Living in the deregulated world

30 March 2001

The Nuclear Energy Agency has produced a report entitled: “Nuclear Regulatory Challenges Arising from Competition in Electricity Markets”. What are the implications of the conclusions presented by the report?

It has almost become a cliché for talks and articles to begin with the words: “In the current deregulated electricity environment...” The NEA report Nuclear Regulatory Challenges Arising from Competition in Electricity Markets begins with the words: “In recent years, a world-wide trend has been developing to introduce competition in electricity markets (commonly referred to as economic deregulation). While not all countries or their various jurisdictions have fully introduced market competition, the trend is gathering momentum and virtually all nuclear operating companies are feeling competitive pressures to reduce operating costs and to increase electricity production.”

One area of concern that has been widely expressed both inside and outside the industy has been that of how the greater emphasis on economic competitiveness will affect nuclear safety regulatory bodies.

Those nuclear safety regulatory bodies had previously typically restricted their oversight to ensuring that the utilities had a stable source of income to operate the plant safely, to decommission the plants upon their retirement, and to safely manage the spent nuclear fuel and radioactive waste. While the nuclear safety regulatory bodies are neutral regarding the introduction of competition in electricity markets, they must be aware of the safety challenges produced by these changes, and should consider whether new regulatory response strategies are warranted.

Where electricity market competition has been introduced, it has been causing many nuclear operators to request reductions in what they view as being unnecessary

regulatory burdens. In this respect, the regulatory body may decide to respond to the new competitive environment by examining how it may improve regulatory effectiveness and efficiency.

Other changes that are taking place are the consolidation of the smaller nuclear operating companies into larger operating companies, as well as the purchase of nuclear plants by foreign companies.

In the face of these challenges, the nuclear regulator must reaffirm that necessary levels of safety are not being reduced because of electricity market competition.

Regulatory challenges

While the full impact of electricity market competition has not yet been felt in all countries, it is becoming clear that the changes taking place are presenting the safety regulator with new issues to understand and deal with, and may even affect the nature of the established relationship between nuclear operators and the regulator.

The wide scope and depth of the issues involved illustrate the challenge to the safety regulator to understand and deal with the changes taking place in the nuclear industry under market competition. It is especially important for the regulator to develop an early understanding of these changes and the operator’s approach to managing the challenges before they develop into actual safety problems. Merely by placing the issues on the agenda for discussion with the senior management of the operator organisations, the regulator may be effective in ensuring that management retains its focus on nuclear safety.

In fact, it is possible that the operator’s responses to market competition issues can lead to improved safety performance if there is an enlightened approach to improved planning, more efficient work practices, and better overall management of day-to-day operations.

Governance issues

The most obvious changes arising from privatisation and competition are those affecting the governance structures of the operating organisations. Some potential problems include:

•The dilution of responsibilities for safety due to a change in ownership, and portions of nuclear site being leased out to other companies.

•The decoupling of owners and business managers at the top of the organisation from the technical managers involved in operating the nuclear plants.

•A significantly greater use of low-price contractors.

•Financial qualification of licensees may be reduced.

•Less than adequate funds being made available for decommissioning of plants and for spent fuel and radioactive waste management.

Where competition has begun, the industry has consolidated through corporate mergers. The general trend is towards there being fewer but larger nuclear operating organisations.

As this restructuring continues, it is important for the regulator to understand the organisational changes that occur and to monitor the financial and organisational changes that follow in the wake of restructuring. For example, when there is a change in ownership of nuclear plants, the regulator should make it clear to the new owner’s senior managers that they, as well as the plant managers, have responsibility for nuclear safety.

It is common practice for the owners of nuclear power plants to reduce operating and maintenance costs by reducing the size of plant staff and by outsourcing some work to specialist contractor organisations. While these actions may be seen as being normal business decisions in response to these competitive pressures, the effect over time may be a serious loss of technical competance and resources within the operator’s organisation. Contributing to the loss of actual technical capability might be a growing belief among the remaining workers that senior management places increasing priority on economics over safety. In the extreme case, the operator could possibly lose the ability to effectively manage the safety of the plants.

The use of contractors is not inherently a safety challenge. Operators have used contractors for specialised tasks and general support for years. Where the safety challenge arises is when the use of contractors becomes so widespread that the operator’s staff finds it difficult to be able to control the contractor’s work and thereby loses the understanding of that work and eventually loses the core capability in the operator organisation in order to manage the plant effectively.

The regulator should hold the operator responsible for ensuring that the contractors are technically competant and financially sound, for specifying and overseeing the contractor’s work products, and for maintaining sufficient technical staff within the operator organisation to manage effectively the safety of the plants.

