Atomic Energy Costing

132 Pages·1998·5.931 MB·English

by  Warren Young (auth.)

Atomic Energy Costing
Topics in Regulatory Economics and Policy Series
Michael A. Crew, Editor
Graduate School of Management, Rutgers University
Newark, New Jersey, U.S.A.
Previously published books in the series:
Crew,M.:
Competition and the Regulation of Utilities
Crew, M., and P. Kleindorfer:
Competition and Innovation in Postal Services
Thompson, H.:
Regulatory Finance: Financial Foundations ofR ate ofR eturn Regulation
Crew, M.:
Economic Innovations in Public Utility Regulation
Crew, M., and P. Kleindorfer:
The Economics of Postal Service
Crew, M., and P. Kleindorfer:
Regulation and the Nature ofP ostal and Delivery Services
Oren, S. and S. Smith:
Service Opportunities for Electric Utilities: Creating Differentiated Products
Kolbe, A L., W. B. Tye, and S. C. Myers:
Regulatory Risk: Economic Principles and Applications to Natural Gas Pipelines
Pechman, C.:
Regulating Power: The Economics ofE lectricity in the Information Age
Gordon, R. L.:
Regulation and Economic Analysis: A Critique Over Two Centuries
Blackmon, G.:
Incentive Regulation and the Regulations ofI ncentives
Crew, M.:
Incentive Regulation for Public Utilities
Crew, M.:
Commercialization ofP ostal and Delivery Services
Abbott, T. A:
Health Care Policy and Regulation
Goff, B.:
Regulation and Macroeconomic Performance
Coate, M. B., and A N. Kleit:
The Economics of the Antitrust Process
Franz, R. S.:
X-Efficiency: Theory, Evidence and Applications (Second Edition)
Crew, M.:
Pricing and Regulatory Innovations Under Increasing Competition
Crew, M., and P. Kleindorfer:
Managing Change in the Postal Delivery Industries
Awerbuch, S. and A Preston:
The Virtual Utility
Gabel, D. and D. Weiman:
Opening Networks to Competition: The Regulation and Pricing ofA ccess
Zaccour, G.:
Deregulation ofE lectric Utilities
Atomic Energy Costing
Warren Y oung
Bar-Ilan University
Israel
1lI...
"
Springer Science+Business Media, LLC.
Library orCongress Cataloging-in-Publication Data
Young. Warren. 1949-
Atomic energy costing I Warren Young ..
p. cm. --(Topies in regulatory economics and policy series)
Includes bibliographical references.
ISBN 978-1-4613-7252-3 ISBN 978-1-4615-4963-5 (eBook)
DOI 10.1007/978-1-4615-4963-5
1. Nuclear industry--Cost effectiveness. 2. Nuclear energy
-Economic aspects. 3. Nuclear power plants--Cosi of operat ion.
4. Nuclear energy--Govemment poliey--United States. 5. Nuclear
energy--Govemment policy--Great Britain. 6. Nuclear energy
-Govemment policy--Japan. 1. Title. II. Series: Topics in
regulatory economics and policy.
HD9698.A2Y68 1998
388.4'362148-dc21 98-31166
CIP
Copyright © 1998 Springer Science+Business Media New York
Originally published by Kluwcr Academic Publishers in 1998
Softcover reprint of the hardcover 1s t edition 1998
AU rights reserved. No pari ofthis publication may be reproduced, stored in a
retrieval system or transmined in any foon or by any means, mechanical, pholo
copying. record ing, or otherwise, wilhout the prior wrinen pennission of the
publisher, Springer Science+Business Media, LLC.
Printed an acid-free paper.
