The Georgia Public Service Commission has, for now at least, denied Georgia Power‘s (A3 stable) request to amend by August the certificate of convenience and necessity it granted for the Vogtle new nuclear construction project to reflect the higher cost estimates and revised schedule recently provided by the construction contractors.
That development is “credit negative” for the Southern (NYSE:SO) utility subsidiary, according to Moody’s Investors Service.
Instead, the PSC will take no action on the request until after the completion of the first of the two new units. Unit 3 would see its revised schedule pushed back by 18 months to the second quarter of 2019 and could be delayed further, Moody’s noted April 7.
Southern said in a regulatory filing in January that its team of contractors has concluded that construction of two new nuclear reactors, Units 3 and 4, will take 18 months longer than expected.
“This regulatory decision magnifies the impact of a credit negative 2013 stipulation between Georgia Power and the GPSC that waived the requirement that the GPSC approve increases to the certified project cost until after completion of Unit 3,” Moody’s said. Moody’s said that stipulation, combined with the recent PSC order, “shows the limits on the degree of regulatory backing for the project, even in a largely credit supportive regulatory environment.”
If the PSC had certified the higher costs and newly delayed schedule, Moody’s would have viewed such a move as “credit positive” and “an important signal” of the PSC’s continued support,
“As a result, the $4.418 billion capital cost currently certified by the GPSC no longer accurately reflects the most recent cost estimate of the contractors, which now stands $.627 billion higher at $5.045 billion,” Moody’s said.
“Moreover, because of this decision, the estimated additional financing costs above the $4.418 billion will not be recovered in rates during construction, but instead be recorded as [Allowance for Funds Used During Construction] AFUDC and recovered later,” Moody’s said.
This will have a modest negative effect on Georgia Power’s financial profile and credit metrics as recovery of these financing costs will be delayed, the ratings firm added.
But Moody’s also noted that the PSC has unanimously verified and approved all costs incurred through the 11th Vogtle Construction Monitoring (VCM) report ($2.8 billion as of 30 June 2014), although these approvals do not include a determination of prudence, and the GPSC can subsequently disallow certain costs if it determines them to be imprudent.
In the latest order, the PSC did acknowledge that the previous $6.11bn certified cost approved is not a cost recovery cap and that the 2013 stipulation does not create a cost recovery cap. “It also reiterated that, absent fraud, concealment, failure to disclose a material fact, or criminal misconduct, Georgia Power will be allowed recovery of all prudently incurred costs up to the certified amount and will be allowed recovery of all reasonable and prudent costs above the certified amount,” Moody’s said.
“We believe the pending litigation with the construction contractors over $425 million of earlier cost increases, one of the rationales for entering into the 2013 stipulation in the first place, has negatively affected the critical regulatory approval process that has been in place between the GPSC and the company since the outset of the Vogtle project,” Moody’s said.