Nuclear plant operations aren’t usually at the center of boardroom drama, but that’s precisely what’s happening in the latest controversy over the Duke-Progress merger.
Duke Energy, after a year-and-a-half convincing regulators that it would be a good idea, merged with Progress Energy to create the largest utility company in the U.S. Before the merger, everyone, perhaps most importantly regulators in North Carolina, home state to both Progress and Duke, was assured that Bill Johnson, CEO of Progress, would continue to head the merged company. Several hours (literally!) after the merger was approved, the board of the merged company, dominated by Duke-friendly directors, voted to name Jim Rogers, formerly the CEO of Duke, to replace Johnson atop the new company.
One of the explanations the Duke board cites for ousting Johnson is the poor performance of Progress’s nuclear plants under his management. Crystal River, one of the company’s 4 nuclear plants, has been shuttered since 2009. Apparently, the reactor containment building cracked during a plant upgrade, and subsequent repair attempts led to more cracking.
To get a longer-term view, I did my own comparison of operations at Duke and Progress nuclear plants. I have a dataset of monthly electricity output at all 103 U.S. nuclear reactors from 1970 to 2009. In my paper with Lucas Davis, we compare plants that were sold to nonutility buyers to plants that remained with regulated utilities. We find that the new owners faced strong incentives to improve operations and succeeded in increasing output by 10 percent compared to the utility reactors.
Using a similar methodology, I compared Duke’s seven and Progress’ five reactors to all the other reactors in the country in the years since Rogers and Johnson became CEOs. Essentially, I’m looking at changes in output at the Duke and Progress plants, controlling for changes in output at other plants over the same time period. It looks like Progress under Johnson’s leadership improved its operations relative to other plants while Duke slipped under Rogers’. The difference between Progress and Duke is about 13 percentage points – big.
Admittedly, my calculation does not include the most recent two-and-a-half years, and the board has those data. But, for any analysis, it’s important to use all possible information and extract a true signal from random noise. Certainly, the Crystal River outage has been very costly to Progress shareholders, but I imagine it’s difficult for the board to distinguish how much of that is Johnson’s fault versus his bad luck. In the years before Crystal River, and considering all of Progress’ plants, things were humming.
Whoever ends up as CEO, Duke Energy is now the second largest nuclear operating company in the U.S. with 12 reactors at 7 plants. Most interesting from my perspective, all of its reactors are cost-of-service regulated, meaning Duke can pass along all their costs to customers.
I will be curious to compare operations at the Duke Energy plants to plants owned by a company like Exelon, the biggest nuclear operator in the country. Both will be big companies, able to take advantage of any economies of scale available from operating multiple plants, like sharing information on best practices across plant operators. But, Duke will remain regulated while Exelon is selling its plants’ power in a deregulated market.
Comparing Duke’s and Exelon’s reactors over the next several years will help identify which factor is most important for operations: being part of a consolidated company or the incentives faced by that company.
Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. During Academic year 2018-19, she will serve as the Acting Associate Dean for Academic Affairs at Berkeley Haas. She is the Program Director of the National Bureau of Economic Research's Environment and Energy Economics Program, Faculty Director of The E2e Project, a research organization focused on energy efficiency and a research affiliate at the Energy Institute at Haas. She is also an affiliated faculty member of in the Agriculture and Resource Economics department and the Energy and Resources Group at Berkeley.
Wolfram has published extensively on the economics of energy markets. Her work has analyzed rural electrification programs in the developing world, energy efficiency programs in the US, the effects of environmental regulation on energy markets and the impact of privatization and restructuring in the US and UK. She is currently implementing several randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.
She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard.