3 V V Solution Provider AIG Env ironmental AIG Environmental: Environmental Risk Management Solutions Make Deals Happ...

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Solution Provider AIG Env ironmental

AIG Environmental: Environmental Risk Management Solutions Make Deals Happen As the power industry continues its transformation with massive corporate restructuring and a steady shift to retail-oriented systems, many multi-million dollar deals falter. In complex transactions such as mergers and acquisitions, portfolios with major real estate assets that assume environmental contamination pose justifiable, sometimes fatal, complications. Price negotiations stumble from liability disputes, unwanted legal obligations, and real commercial risk. Even with due diligence, unanswered questions about the extent of contamination and cost of cleanup can kill a deal altogether. The reality is that environmental loss is usually a major hit to earnings. AIG Environmental® offers sophisticated environmental insurance products and services that help power companies keep focused on business, not cleanup. With protection for all parties, our innovative financial and risk management solutions are designed to facilitate deals by minimizing environmental uncertainties and controlling costs. These commercially viable programs are not your run-of-the-mill general liability policies. Instead, they are written with the express acknowledgement that environmental contamination is the issue. For financial transactions involving contaminated properties, energy companies can manage their environmental liabilities and risks with flexible, affordable coverages, ample liability limits, and longer policy periods. AIG Environmental’s menu of customized options offers ways to “fund” the cleanup, “cap” the risks of cost overruns without coverage redundancy or numerous endorsements, and provide coverage and defense for future risks. The programs include: • Pollution Legal Liability Select®, which covers key environmental risks that accompany ownership or operation of a facility from known and unknown pollution conditions. • Cleanup Cost Cap Program, which helps to contain and quantify the cost of remedi-

ation projects, even on a portfolio basis. The commercial “risk” of exceeding the dollar value of the negotiated self-insured portion of any liability is “transferred” to the insurer. • Environmental Protection Program, which combines risk transfer and self-funding mechanisms with environmental loss control. An effective way to meet your financial responsibilities under federal laws imposed on hazardous waste treatment, storage, and disposal facilities. By increasing buyer and seller confidence with environmental insurance provisions, a better deal can be negotiated to protect shareholders and satisfy lender requirements without a “messy” balance sheet. Environmental insurance provisions aid multi-party settlements of disputed environmental liabilities, even when dealing with Superfund sites. As a component of an investment strategy or balance sheet management, corporate officers can successfully manage money, time, and results when dealing with environmental liabilities, even those associated with nuclear decommissioning. It’s a practical, effective solution for energy companies that want to keep moving ahead by concentrating on building more profitable operations.

C O N TA C T I N F O R M AT I O N Joseph L. Boren President & Chief Executive Officer Kenneth B. Cornell Executive Vice President & Chief Underwriting Officer Lawrence Stern Vice President, National Accounts Janet Moylan Vice President, Marketing

AIG Environmental 1801 K Street NW, Suite 404L Washington, DC 20006 Phone 202.861.4700 Fax 202.775.2442 AIG Environmental 175 Water Street, 12th Floor New York, NY 10038 Business Contact Michael Natale Power Industry Specialist Phone 202.861.8653 [email protected]

About AIG Environmental AIG Environmental, a division of American International Group (AIG), offers numerous programs and products to cover a broad range of environmental exposures, including a portfolio of products that specifically address environmental exposures faced by the power industry. Member companies of AIG form the leading U.S.-based international insurance organization and the nation’s largest underwriter of commercial and industrial coverages. AIG Environmental’s risk management tools protect power companies by removing the financial uncertainties of environmental liabilities resulting in more secure transactions.



White Paper

Profitability Risk Assessment at Nuclear Power Plants Under Electricity Deregulation WRITTEN BY Geoffrey Rothwell Department of Economics Stanford University

Geoffrey Rothwell has taught at Stanford since 1986. He is a senior lecturer and director of the honors programs in the Department of Economics and the Public Policy Program. He received his Ph.D. in Economics from the University of California, Berkeley, in 1985 and was a postdoctoral fellow at the California Institute of Technology, 19851986. He has published dozens of articles on all aspects of nuclear economics, including the front and back ends of the nuclear fuel cycle, and nuclear power plant construction and operating costs, productivity, reliability, and decommissioning. His current research focuses on nuclear power competitiveness under electricity deregulation, industry restructuring, and carbon dioxide emissions reduction. This research was sponsored by the Department of Energy and the Energy Information Administration.


With the deregulation of electricity generation and the restructuring of the electric utilities industry, owners of nuclear power plants can increase their company’s value by either selling electricity or selling their plants. Both options involve reorienting plant management away from the static environment of rate-of-return regulation toward the dynamic environment of market competition where there is no safety net of guaranteed revenues. This white paper will discuss maximizing nuclear power plant value in competitive electricity markets while the U.S. Nuclear Regulatory Commission experiments with “Risk-Informed and Performance-Based Regulation.” Measuring Nuclear Power Plant Performance in the 1990s With competition in electricity markets, here is concern that reliability and safety at nuclear power plants (NPPs) will be compromised. Some argue that safety shortcuts will be taken by NPP operators to reduce cost. But without rate regulation (and the ability to pass through the costs of repairs and replacement power to cover commitments during outages due to unsafe practices), NPP operators are learning that both high safety and low cost are required under competition. Without guaranteed revenues, extended regulatory outages for safety problems or an outage due to an accident could lead to a total loss of plant equity. To make a profit in a competitive market, base-load nuclear power plants must attempt to (1) maximize the number of megawatt hours (MWh) generated (output) during the year to cover fixed costs while (2) minimizing the cost per MWh to cover variable costs. This is done by maximizing the capacity factor and minimizing total cost. In this white paper I’ll discuss the primary per formance indicators (output and cost) and how they are functionally related to several secondary per formance indicators. (In the next section I discuss the NRC’s safety Per formance Indicators.) First, the annual capacity factor (CF) is output divided by the maximum megawatts that could be generated during a year (annual capacity, e.g., Maximum Dependable

Capacity, MDC). (So, output is equal to capacity times the capacity factor.) The capacity factor is equal to the capacity utilization rate (the capacity factor while the plant is operating) times the ser vice (or availability) factor (the percent of the time the plant is operating). The service factor is equal to scheduled availability rate times the reliability factor. To maximize output, the plant operator must: 1) increase capacity utilization (CU) by minimizing production losses during operation (1 - CU), i.e., by pushing the plant closer to its designed capacity limits; 2) increase the scheduled availability (SA) factor by minimizing the scheduled outage rate (1 – SA), i.e., by reducing outage maintenance time; and 3) increase the reliability factor (RF) by minimizing the Forced Outage Rate (1 – RF). To summarize, CF = CU x SA x RF, i.e., the capacity factor is a function of several underlying per formance indicators, including reliability. During the last 10 years, nuclear power plants have increased the median industry capacity factor from 68 percent in 1989 to 88 percent in 1998 (because several plants were experiencing unusual outages in 1997, the data in that year is skewed). See Table 1. This was done by: • Reducing the median production losses during operation (1 - CU) from 5.9 percent to 0.7 percent • Reducing the median scheduled outage