Contents
Preface
Introduction, Chronology and Background: A "New World" with "Free Energy" 1
Key Questions and Debates, Ancient and Modern 1
1
"Ancient Debates" over Costing and Control of Atomic Energy, 1946--54 9
A. Economic Costing, Consequences, and Control-the Cowles Project
and lsard Studies and Lerner's approach 9
B. Variations on the theme: the UK Ca~Blackett, lsard, Cherwell,
Harrod and Cockcroft 19
2
Patterns, Paramteters, and Politicization of Atomic Energy Costing 23
A. The Cost "Enigma" and Private Enterprise: profits and subsidies, in
terest and discount rates, private and social costs 23
B. Politicization of Atomic Energy Costing: a new political economy per
spective 30
3
Agency Theoretic and Welfare Aspects of Atomic Energy Costing and Regulation 39
A. Alternate Principal-Agent approaches to Public Utilities and their
Regulation: from "control" and "capture" to "regulatory environment"
46
B. Pigovian and Coasian aspects of the Nuclear Cost Cycle
C. "Planning Context," "Official Technology" and the notion of
"capture": a critique 49
4
Modern Costing and Regulation Debates: from OPEC-1 Onwards 51
A. The nuclear-political cost cycle: from "independence" to "constraints" 52
B. A Free Lunch Again?-the New Atomic Energy Costing Debate
amongst economists and in the economic press from 1983 onwards 61
5
Atomic Power and Its Regulation: A Comparative Analysis and Critique of Projections 75
A. The Japanese Nuclear Program-an overview 75
B. Japanese and US Regulatory Approaches in Theory and Practice 79
C. The UK case: regulatory failure or government failure? 82
D. US Department of Energy Long Term Projections for Nuclear Power:
a costing-based critique 85
6
Summary and Conclusions: Atomic Energy Costing-Retrospect and Prospect 91
Retrospect: "No Free Lunch" 91
Prospect: from regulated "plutonium" to deregulated "hydrogen-based"
economies 97
Appendix: 101
Simon, Marschak and Schurr on the '''Economic' and 'Trigger' Effects
case
of Technological Olange-the of Atomic Energy: from the
19405 to 19905" 109
Bibliography 113
Index 121
PREFACE
In the centennial year of the birth of Sir John Cockcroft, first master of my Cam
bridge College, Churchill, and the first man to split the atomic nucleus by artificial
means, it is indeed relevant to consider the outcome of his efforts at developing
atomic power. From the earliest days of the construction of Calder Hall-the first
nuclear power station in Britain-and the establishment of the British Atomic Re
search Center at Harwell, and the Chalk River Nuclear Station in Canada, through the
"Windscale" nuclear accident in Britain, up to the present, when some 20% of UK
energy is derived from nuclear power, the Cockcroft legacy is felt. As the British
historian Mark Goldie put it, in the "pure and sanguine 1950s," Cockcroft had almost
absolute "faith in 'peaceful atoms' and in the boundless, almost cost free, energy that
atoms would soon produce" (Goldie, 1997, p. 21). But, as the eminent economist
Frank Hahn recalled, "the only failing Cockcroft had" was "that he wasn't up to
much in economics." Indeed, Hahn recalled that he "had to explain" to Cockcroft
"the economic notion of optimum durability" as it related to the "interest rate" in the
context of building Churchill College with "hand-made bricks." After his explana
tion, as Hahn recalled "Cockcroft smiled and proceeded to order more hand-made
bricks" (Hahn, 1997, p. 27). Indeed, as most nuclear scientists and engineers of his
age who also believed in "almost cost free energy," Cockcroft was optimistic about
atomic power costs, to such an extent that in 1957 he forecast that US nuclear power
costs would eventually be some 50% more expensive that that in Britain, while also
projecting that both were to be cheaper than conventional energy costs. But alas, this,
however, did not turn out to be the case. Rather, the lack of economic intuition and
understanding, especially as regards the importance of the interest rate brought
not only Cockcroft but other scientists and engineers to think of the issue of atomic
energy costing as an engineering problem to be solved, rather than as an eco
nomic problem to be analyzed and appraised in cost-benefit terms. And it is this
that is the central message of the material to be presented in this book.
In the most general terms, this book deals with atomic energy costing on three lev
els: patterns, parameters, and politicization of atomic energy costing. In the Introduc-
viii ATOMIC ENERGY COSTING
tion, an overview of the key questions and debates over atomic power, both "ancient"
and modem, is provided, that is, an overview of some of the debates over and the
early costing of atomic energy between 1946 and 1954. A brief overall chronology of
developments in atomic energy in the US and Britain over the period is provided here
in order to understand the background to the debates and early costing studies. With
regard to the first level, in Chapter 1 Economic costing and economic consequences
as reflected in the debates and early costing studies is discussed in detail. In this
chapter, the focus is on the Cowles Project, which involved, among others, Marschak
and Simon, and the work of Isard, who was a contemporary critic of the Cowles
methodology.
