Obama's call for nuclear power will not protect risky nuclear investments

Despite President Obama’s call for the development of nuclear power in the State of the Union address, events in Florida, Vermont and as far away Abu Dhabi make clear that the Obama administration can not protect nuclear investors. Even with federal government support, other factors, such as cost overruns, state regulation, nuclear waste storage, decommissioning cost, and the hit portfolios would take in the event of a nuclear accident, combine to make nuclear an awful investment.

Despite the green energy rhetoric the Obama seems to prefer the two most environmentally harmful sources of energy — nuclear and coal.

The Obama administration seems uninterested in the cleanest fossil fuel alternative — natural gas, and are doing only token projects with regard to solar and wind energy. But despite Obama’s  call for building more nuclear power plants those considering investing should be wary.

As recent events summarized below make clear, nuclear power continues to be plagued by problems, and remains a bad investment idea.

Advisory downgrades Florida Power and Light to “sell” after cancellation of nuclear project

The Florida Public Utility Commission rejected Florida Power and Light’s (FPL) request for a major electricity rate increase, which would have paid for the construction of two Toshiba-Westinghouse nuclear reactors at its Turkey Point nuclear power plant near Miami. FPL responded by halting plans to build the two nuclear reactors.

Although state law authorized the Public Utility Commission to bill ratepayers in advance to build nuclear reactors, years before any electricity is actually delivered the Utility Commission decided to refuse FPL’s effort to burden ratepayers with the financial risks. of building new reactors, while offering little to none of the projected profits in return.

Entergy’s Vermont Yankee nuclear reactor facing problems

Radiation levels at least 40 times higher than that permitted for drinking water were found in a monitoring well at the Vermont Yankee nuclear power plant. Although no drinking water samples have shown contamination the evidence that radiation has escaped into ground water have endangered not only the health and environment, but efforts to obtain an extension of the plants operating license. The extension may be denied because rising radiation levels indicate radioactive water is leaking and contaminating the soil. The rising radiation levels have so spooked state residents that the state’s health department have been posting updates almost daily on the monitoring efforts.

If Vermont Yankee is denied the extension it will be the first such denial since 1989, when residents of Sacramento voted to close the Rancho Seco nuclear plant owned by a municipal utility in California. Although such decisions are usually decided by the federal government’s Nuclear Regulatory Commission, state agencies have played an increasing role in recent years.

Since Entergy bought Vermont Yankee in 2002, it has shown itself to be incompetent at running nuclear facilities. In 2007 a cooling tower at Vermont Yankee literally collapsed. A vice president for Entergy lied to state officials, telling them the Vermont Yankee plant did not have underground piping that carried radioactive water, when in fact it did. And the likelihood of further yet to be disclosed problems are believed to be the motivating factor in Entergy’s efforts to obtain permission to spin off Vermont Yankee and five other nuclear plants, and thus limit Entergy’s legal liability.

Areva loses an investor and a reactor deal with Abu Dhabi

The French oil company, Total, has canceled plans to invest in Areva after the French nuclear company lost a bid to build two new reactors in Abu Dhabi, United Arab Emirates. Total’s director general also questioned if EPR – Areva’s flagship new reactor – could be built less expensively without compromising safety following a joint statement by the Finnish, British and French nuclear safety bodies, stating the EPR’s control and safety systems should be changed to avoid both failing at once. Areva has been struggling financially because the EPR nuclear design has been subject to postponement and cancellations in major markets like the U.S. and China because of unsafe design.

Don’t bet your portfolio on nuclear investments

With oil prices down significantly from the time when they topped $100 a barrel it is easy to forget the atmosphere in 2005. That year, high energy prices led Congress to add $18.5 billion in loan guarantees for nuclear construction to the 2005 energy law.

 There are 104 nuclear reactors operating in the United States. All were ordered before the 1979 Three Mile Island accident. Since that time not a single U.S. nuclear reactor has been built.

Because the lower cost of generating nuclear electricity seems economically advantageous, some investment newsletters, such as Roger Conrad’s  Utility Forecaster,  urge investment in nuclear related stocks. In offering such advice, proponents of nuclear investing have often been negligent in failing to warn investors of potential problems.

In 2005 the business section of the NY Times cautioned “…investors should understand that betting on nuclear entails risk beyond the stock market’s usual shimmies and shakes. Domestic [nuclear] plants have operated without a major incident since Three Mile Island, but another big stumble, in the United States or abroad, could hobble the industry.”

