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September 26, 2007

NUCLEAR UTILITIES REDEFINE ONE WORD TO BULLDOZE FOR NEW PLANTS

By Elliot Blair Smith

Sept. 25 (Bloomberg) -- On tree-lined bluffs overlooking the
Chesapeake Bay, where anti-nuclear activists won a landmark
environmental victory 36 years ago, Constellation Energy Group Inc. is
engineering atomic power's comeback.

This time, even if there are protests, bulldozers will roll.

That's because the Baltimore-based utility and its allies have found a
way around a longstanding regulatory policy they say added a year or
more to construction times for nuclear plants.

In April, the U.S. Nuclear Regulatory Commission agreed to industry
demands that it reduce its oversight of initial work at reactor sites.
By narrowing its definition of the word "construction" in agency
rules, the NRC put off the required public hearings and permits that
have waylaid past projects.

The untold story of how the energy lobby and the federal government
worked to clear a path for new reactors -- backed by an NRC
commissioner seeking a job in the industry -- reveals one way pro-
nuclear forces have stolen a march on environmentalists.

"It was a very smart, strategic move to work in the background before
ever submitting a new proposal for a plant," says Steve Warner, 42,
founder of the anti-nuclear Chesapeake Safe Energy Coalition, who says
he was caught flat-footed.

Utilities and the administration of President George W. Bush say they
want new reactors on line by 2015. Power companies are rushing to take
advantage of federal tax credits and loan guarantees in the Energy
Policy Act of 2005, some of which begin to expire next year. The NRC
says it expects to receive as many as 21 applications to build 32 new
reactors, the first of which will be filed today by NRG Energy Inc. of
Princeton, New Jersey.

$4 Billion

Constellation, the largest U.S. shareholder-owned electricity
wholesaler, proposes building as many as seven new reactors through a
joint venture with Paris-based Electricite de France SA, Europe's
largest electricity utility.

The first of these would be on a rural tract near Calvert Cliffs State
Park in Lusby, Maryland, an hour's drive from Washington.
Constellation already operates two 1970s-era nuclear generators at the
site.

In June 2005, Constellation CEO Mayo Shattuck III hosted Bush and NRC
commissioners on a tour of the existing plant, where Bush promoted the
new energy legislation. The company declined to comment on whether
Shattuck, who serves on the executive committee of the industry's
trade group, the Nuclear Energy Institute, played a role in winning
government support for a change in the construction rule.

Building a new reactor will take $4 billion and seven years, including
42 months of regulatory reviews, according to industry and government
estimates.

'Unnecessary Barriers'

To save time and expense, utilities have been working with the NRC
through the NEI trade group to streamline agency licensing.

The new construction rule is only the latest such initiative. In 2004,
the NRC limited the public's ability to gather evidence and question
witnesses during hearings.

"We recognized that we did have these unnecessary barriers that were
not allowing people to move forward," says former NRC Commissioner
Jeffrey Merrifield, who voted for the change in the construction rule
while seeking a new job under an unusual arrangement designed to avoid
conflicts of interest.

In July, Merrifield, a 43-year-old lawyer and former Republican
congressional staffer, joined the nuclear plant builder Shaw Group
Inc. as a senior vice president.

Environmentalists, belatedly, are realizing what they lost.

"Streamlining is a pseudonym for confiscation -- it's Orwellian,"
says Michele Boyd, the recently departed legislative director of the
energy program at Public Citizen, a consumer lobby in Washington.
"They're streamlining it for the industry, which requires that the
public is not involved."

Environmental Consequences

The construction limits on nuclear power plants date to 1971. That
year, Chesapeake Bay conservationists trying to protect the Calvert
Cliffs area won a federal appeals court decision that forced the NRC's
predecessor, the Atomic Energy Commission, to consider the
environmental consequences of a reactor's construction as part of its
oversight.

At the time, Johns Hopkins University scientists warned that cooling
water discharged from a reactor into the bay might harm Maryland's
famous blue crabs and oysters.

The efforts to block construction eventually failed.

Yet to carry out the court's ruling, the Atomic Energy Commission
decided that, beginning in 1972, it would require a public hearing and
a reactor construction permit before the first shovelful of dirt could
be moved.

The stricter reviews slowed licensing, and, after the meltdown
accident at Three Mile Island in 1979, all but derailed the process.
It took almost a quarter-century for the most recent U.S. reactor to
be built and licensed in 1996.

"We were concerned that it was just too lengthy of a process," says
Steven Frantz, an energy lawyer at Morgan, Lewis & Bockius LLP in
Washington who works for the nuclear lobby.

Competing With Coal

Holding time-and-material costs in check is an essential element of
the nuclear power industry's current effort to become more competitive
with coal and natural gas. The cost of building an atomic plant -- 41
percent greater than for a conventional coal plant, according to the
U.S. Energy Information Administration -- is balanced by lower fuel
costs.

After accounting for all building and operating expenses, electricity
from a new U.S. reactor will still cost about 13 percent more in 2015
than it would from one of today's coal plants, according to the EIA.

Constellation lawyer Carey Fleming was complaining about the
regulatory obstacles to building during a meeting at NEI headquarters
in Washington in April 2006 when a potential solution emerged, several
participants say. Constellation declined to make Fleming available for
an interview.

"My question was: What's the definition of 'construction'? Can we
look at that, and, in fact, redefine that?" says David Repka, an
energy attorney at Winston & Strawn LLP in Washington.

Draft by Lawyers

The NEI -- whose members include nuclear utilities, manufacturers and
builders -- hired Winston & Strawn and two other Washington law firms
to develop an argument that oversight should begin with construction
of the reactor itself, not with the property and structures around it.

The chairman of Winston & Strawn's energy practice is James Curtiss, a
Constellation director and former NRC commissioner.

The power of the lawyers' brief was in its simplicity: By redefining
"construction" to exclude excavation, road building and the erection
of some cooling towers, the NRC could reduce its oversight without
violating the 1971 court order.

On May 25, 2006, Adrian Heymer, the NEI's senior director of new plant
development, conveyed the argument in a letter to the commission,
saying the prohibition on pre-licensing construction was "excessive
and unnecessary" and "should be changed."

Already grappling with a nearly decade-long overhaul of plant
licensing, the commission in October took on the industry proposal as
its own and expedited the adoption process.

'They Dug the Hole'

At a Nov. 1 public hearing, Geary Mizuno, a senior attorney in the
NRC's Office of General Counsel, warned that agency objectivity might
be vulnerable to a court challenge should the NRC consider an
application after a site was partially developed.

"The question," Mizuno said, "is whether the reviewing judge is
going to say: 'Mr. NRC, you've got to be joking. They dug the hole.
You didn't even determine whether this site is a suitable site for a
plant, and yet you expect me to believe that the agency is going to
act in an unbiased fashion?"'

Andrew Kugler, senior environmental project manager in the NRC's New
Reactor Office, protested to the general counsel's office. Kugler said
in an e-mail that the proposed rule would exclude from NRC regulation
"probably 90 percent of the true environmental impacts of
construction."

The NEI pressed its case before the full commission on Nov. 9.
Merrifield encouraged the lobbyists to expand their arguments in a
written follow-up, saying that among agency streamlining measures he
had "pushed on this one in particular."

Allied Utilities

At the time, Merrifield had just announced plans to leave the
commission and had begun one of his last assignments, chairing an
agency task force on ways to accelerate licensing.

Several utilities wrote the NRC to support the proposed expansion of
their authority, including Constellation; Dominion Resources Inc. of
Richmond, Virginia; Duke Energy Corp. of Charlotte, North Carolina;
Southern Co. of Atlanta; and plant designers Areva SA and General
Electric Co.

On April 17, the NEI got what it wanted. The agency approved the new
construction rule. And it did so in less than six months, compared
with the 11 years it had needed to produce a new drug-and-alcohol
testing procedure for nuclear plant workers.

The rule will go into effect 30 days after it is published in the
Federal Register, probably later this year.

An NRC analysis supporting the change pointed out that any pre-
licensing construction still would be reviewed before a final permit
is issued.

Dissenting Voice

Commissioner Gregory Jaczko, a Democrat who was the lone dissenter on
the five-member body, says he worries the rule will boomerang. "It
raises a question about what is the baseline when you come in and do
an environmental impact statement," Jaczko says. "We may find
ourselves raising legal issues that are going to cause problems down
the road."

The National Association of Environmental Professionals -- whose
members consult for the NRC about its obligations under the National
Environmental Policy Act of 1969, the law cited in the appeals court's
Calvert Cliffs decision -- says it was unaware of the rule change
until contacted by Bloomberg.

"It didn't hit our radar," says Ronald Deverman, vice president of
the Malden, Massachusetts-based group.

In a statement responding to the new rule, the association says the
NRC must take special care to ensure that licensing reviews remain
"objective and unaffected" by utility investments in pre-licensing
construction.

'Valuable Experience'

Among the companies that stand to benefit from the expanded authority
is Merrifield's new employer. Shaw Group, based in Baton Rouge,
Louisiana, says it has worked on 95 percent of the nuclear power
plants in the U.S. It owns 20 percent of Pittsburgh-based Westinghouse
Electric Co., whose designs are employed in half of the world's
reactors.

Shaw announced it had hired Merrifield on July 11. He reports to
Executive Vice President Richard Gill, who is chairman of the NEI
trade group's executive committee.

In an accompanying statement, Shaw Chief Executive Officer James
Bernhard Jr. said, "Mr. Merrifield brings valuable regulatory and
legislative experience to the Shaw Group as we expand our ability to
engineer, design and construct advanced nuclear power generating
facilities."

'Firewall' Lawyer

Merrifield was paid $154,600 a year at the NRC. In Shaw's industry
peer group, $705,409 is the median compensation for a senior vice
president, according to ERI Economic Research Institute of Redmond,
Washington. Shaw spokesman Sean Clancy said any comparison would be
speculative and that the company and Merrifield had no further
comment.

John Szabo, a senior attorney in the NRC's Office of General Counsel,
says he authorized Merrifield to look for an industry job while
continuing to make commission policy. Merrifield had told him prior to
initiating the search that he was hiring a lawyer to conduct it for
him, Szabo says.

In an interview, Merrifield said he structured the search that way as
a "firewall" that he described as "relatively unique."

"I'm not aware of anyone else having done this," he said.

Merrifield complied with the agency's ethics policy so long as the
outside lawyer handled the search and didn't share the names of
prospective employers with the commissioner, according to Szabo. He
adds that if Merrifield directly engaged in job talks, he had to
recuse himself on related agency business.

Speedier Hearings

Szabo says Merrifield told him he was discussing possible employment
with Shaw on May 17, a month and a half before he left the commission.
That was after he voted on the construction rule yet during the time
his efficiency task force report was being circulated for commission
approval.

Merrifield's task force proposed further accelerating licensing
procedures by reducing some public comment periods; creating a new
working group to further overhaul agency environmental reviews; and
ending mandatory hearings on so- called uncontested applications for
new reactors. The NRC decides who can formally contest new plants.

On June 22, the commission agreed to speed up, and seek to end, the
uncontested hearings. It opted not to reduce public comment periods or
to further streamline environmental reviews.

Merrifield did not vote on his report's recommendations.

In an interview, Merrifield said he made no decision about his new job
until after he left the commission. He did not respond directly to
questions about when he became aware of Shaw as a prospective
employer.

'Recused Myself'

"If there were a case where I had to have communication with the
company, I went through the appropriate channels and recused myself,"
Merrifield said.

In a follow up statement provided by Shaw, Merrifield reiterated that
his job search had been cleared by the NRC's Office of the General
Counsel and its Inspector General.

NRC Assistant Inspector General George Mulley says he is reviewing
Merrifield's departure to ensure that the commissioner's job search
didn't conflict with his duties.

Danielle Brian, executive director of the Project on Government
Oversight, a public watchdog group based in Washington, says she is
skeptical.

"Even if Commissioner Merrifield followed the letter of the law, he
clearly trampled the spirit of it," she says. "There is nothing more
devastating to the public's confidence in the government, and to civil
servants' morale, than to see senior policy makers cash in on their
public service like this."

Fortune 100 Customers

On July 13, Constellation revealed plans to take advantage of the new
construction rule in a partial-license application it filed with the
NRC. The 4,855-page document details the utility's plans to build a
third reactor that would double its electricity output at Calvert
Cliffs.

Constellation also owns the regulated utility Baltimore Gas & Electric
Co., two nuclear power plants in upstate New York and fossil fuel
plants in California, Maryland, Pennsylvania and Utah. Its customers
include 75 Fortune 100 companies.

"We are trying to preserve our option to move as fast as possible,"
says Constellation Vice President George Vanderheyden, the top
executive at the joint venture developing the new reactors, UniStar
Nuclear Energy LLC.

He says excavation probably won't begin until 2009.

Environmental attorney Anthony Roisman, who sued and won the Calvert
Cliffs lawsuit more than three decades ago, says the NRC has unraveled
much of what he accomplished in court.

"There are a series of things that they have done -- and are doing --
in which they are turning back the clock," Roisman says. "It's all
for the same reason: The nuclear industry has come to the agency and
said, 'If you don't make it easy for us to get a license, we are not
going to apply for one."'

To contact the reporter on this story: Elliot Blair Smith in Lusby,
Maryland, at esmith29@bloomberg.net