In addition, the issue of economic control of atomic energy in the US, that is, by
government, public sector monopoly, or private enterprise as it was presented at the
time by, among others, Lerner, is discussed. Some British variations on this theme by
none other than Harrod, who was an active observer and participant in the contempo
rary behind the scenes debate in the UK regarding economic costing, consequences,
and control of atomic energy, are also presented in this chapter. As for the second
level, Chapter 2 focuses initially upon the parameters of profits and subsidies and
interest and discount rates and how they affected cost-benefit appraisals of nuclear
energy, and also deals with the issue of private versus social costs. This is done by
reference, first, to the very important albeit almost totally forgotten 1951 SSRC Re
port by Dahl and Brown, which was not even mentioned by Mullenbach in his 1963
book, and by reference to Mullenbach's 1963 work itself and the Ford Foundation
Reports (1974, 1977). The third level, politicization, is dealt with by first focusing on
the role of atomic energy legislation and regulation in the perspective of new political
economy in Chapter 2. In Chapter 3, the politicization of atomic energy costing is
also dealt with via a discussion of alternate agency theoretic and welfare aspects of
atomic energy costing. In this context, the "regulatory capture" model of Laffont and
Tirole (1991, 1993) is applied to the US case and extended to include the "sovereign
political environment" accordingly, Pigovian and Coasian aspects of the Nuclear
Cost Cycle are also discussed, and a critique of work that disregards the "regulatory
capture" notion is presented. Chapter 4 presents a detailed survey of the modem
costing and regulation debates in the US and UK in the context of what I call the
"nuclear-political cost cycle," while Chapter 5 presents a comparative analysis of
atomic power and its regulation in the US, UK and Japan and a critique of DOE pro
jections. Chapter 6 sums up the material and attempts to derive some conclusions
regarding the atomic energy costing debates. The extended "regulatory capture"
model presented in Chapter 3 is also further developed to take into account the dif
ferential information structure regarding the cost of atomic energy in terms of
"captured" and "non-captured" cost vectors, reflecting penalties for "false" informa
tion or non-disclosure such as characterized the Japanese case, as against the US
case. Recent technological developments are presented which may change the very
nature and efficacy of the provision of nuclear-based electricity generation. Finally, a
detailed survey of the correspondence between Marschak and Simon regarding the
Cowles study, and Simon's early contributions to the analysis of the economic effects
of technological change as applied to the case of atomic energy are dealt with in an
Appendix.
PREFACE ix
At this point I would like to acknowledge the assistance of Prof. Herbert Simon
and the staffs of Carnegie-Mellon, UCLA and Nuffield College, Oxford Libraries,
where research was carried out with a grant from the Royal Economic Society. Once
again, I am indebted to my long-suffering family who allowed me to "carry on"
where others would have stopped me, and to Bar l1an University, for providing finan
cial support to enable me to complete this book.
INTRODUCTION, CHRONOLOGY
AND BACKGROUND: A "NEW
WORLD" WITH "FREE ENERGY"
KEY QUESTIONS AND DEBATES, ANCIENT AND MODERN
There is an old African saying to the effect that "what goes around comes around." In
no instance is this more apt than atomic energy, especially in the US case, which has
been described by a number of observers as going from a "rags to riches to rags"
situation (Weingast, 1980, p. 232). In its initial phase, 1956-63, the commercial
atomic energy program in the US case relied, for the most part, on direct government
subsidies for research and development, as will be seen below. Afterwards, with the
end of direct subsidies, costs became somewhat "competitive" (in terms of fuel but
not capital cost), and orders for generating plants expanded. Due to the inflation of
the late 1960s, the capital costs of nuclear plants rose more rapidly than those of
other electricity generating plants (oil and coal) and plant orders fell. With the 1973-
4 oil crisis, nuclear energy ostensibly looked attractive, and orders peaked. But by the
late 1970s, expectations of the "competitive advantage" of nuclear generated elec
tricity did not materialize; and with rising externalities (safety and waste management
and disposal costs), orders for new nuclear power plants in the US declined and came
virtually to a halt by 1976 (Weingast, 1980, p. 240). In contrast to the view of We in
gast, however, the atomic energy program in the US became stalled not only "in re
sponse to the active opposition of environmentalist groups" (Weingast, 1980. p. 231).
Rather, the rise and fall of the commercial atomic energy program in the US and
Britain was, in my view, due to factors beyond the opposition of one specific interest
group, that is the environmentalist lobby. The factors that drove the atomic energy
program and finally brought it to a halt-in the US case at least-were based upon
W. Young, Atomic Energy Costing
© Springer Science+Business Media New York 1998