Question

Please comment on the economic thought of the following statement, and state why. Then provide whether you agree or disagree with one or both bulleted statements:

Critics have charged that, in carrying out an economic analysis, the commercial nuclear power industry does not consider the cost of decommissioning, or “mothballing,” a nuclear power plant and that the analysis is therefore optimistic. As an example, consider the Tennessee Valley Authority’s Bellefont twin nuclear generating facility under construction at Scottsboro, in northern Alabama. The initial cost is $1.5 billion and the estimated life is 40 years. The annual operating and maintenance costs are assumed to be 4.6% of the initial cost during the first year and are expected to increase at an annual rate of 0.05% thereafter. Annual revenues are estimated to be three times the annual operating and maintenance costs throughout the life of the plant.

• The criticism that the economic analysis is over-optimistic because it omits “mothballing” costs is not justified, since the addition of a cost of 50% of the initial cost to “mothball” the plant decreases the 8.95% rate of return only to approximately 8.77%.
• If the estimated life of the plants is more realistically taken to be 25 years instead of 40 years, then the criticism is justified. By reducing the life to 25 years, the rate of return of approximately 9% without a “mothballing” cost drops to approximately 7.7% when a cost to “mothball” the plant equal to 50% of the initial cost is added to the analysis.

Answer 1

As per above statement it has been argued that Economic analysis is over optimistic for the production capacity of nuclear power plant as ''Cost of decommissioning ''or ''Mothballing Cost'' has not been included while analyzing the prediction.

MOTHBALLING COST : Mothballing cost is referred to a practice in which a company keeps equipment in a factory or other production facility in working order but does not use it on constant basis. Basically the reason behind this is already high operating cost and it would become even more expensive to use production capacity and to operate it. Hence the production faciity kept aside is used when there is need to use as per production .

Economits always do COST ANALYSIS before adding or omtting any cost to the production capacity. Cost Analysis refers to the Cost-Output realtionship. It means the econimists are concerned with determing the cost incurred in hiring the inputs and how well these can be rearranged to increase the productivity ( Output) of the firm.

As per the given example of Nuclear Power industry that doesn't include ''Mothballing Cost'' while predicting the output level is saidto be optimistic as due to non inclusion of the said cost will overestimate the production level of nuclear power plant.

Here we are given 3 scenarios by which we can analyze whether to omit Mothballing cost will oversetimate the prediction level.

1.

	VALUE IN TERMS OF INR	Estimated Life
Initial Cost	1500000000 ($1.5bn)	40 years
Annual operating cost	69000000 ( $ 6.9mn)
Rate of return	8.95%

As per the above data, there is incurred Initial cost of $ 1.5bn (In terms of INR) in the Tennessee Valley authority's Bellefont twin nuclear generating facility under construction . The Initial cost incurred is giving life expectancy of 40 years of nuclear plantwhich includes annual operating cost of $ 6.9 mn ( In INR terms) which will give away the annual return of 8.95%. The criticsm here is non inclusion of Mothballing cost which is giving us the overestimated rate of return of 8.95% as to use the production facility will have expenses that had kept aside for future use and will result into less rate of return .The Non inclusion of Mothballing cost here also overestimates the Life expectancy of nuclear plant.

2.  

	VALUE IN TERMS OF INR	Estimated Life
Intial Cost	750000000 (0.75 bn)	40 Years
Mothballing cost	750000000 (0.75 bn)
Rate of return	8.77%

Here as per above data we can say that economists are not much over-optimistic while analyzing future production level of nuclear plant. The total intial cost of 1.5 bn is including 50% mothballing cost which will give better analysis. The result of Including mothballing cost in initia cost is to get the most accurate rate of return which has now dropped to 8.77% from previous prediction of 8.95%. Inclusion of mothbalic cost gives us clear picture of rate of return as this cost includes regular maitainence , clerance and check up of production facilities which are kept aside for future use and are not used like other inputs.

3.

	VALUE IN TERMS OF INR	Estimated Life
Intial Cost	750000000 (0.75 bn)	25 Years
Mothballing cost	750000000 (0.75 bn)
Rate of return	7.77%

The above data gives us the most precise picture of economists analyzing of nuclear power plant production level.Here the economists have taken into account all the possible etsimates and their effects. Table 2 was including mothballing cost but it could not analyze the impact of mothballing cost on actual rate of return and life expectancy of nuclear power plant. The addition ofmohballing cost has drop down the rate of return to 7.7% from 8.95% ( when mothballing cost was excluded). Also the addition of mothballic cost will drop down the Life exectancy of nuclear plant to 25 years from 40 Years as inclusion of mothballic cost will raise the overall cost level while doing the cost analyses and will modify the production level accordingly.

CRUX :

Table 3 gives us the most accurate prediction because while analyzing ecomoists here have taken all the figures into account and theeby all the effects by adding those figures.Inclusion of Mothballing cost gives us compete picture of cost incurred and thereby its effect on Life expectancy, Rate of return and future cost predictions.