 days before fuel load; NRC publishes notice in Federal Register inviting requests for hearings

Threshold for intervention hard-wired to objective criteria: Hearing request granted only with prima facie evidence that one or more ITAAC has not been met, or will not be met

Even if NRC allows hearing, NRC can also allow fuel load and plant operation while hearing proceeds, if plant operation would not jeopardize public health and safety

Nuclear Plant Licensing: “Then and Now”

Then Now

Changing regulatorystandards and requirements

More stable process: NRC approves site and design, single license to build and operate, before construction begins and significant capital is placed “at risk”

No design standardization Standard NRC-certified designs

Inefficient construction practices Lessons learned from nuclear construction projects overseas incorporated, and modular construction practices

Design as you build Plant fully designed before construction begins

Multiple opportunities to intervene, cause delay

Opportunities to intervene limited to well-defined points in process, and must be based on objective evidence that ITAAC have not been, will not be, met

Technology still evolving Technology mature, stable designs

Time-to-Market Under New Licensing Process

First applications ESP: 33–36 months Design Certification: 36–60 months COL: 27–60 months (depending on

whether application references DC and/or ESP)

Nth applications COL: 22–36 months (depending on

whether application references ESP) Construction: 45 months from first

concrete to fuel load (achieved overseas)

Roadmap to Commercial Operation

0 1 2 3 4 5 6 7 8 9 10

Building a new nuclear plant is not a

one-step process or decision: It is a

sequence of 3 successive decisions

Time in Years (times shown are estimates)

1

2

3

Before a company can apply for a construction/operating license (COL), design and engineering work must be essentially complete and the reactor design certified by the NRC

FIRST DECISION: To file an application for a COL (a 3-4 year process, $50-90 million commitment)

SECOND DECISION (approx. 12 months before COL is issued): Long-lead procurement of major components and commodities

THIRD DECISION: proceed with construction

Industry Response to the 2005 Energy Legislation

Marvin S. Fertel Senior Vice President

Nuclear Energy Institute

Status of Reactor Designs

AP1000 (Westinghouse): Design certification expected in 2005/2006

ESBWR (General Electric): Design certification application filed August 2005, certification expected 2008

US EPR (UniStar): Application for design certification expected in 2007.

Before the Energy Legislation

Three companies have applied for Early Site Permits (ESPs) Dominion (North Anna) Entergy (Grand Gulf) Exelon (Clinton)

Three consortia Dominion (preparing COL for 2007 filing) NuStart (preparing COLs for 2007 filing)

• ESBWR at Grand Gulf• AP1000 at Bellefonte

TVA (feasibility study of new nuclear plant at Bellefonte)

Duke Energy considering COL

After the Energy Legislation

Progress Considering COL application in 2008, evaluating sites and

reactor vendors Southern Nuclear

In 2006, will file ESP application or preliminary data for COL application for Vogtle site

South Carolina E&G/Santee Cooper Considering COL

UniStar Nuclear Joint initiative by Constellation and Areva to develop

projects on own account, or in partnership with other companies

Entergy COL for ESBWR at River Bend

Financing New Nuclear: Significant Flexibility

Expect to see a spectrum of project and financing arrangements:

Regulated projects Merchant projects Varying degrees of leverage Projects built by single companies Projects built by consortia in order to share risk Projects built by companies on behalf of others Projects that are non-recourse to the project

developers’ balance sheets Projects that are full-recourse Other arrangements that we have not yet thought of

Prerequisites for NewNuclear Plant Deployment

Before Ordering a New Plant

Construction Commercial Operation

(1) Progress on technology design, technology cost, licensing issues (Nuclear Power 2010 Program)

(2) Price-Anderson renewal

(3) Protection against regulatory risk (construction delay, delay in commercial operation)

(4) Financial incentives to offset market risk of first few plants (i.e., high capital cost of first plants results in electricity that is not competitive)

2005 Energy Policy Act Satisfies All Prerequisites

Before Ordering a New Plant

Construction Commercial Operation

(1) Progress on technologydesign,technologycost, licensing issues (NuclearPower 2010 Program)

(2) Price-Anderson renewal

(3) Protection

AgainstRegulatoryRisk(constructiondelay, delay in commercial operation)

(4) Financial

incentives tooffset marketrisk of first few plants(i.e., highcapital cost of first plants results in electricity that is not competitive)

The Energy Policy Act of 2005: The

Implications for Nuclear Energy