Progress Energy Learns To Regret Self-Managing To Lower Costs

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Progress Energy‘s disastrous do-it-yourself upgrade to the Crystal River nuclear plant was such a risky idea that the company’s own internal report warned against it.

The company’s lack of expertise and experience “outweigh strengths and opportunities,” the report said. “Those weaknesses cannot be changed to strengths in sufficient time to plan and implement” the project.

The report’s conclusion: Although the opportunity to save money self-managing the replacement of steam generators inside the nuclear containment building “is huge, the risk is just as large.”

Progress subsequently took steps to address the risks and decided to self-manage the project anyway. But its plan failed. The concrete containment building cracked. Two more major cracks followed.

Progress wants its customers to pay at least $670 million of a $2.5 billion repair bill.

That can’t happen without agreement from the Florida Public Service Commission, which has scheduled hearings for June where the word “prudent” will be a main focus.

The St. Petersburg Times has detailed how Progress conducted the work at the Crystal River job differently from other utilities and how subcontractors on site raised warnings about the unique approach.

No one, Progress officials maintain, could have predicted or prevented the problems at Crystal River.

But the internal report undermines that argument, said several utility, nuclear and legal experts including Mark Cooper, senior fellow at the Institute for Energy and the Environment at Vermont Law School.

In fact, he said, it “is a smoking gun.”

Progress Energy began looking into options for replacing the aging steam generators at the plant in Citrus County in the early 2000s.  Only two engineering firms had been the prime contractor on all the other similar projects in the country. Progress wanted to see if it could oversee the project itself and save money.


The internal report completed by the summer of 2004, titled “Proposal for Self Managed Steam Generator Replacement,” outlined the pros and cons.

  1. Self-managing the project scheduled to begin in 2009 would reduce redundancies between Progress Energy and a prime contractor, the report concluded.
  2. The number of engineers could be reduced, cutting the cost by almost $7 million.
  3. Construction and other costs could be decreased by at least $11 million.
  4. And eliminating the standard 10 percent fee paid to a prime contractor would save $10 million on a $100 million portion of the project.

Total potential savings: $27.9 million. (Later, once all contracts had been negotiated, Progress believed actual savings would be about $15 million.)


Still, the report went on to say that “large scale engineering and construction management is not our core business.” Delays related to the utility’s lack of expertise could wipe out any savings.

The report concluded that Progress should hire a prime contractor.

In a memo dated Aug. 6, 2004, William J. Flanagan, a Progress Energy manager, reiterated to Terry that the company’s own internal report found that self-management was risky.

“It was concluded,” Flanagan noted in the memo, “that Progress Energy was an electric utility company and not an engineering and construction company. … There is a high risk that any savings realized by elimination of oversight positions and contractor fees would be offset by even higher delay costs.”

Parts of Progress Energy’s management ranks were abuzz about the prospect, and risks, of self-managing.

“We will need to make sure our decisions are well documented,” one memo stated.

“The pain is ours… no matter who manages it,” another memo pointed out.

Progress decided to self-manage in early 2005.

“I was aware that there were risks involved with us self-managing,” Clayton Scott Hinnant, Progress’ former chief nuclear officer, said during a recent deposition about the cracked containment wall. Progress did it knowing “we’re the owner and we’re going to share in whatever downside or upside occurs.”

When the work began in 2009, Progress had hired two contractors for critical jobs that had no experience performing the specific tasks they were asked to do.

The second contractor was the demolition company that was cutting the building when workers found a large crack on Oct. 2, 2009.


Cooper, the senior fellow at Vermont Law School, said Progress should have heeded its own warning in the 2004 report.

“It was a self-interested, shortsighted decision that no prudent person would have made,” Cooper said. “They clearly did not do the prudent thing.”


The Public Service Commission has scheduled a meeting for June to hear testimony from consumer advocates and Progress Energy. Based on the findings, the commission will determine whether Progress’ actions were prudent.

If Progress wins, customers will be on the hook for part of the $2.5 billion. Otherwise, Progress and its investors will have to find a way to pay for the repairs. Progress has said insurance will pay for most of the cost.

Progress spokesman Tim Leljedal said in an email that the utility will address the issues raised by the internal report as it files arguments in the PSC case.


Cooper said Progress should not be entitled to collect any money from customers going forward. He said in a capitalist society, companies should not get rewarded for making a gamble and failing.

“If they had pulled it off, they would have made a lot of money,” Cooper said. “You can’t let them make the same amount of money if they got it wrong. This is not the way prudence is supposed to work.”



Arnie Gundersen put it another way.

“Prudency says you can be dumb, but you can’t be stupid,” said Gundersen, a nuclear expert who has testified in front of public service commissions nationwide, including Florida. “It’s okay to be dumb, if it appears you went through a process that was logical. From my standpoint, this memo shows they weren’t prudent. They knew it was wrong and they did it anyway. That wasn’t prudent.”



Mark J. Roe, a Harvard law professor specializing in corporate governance, said not only does Progress’ decision to ignore its own report raise questions about its case before the state Public Service Commission, but it could subject the company to lawsuits from customers or investors.

Progress made a “really weighty decision” to disregard the internal report, Roe said. If the company did not get a third-party to independently assess the merits of self-managing, the decision could be tough to defend in court.

“In a corporate lawsuit, the (court) would say this was not a reasonable judgment in this case,” he concluded.



J.R. Kelly, the Florida public counsel who represents customers on utility matters before the state, said his office is trying to understand why Progress chose to ignore its own warnings given them about the approach to the project.

“You have to ask the question, Why?” Kelly said. “Why did you self-manage? It does not seem to follow rationally nor reasonably that you would self-manage when everything seems to point the other way.”


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