After Three Mile Island, nuclear stocks plunged; it took years for many to recover. Several utilities were not permitted to open and operate completed nuclear plants, meaning the entire cost of construction was lost. The fact that serious talk of building additional nuclear plants was not raised for over 30 years speaks volumes.

Investment newsletters promoting nuclear do a disservice to investors who need to understand the potential risk, along with the potential upside. This article examines several recent developments investors should consider before contaminating their portfolio with stocks in nuclear companies.

DWINDLING GOVERNMENT SUPPORT

The nuclear industry relies heavily on government subsidies to be profitable, and it is becoming abundantly clear that government support for the nuclear industry is fading fast, with federal support evaporating on everything from loan guarantees, to design approvals, to nuclear waste disposal.

• President Obama’s removal of $50 billion in further loan guarantees from his stimulus bill signals the new administration may be having second thoughts on nuclear expansion.
• Funding to open the Yucca Mountain Nuclear Waste facility has been cut to a level that assures it will not be opening in the foreseeable future.
• Industry hopes that approval of standardized designs to speed up construction and result in significant cost savings have been disappointed, with the Nuclear Regulator Commission yet to approve two design proposals. (An advanced design submitted by Westinghouse, and another design by Areva).
• At the state government level, the industry succeeded in having regulators in the states of Georgia and Florida raise electric rates so consumers pay for construction before it begins, but when Missouri refused a pre-construction rate increase, Ameren UE abandoned plans to build a new nuclear plant
• In Maryland, Constellation Energy may be facing a 10% rate cut to compensate consumers for the Utilities proposed nuclear power venture.

COST OVERRUNS, DELAYS AND CANCELLATIONS

Nor is lack of government support the only problem. Cost overruns and construction delays continue to plague the industry.

• Exelon canceled plans to build a new nuclear plant in Texas.
• Ontario Providence in Canada has suspended plans to build new nuclear reactors
• Ameren UE suspended plans to build a plant in Missouri.

Indeed, of 45 nuclear plants being built around the world, 22 have encountered construction delays.

Recently Areva learned how damaging nuclear development projects could be, when construction problems with a Finland nuclear reactor not only caused a steep drop in company earnings, but had a cascading effect, both undermining Areva’s efforts to get Nuclear Regulatory Commission approval for the reactor design in the U.S., and in leading to the cancellation of a nuclear reactor of the same design in France.

Cancellations can be worse than delays, especially if construction has begun or been completed. In such cases regulators may not allow investors to recover the cost of a project that does not go on-line. In this regard it is important to remember that although it is extremely rare for a regulated utility to undergo bankruptcy, one of the few such bankruptcies on record is that of WHOOPS, a Washington State utility that went out of business because of the high cost of nuclear power. The high cost of construction, operation, caring for the nuclear reactor once it ceases to operate, and on-site storage of nuclear waste can all negatively impact profitability.

STILL NO STORAGE SOLUTION FOR NUCLEAR WASTE

The U.S. Department of Energy was to begin accepting spent fuel at the Yucca Mountain repository in January, 1998. Now, after over a decade of delay, it appears the Obama administration is getting ready to kill the project . In March the Obama Administration fulfilled a campaign promise by proposing to cut most funds for the Yucca Mountain nuclear waste project. In July, the U.S. Senate went even further, reducing Obama’s proposed $56 million in funding for a Yucca Mountain study to $29 million, sapping the Nuclear Regulatory Commission of funds needed for review of the application to approve the waste repository.

Energy Department officials have confirmed it’s the administration’s policy that Yucca Mountain never be used. “I’m convinced that for the foreseeable future, for the next 50 to 100 years, we’ll simply store the spent fuel rods on site,”  Senator Reid told reporters. That would pose a severe problem for the nuclear industry, which must bear the cost of monitoring, maintenance and operation of the steel-lined pools and steel concrete casks near the reactors, where the waste has been accumulating for decades.

Considering that there are so many other good investment ideas, is it really wise to contaminate your portfolio with nuclear?