Another example of the effect of market competition is that in a fully competitive electricity market, the operator only receives income from the electricity that is generated and sold at the prevailing market prices. If the plants have low capacity factors and the generating costs are high, a nuclear plant could become unprofitable. If that situation were to persist, then the regulator could be faced with the question of whether the operator remained financially qualified to operate the nuclear plants safely and, in addition, whether the operator has adequate funds to be able to meet its obligations for plant site decommissioning and long-term spent fuel and radwaste management.

The regulator may want to examine whether its authority is adequate to cover the situation where a nuclear operator encounters severe financial difficulty. In particular, the regulator should require third-party liability insurance and segregated funding arrangements, such as trust funds, to meet the operator’s obligations for plant site decommissioning and long-term spent fuel and radwaste management.

These issues, while not new for the regulator, are likely to be persistent, and they point to the need for the regulator to be prepared to deal with them as ongoing safety challenges. As an essential step in preparing to deal with the issues is for the regulator to fully understand the economic conditions of the competitive electricity market, and therefore the competitive pressures facing the operator. These conditions will be very different from the days of regulated markets. In addition to the steady pressure on costs and production, because of expected electricity price volatility, there will be added pressure to keep the nuclear plants on line during those times when prices are highest.

It is important for the regulator to remain in close communication with the operator’s senior management in order to learn first hand the operator’s proposed actions in response to competitive pressures, and how the operator intends to maintain safe operation of the plants.

The regulator will also have to examine whether the regulations and regulatory guidance documents are adequate to deal with the challenges of market competition. In the UK, for example, the regulatory body found it that it was necessary to introduce a new licence condition requiring the operator to effectively manage changes to its organisational structure and use of resources, and in some cases requiring the regulator’s concurrence with the changes. The regulator may conclude that some controls over reductions in the operator’s manpower are necessary.

Another area that may be examined is whether regulatory guidance is needed to establish minimum standards on the use of contractors for conducting essential safety work associated with the plants.

Direct safety challenges

Some of the changes resulting from market competition can lead to direct safety challenges in the operation of nuclear plants. These challenges are largely the result of competitive pressures being applied on the operators to increase electricity generation and reduce the costs of generation. Some of theses potential direct safety challenges include:

•Operator management focused on economics over safety.

•More pressure on workers, perhaps overstressing them.

•Excessive overtime that causes worker fatigue.

•Lower quality of work (reduced expertise, lower quality equipment).

•Plant ageing problems (reduced maintenance and pressure for life extension).

•Reduced safety margins (power upgrades, increased fuel burnup).

•Less investment for equipment upgrades and safety backfits.

•Reduced equipment reliability due to changed maintenance strategies (reduced preventative maintenance, increased on-line maintenance).

•Decreased electricity grid stability and reliability.

The types of issues that are presented by the economic pressure on operators to reduce costs and increase electricity production are similar to the traditional issues that have long been of concern to regulators. However, under market conditions, the pressures on the operators will be more intense and will be relentless, and they may lead workers to supress or self-censor the reporting of safety problems.

The collective impact of these direct safety challenges may result in a decline in safety performance. The regulatory response to these challenges will be similar to the standard regulatory oversight programme of looking for early signs of declining performance. However, the regulator may want to increase the focus on safety culture issues, such as signs that plant worker morale is being negatively affected by job security concerns that are brought about by staff reductions.

Likewise, the regulator may want to give increased attention to safety management processes, as the operator attempts to compensate for staffing reductions by work process improvements.

In most countries introducing electricity competition, the generating companies may no longer have responsibility for grid stability and reliability. Instead, this responsibility will be held by an independent grid regulator. However, for nuclear power plants, grid reliability can be a safety issue because it can affect the frequency of degraded grid conditions and offsite power losses to the plant. The response to this challenge is for the regulator to understand fully the new responsibilities for grid stability and reliability, and to have regular discussions with the grid regulator. The safety regulator should ensure that the plant operator has adequate procedures in place to be able to monitor grid stability and reliability changes and their effects on nuclear plant operations.

The regulator should stay in close communication with operator senior management to understand and ensure the adequacy of the operator’s proposed actions in response to these challenges.

Infrastructure issues

The challenges of competition come at a time when a general consolidation and reduction in size of the nuclear industry is already under way in most OECD countries, partly in anticipation of competitive pressures.

These changes in the nuclear technology infrastructure present yet another set of potential challenges for the regulator:

•Less staff expertise being available in the operator organisations, at vendors and at contractors.

•Diffusion of design authority capability (loss of design base knowledge).

•Less co-operation among operators.

•Less safety research being carried out by operators, with consequently less support for their safety positions.

•More pressure to reduce the regulatory safety research programmes.

