The Liability Equivalence of Unfunded Nuclear Decommissioning Costs

Abstract:     
For public health and safety reasons, a nuclear power plant needs to be decommissioned at the end of its useful life. In a recent report, the General Accounting Office (GAO 1999, p. 16) has called into question the adequacy of funding for decommissioning. In the context of the ongoing deregulation of the electric utility industry, there is considerable uncertainty at this time as to how much of the unfunded decommissioning costs will be recovered from ratepayers.

In this study, we utilize alternative current cost and present value estimates of unfunded decommissioning costs to investigate whether investors are cognizant of these potential claims on utility net assets. Our findings are largely consistent with the recent Financial Accounting Standards Board (2000, para. 5) exposure draft which indicates that decommissioning costs should be recognized in the financial statements as a liability. However, the results suggest that unfunded decommissioning obligations have a smaller incremental negative effect on the stock price than other utility liabilities indicating that investors expect partial recovery of these unfunded costs from ratepayers. Given the uncertainty inherent in present value estimates and the uncertainty associated with the future recoverability of unfunded decommissioning costs from ratepayers, additional disclosures may mitigate uncertainty and facilitate investor assessment of these potential obligations.

Keywords: nuclear decommissioning costs, unfunded obligations, liability equivalence

JEL Classification: M4

Accepted Paper Series