Xcel defends handling of Monticello nuclear plant upgrade

Top executives of Xcel Energy said Tuesday that the utility acted reasonably during the costly, five-year rebuilding of its Monticello nuclear power plant — and that customers, not investors, should pay for it.

The project to extend the life of the 1970s-era plant and to boost its output was successfully completed last year. Now, utilities regulators are investigating why the price tag rose to $665 million, more than double the original estimate, in what is believed to be the largest utility cost overrun in state history.

In more than 750 pages of regulatory filings defending their actions, executives of the Minneapolis-based utility disputed allegations made in July by government-hired experts that the company misunderstood the complexity of the job, poorly planned it and insufficiently supervised contractors.

Dave Sparby, chief executive of Xcel's Minnesota regional operations, said the project, even with the higher price tag, remains overwhelmingly cost effective. "It is safer and even more reliable,'' Sparby said in an interview with the Star Tribune.

The investigation carries big stakes for Xcel investors and customers. The state Commerce Department, which has a key role in the inquiry, wants investors to absorb a significant part of the cost overrun. Xcel estimated investors' share would amount to $94 million, about half the profit Xcel reported in its most recent three-month period. The next stage of the investigation will be a trial-like proceeding before an administrative judge in October.

The cost of renovating the Monticello plant, 45 miles northwest of the Twin Cities, also is a driver in Xcel's request for a rate increase over two years. Xcel recently reduced its pending request by $43 million, but still seeks a $248 million rate hike, or 5.1 percent this year and 3.8 percent in 2015.

"We essentially rebuilt an almost-new power plant around the existing core and reactor," Sparby said in written testimony filed with the state Public Utilities Commission.

During the project, Xcel replaced major equipment, including pumps, turbine and electrical systems, in what Xcel executives say turned out to be a complex, more costly effort than imagined in 2008. The plant is operating, but not yet at the increased output of 671 megawatts. Xcel says that should happen by the end of the year after tests are completed.

"The nature of these projects is such that every other company that has undertaken a significant project basically trying to rebuild an operating nuclear power plant has faced complexities and ended up spending more than they predicted at the beginning," said Laura McCarten, a regional vice president for Xcel. "But in the end, the final cost provides great value for our customers and it was the right thing to do."

Two years into the project, Xcel replaced the design and construction team, brought in Bechtel Corp. to take over the project and hired a new Xcel executive to take charge. In testimony filed Tuesday, Xcel clarified that one of the original firms was retained as the main mechanical subcontractor for continuity.

Xcel executives, backed up by their own nuclear experts, defended managers' actions on such matters as whether they understood that some of the new, larger equipment had to be squeezed into spaces designed for smaller, original equipment.

The utility's chief nuclear officer, Timothy O'Connor, said in written testimony that engineers were well aware of the tight-space problem and worked hard to address it. In one case, he testified, the original design for installing a new piece of equipment would have left it not fully functional, so it had to be redesigned. "Far from being imprudent, our approach saved us several million dollars by not proceeding with suboptimal designs," he said.

Sparby also repeated in his testimony the statements he made in July to the Star Tribune about the Xcel board of directors' role. He said the state's expert was incorrect to say Xcel's board cut the project's budget in 2007 and put it on a fast track that hobbled it. Sparby said the board approved the cost estimate of an engineering team, and that the company had legitimate reasons to want the project finished sooner rather than later. At the time, he said, the utility was projecting increased electrical demand and higher natural gas prices.

"While we were wrong about the final costs, it was a reasonable basis from which to begin," Sparby said.

Ultimately, regulators must decide whether the investment was prudent. Sparby said state regulators need to consider whether it was "reasonable under the circumstances" and he questioned the state's approach. "We urge the commission to avoid applying hindsight to otherwise reasonable decisions and actions," he said.

In the investigation's next step, a state administrative law judge, Steve Mihalchick, will examine the state's evidence, Xcel's response and other information submitted in writing and at a hearing in early October. Mihalchick will issue a report to the Public Utilities Commission, which next year will decide if Xcel's ratepayers must pay for all or part of the cost overruns.

David Shaffer • 612-673-7090 • @ShafferStrib