The general challenge posed by the nuclear technology infrastructure issues is the potential for a gradual decrease in technical safety expertise in the nuclear operator organisations and in the broader nuclear industry, including vendors, contractors and universities. This challenge is especially difficult for the regulatory body to cope with because its regulatory authority generally extends only as far as the operator organisations.

The primary regulatory response to this challenge is to discuss with senior management the operator’s plans for maintaining the essential skill sets that are needed among the plant staff to operate the plant safely. In particular, the regulators will have to ensure that the training programmes remain adequate for the plant workers. A related area for discussion is how the operator intends to maintain its design authority capability, and thereby maintain the plant design basis.

To deal with the broader issue of loss of expertise across the nuclear industry, the regulator may choose to have a meeting with all operator organisations in order to determine their plans for the collective support of the nuclear industry, such as owners groups, industry groups sponsoring nuclear research, and university nuclear engineering departments.

The potential reduction in safety research is of particular concern, because it has the direct effect of loss of continuing safety knowledge as well as the consequent effect of loss of research facilities and expertise and the loss of academic interest in nuclear safety research.

The regulator will have to be firm in defining what research information is necessary in order to justify the operator’s safety positions, for example, on higher fuel burnups. Further, the regulator will have to be firm in defining an adequate programme and seeking funds for a regulatory research programme.

Increased pressures on the regulatory body

Just as market competition will produce competitive pressures on nuclear operators, there will also be corresponding pressures placed on the regulatory body that challenges the way that the regulator has carried out its activities in the past.

These pressures may include the demand to reduced perceived unnecessary regulatory burdens and a general resistancce by operators to consider plant backfits and other safety improvements sought by the regulator. Some potential increased pressures are:

•New regulatory competencies are needed.

•Less expertise might be available to the regulator.

•More aggressive relations between operator and regulator.

•Information flow reduced because of concerns over the sensitive nature of much market information.

•Legislative basis for enforcement may be inadequate.

•Pressure on the regulator to avoid the requiring shutdown of plants, as projected long shutdown may lead to the plant having to be decommissioned.

•Operators will demand more international consistency of regulations.

•Pressure to reduce the regulatory impact costs (fees, research and size of regulatory body).

•Increased direct pressure on the regulator to reduce perceived unnnecessary regulatory burdens.

All of these issues will combine to produce an increased workload for the regulatory body. In the face of these broad regulatory challenges and new pressures, the regulator may want to conduct a broad self-assessment in order to be able to examine what changes in the regulatory body may be called for in light of the changes that are currently taking place in the nuclear industry.

A special area for the regulator to examine is what new skills and competencies may be needed by the regulatory staff, especially in the areas of market economics, finance, organisational issues and business management. Similarly, the regulator may want to examine how it intends to maintain the technical skills and historical safety knowledge among its own staff in the future.

Yet another challenge for the regulator is the pressure for international regulatory consistency where operators face the competitive pressures of selling electricity across national boundaries. In western Europe, for instance, there is an initiative for safety regulators from several countries to work together to harmonise regulatory requirements, largely in response to these pressures brought about by market competition.

The regulator may want to review the current body of regulations and guidance documents and to examine current enforcement authority to see if different requirements may be needed and, just as important, whether all of the regulations and other requirements are still necessary and effective.

Implications of the pressure

The competitive climate of electricity markets has not changed the basic responsibility of the operators to safely operate the nuclear power plants.

In independently ensuring that nuclear plants are operated safely amid the changes of market competition, the regulator must ensure that the operator maintains the staff expertise, design basis information, research data and resources to support safe operation.

The main elements involved in this new regulatory approach can be summarised as follows:

•The regulator must fully understand the economic conditions of the competitive electricity market and the range of competitive pressures that are facing the operator. It will be necessary to stay in close communication with the senior management of the operator in order to learn first hand the operator’s proposed changes and how the operator intends to maintain safe operation of the plant.

•The regulator will have to consider how its existing technical skills will be maintained and what new skill sets and competencies must be added to the regulatory staff, particularly in areas such as market economics, finance, business management, safety culture and organisational issues.

•The regulatory inspection programme should be re-examined to ensure that it is adequate to be able to detect any early signs of a decline in safety performance.

•The regulator will have to define what research information is necessary in order to justify the operator’s safety positions, and similiarly will have to define an adequate regulatory research programme.

•The regulator will have to consider whether the current set of regulations and enforcement authority is adequate to cover the changing conditions brought about by market competition.

•Regulatory bodies should continue to share essential safety information with their international colleagues, particularly operating event experience, and will have to make special efforts to share their experiences as electricity market competition unfolds.

This new regulatory approach to the challenges arising from electricity market competition implies a larger workload for nuclear safety regulatory bodies in the future. The regulators may want to conduct a self-assessment of its current workload and priorities in order to plan how to accommodate the new regulatory approach within current regulatory resources.

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