 Below is a partial list of companies that build nuclear reactors:

• Areva
• General Electric
• Toshiba (through it’s Westinghouse division)

The following utilities use nuclear power to generate electricity:

• Ameren (AEE)
• CEG
• CenterPoint Energy (CNP)
• Central Vt. Pub Service (CV)
• Dominion (D)
• Duke (DUK)
• Entergy (ETR)
• Exelon (EXC)
• FirstEnergy (FE)
• FPL
• Progress Energy (PGN)
• Public Service Enterprise Group (PEG)
• Pinnacle West (PNW)
• SCANA (SGC)
• Southern Company ((SO)
• Westar Energy (WO)
• Xcel (XEL)
• Elec de France (ECIFF)
• ENEL (Italy)
• RWE (Bulgaria)

How I survived the market collapse and outperformed the professionals

About 2 years ago, I got the upsetting news that my dear uncle had passed away. I was so devastated by the news, that I did not realize until I was in the airport that I had forgotten to put on shoes, and was wearing my slippers as I boarded the flight to attend memorial services. Eventually I learned that he had left me an inheritance.

But I didn’t need a new car. My old car worked just fine and had good gas mileage.
Besides, buying a new car seemed like a celebration of sorts, and I did not feel like celebrating. I was determined not to squander the inheritance and wanted to use it in a way that would somehow honor his memory.

My uncle was a brilliant man. Before going on vacation he would learn the language and study the history of places he was planning to visit. After 20 years as a physician, he wanted new challenges, so went back to school and became a psychotherapist . He had a life-long love of learning, so using the inheritance to learn something new would honor his memory.

That is how I began, for the first time in my life, to learn about investing. Talk about learning something new—before deciding to learn investing I rarely looked at the business section of the newspaper!

My education began with the purchase of “The Bond Book.” My inclination was to invest in bonds because I knew they guaranteed a return of the initial capital, and paid interest. But I learned that most bonds are sold on a secondary market and that the only bonds the average person could buy at face value were those offered by the U.S. Treasury. Although I later learned that a few companies issued bonds for direct purchase, bond investing appeared too complicated, so I continued researching, reading over 30 books before finally deciding to open an on-line account at a discount broker.

I started by buying several different mutual funds. Later I built a portfolio of stocks in socially responsible companies. At first my stocks were doing well, with my overall portfolio usually showing gains of about 15% at the end of each day. Then the market began its decline.

And as the market fell, so did my portfolio, losing 10, 20 and at one point over 30%. I knew the idea was to “buy low, sell high,” so I continued buying as stocks went down, far exceeding the amount I initially planned to invest.

I had no experience and virtually everyone was encouraging me to cut my losses and sell. But although I was beginning to worry, I did not panic and sell. Instead I waited patiently for stocks to return to at least the original purchase price, selling each time the market rallied. Because most stocks I owned were solid companies I knew they would eventually recover, but how long would it take and would they ever come back to their former level? Or would I suffer permanent losses?

I started thinking that despite all my study I had blown it. Then, one evening while watching the news, I learned Warren Buffet’s portfolio was down 30%. That sounded like a bigger loss then I remembered, so I checked my own portfolio. Imagine my surprise at seeing my portfolio was down by only 20%! Now it might have been just good luck, but I figured I was doing something right. It gave me the confidence to stay the course, continuing to sell on rallies, and pouring money back into stocks in solid companies at bargain prices.

Buying as prices went down turned losing investments into profitable ones. One stock I had bought at $110 a share plunged, eventually going low as $27 a share. By continuing to buy as it went down, I reduced my average price. As a result, that stock, on which I was losing thousands, today sits in my portfolio as one of my most profitable investments, despite the fact that the share price is still far less then $110 a share. But I had only so much money, and ran out of investment capital before the market hit the March lows, so I never was able to get the best bargains.

To be sure, I made mistakes. I should have reserved capital and brought heavily during the March bottom, and I missed some big gains by selling too early, sometimes for profits of less then 10%, because I feared they’d go down again. But I lost little, selling very few stocks at a loss, and more than making up for the losses in profits from other trades.

As I write this, my portfolio is showing a 4% gain. But even more fascinating is the comparison with the mutual funds. After all, I bought those funds because they are managed by professionals who supposedly know the market, so how does the 4% gain in my portfolio compare? A 4 star rated emerging market fund I own is down 17%; of two large cap growth funds I own, one with a 5 star rating, is down 9%, another with a 4 star rating, is down 14%.

So there you have it, my story of how someone with no knowledge of stocks outperformed the professionals.

Believe me, I am no genius when it comes to the stock market, I do not devote hours each day to it, and I am horrible at math, but with just a little effort to get good information, I believe most people can do this too. I hope this blog will encourage other people learn and earn more from trading and investing.