Time to Pull the Plug on Entergy Corporation?

Another rejection for Entergy Corporation (NYSE: ETR  ) looks to be imminent, and yet the company's executives appear confident they can win a protracted legal fight with New York state regulators and elected officials. Of course, if they do then Entergy's share price is likely headed higher, but if history repeats itself, investors could find themselves cursing the darkness as the best nuclear power plant in the Northeast shuts down.

Entergy disappoints shareholders, yet again
After two years of work on a plan in which Entergy would spin off and merge its power transmission business with ITC Holdings (NYSE: ITC  ) , the two companies in mid-December said they were giving up on the transaction. The announcement came just three days after Mississippi regulators rejected the proposed merger.

A very expensive deal to lose
Had the sale been done according to plan, Entergy would have received $1.78 billion and never have needed to worry about $2 billion in maintenance expense over the next five years. Entergy also would have netted hundreds of millions of dollars in savings from avoided costs.

The upgrades ITC would have made to the Entergy transmission business it sought to acquire were to eliminate congestion points, allowing Entergy and other ITC transmission customers to buy larger amounts of wholesale electric power during peak demand times. This would have cost much less than the backup power generation capacity Entergy must currently maintain. Peter Fox-Penner in his 2010 book, Smart Power: Climate Change, the Smart Grid, and the Future of Electric Utilities, explains the potential financial benefit from avoided cost.

One of the largest quantifiable benefits from the Smart Grid is avoided capital costs—the costs saved by either deferring or never building more upstream generators, transmission lines, or distribution systems. For the types of distributed generation (DG) that provide energy mainly at peak times, the value of the avoided capital can easily be five to ten times as large as the saved energy.

Entergy has been a disappointment to shareholders before
In 2010, the New York Public Service Commission rejected Entergy's plan to divest its nuclear business. "The spin-off of the plants, mostly located in the Northeast, would have created the nation's first, stand-alone nuclear generation company," reported The Wall Street Journal.

Regulators, however, rejected the plan because they were concerned Entergy was loading the spinoff with too much debt.

Some state regulators and elected officials in New York want Indian Point shut down. Among this group is current New York governor Andrew Cuomo. He has led the charge to expedite the review and approval process for new transmission lines. The aim is to lessen southern New York's dependence on Indian Point. The nuclear power plant right now generates about 30% of the electric power consumed by New York City and Westchester County ratepayers.

There are 3 nuclear reactors at Indian Point
Reactor 1 was retired in 1974. Reactor 2 is in service pending the outcome of an application to extend its license for 20 years. The original 40-year license expired in September 2013. Reactor 3 faces license expiration in December 2015.

Source: Entergy

The Indian Point fight
The New York Department of Environmental Conservation rejected Indian Point's water quality permit application, which is a problem. The state water quality permit is a prerequisite to any federal extension of the license. The environmental regulator says it rejected the application because the Indian Point water cooling system is not compliant with the Federal Clean Water Act. Entergy argues its water cooling system is grandfathered.

The cost of compliance may exceed the value of Indian Point
Were Entergy to build the stadium-size water cooling system demanded for a water quality permit, it would run something in the order of "$1.1 billion and would require shutting both reactors down entirely for 42 weeks," reported The New York Times. Moreover, some industry experts question whether such an investment might force Entergy to shut down Indian Point for economic reasons, which they say would likely produce a ripple effect.

"'The early closure of Entergy's 'crown jewel' among the nuclear portfolio, as the only asset producing any material cash flow ... would likely necessitate the closure or sale of its entire remaining [northern states] nuclear portfolio,'" explained UBS analyst Julian Dumoulin-Smith for Platts Nucleonics Week.

Entergy investors might be plugged in through a surge protector
No application to extend a nuclear power plant license in the U.S. has been denied. Furthermore, although New York governor Andrew Cuomo has called for the shutdown of Indian Point and for the construction of new transmission lines to reduce southern New York state's dependence on the power plant, these things are unlikely to change the need for Indian Point. And as the Poughkeepsie Journal reported, there is already opposition to the construction of new transmission lines:

"The plans ignited controversy along its routes, notably in northern Dutchess County as well as in Columbia, where lines sometimes run near homes and farms. One fear was potential seizure of private land through eminent domain if a plan were chosen that would require a wider right-of-way to increase capacity."

And as far as shutting down Indian Point goes, this too seems unlikely. Per the company's 2012 annual report to shareholders:

[A]t a Manhattan Institute event held in September 2012, economist Jonathan Lesser, President of Continental Economics, gave a report that concluded closing Indian Point would result in an increase in annual electric costs in New York state by $1.5 billion to $2.2 billion between 2016 and 2030; the loss of 26,000 to 40,000 jobs annually; violation of reliability standards and rolling blackouts; and a total economic impact of $1.8 billion to $2.7 billion per year. According to Lesser, all replacement scenarios for Indian Point result in electric rate increases for residential, commercial and industrial customers.

Final thoughts
Entergy could be forced to shut down Indian Point if the price of a 20-year license extension is a $1.1 billion water cooling system. Also, opposition to the Indian Point nuclear power plant is somewhat higher-profile than what has been seen elsewhere in the country by other nuclear power plants that have sought to extend their operating licenses. This means federal regulators may take into consideration other factors in their decision on whether or not to extend the life of Indian Point.


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