Wednesday, February 17, 2016

Nuclear Industry Subsidies Part I: Definitions

Update: I am reposting this series on Nuclear Power Industry subsidies in proper order.  This reposting will serve as an introduction to a new series on subsidies which will look at the justification of subsidies as well as their motives.  The primary focus of these new posts will be on the justification, if any, of nuclear power subsidies.  

Any analysis of nuclear industry subsidies should begin with definitions of the terms "Nuclear Industry" and "subsidy." We need to understand what it is we are talking about before we can talk intelligibly.

The broadest meaning of term "nuclear industry" can only be understood nominally. Both the medical uses of radioactive isotopes, and the manufacture of nuclear weapons are understood as activities of the Nuclear Industry, but they are very different sorts of activities, usually carried on by different industrial organizations. For example, some materials used in nuclear weapon are manufactured in specialized reactors, and medical specific radioisotopes are also manufactured in specialized reactors. At one time the same reactors might have been used for both purposes, but current requirements lead to a separation of medical isotope and nuclear weapons manufacture technology, and those two activities may not be carried on by the same organization.

Nuclear medicine and nuclear weapons production are regulated by different sets of laws,rules and regulations. Thus, for example, reactors used in the production of medical radioisotopes are required by international regulation to use low enrichment uranium, while military reactors are not required to do so. The handling sale and use of reactor modified actinides used in weapons, is regulated by a different set of rules than those governing the handling, sale and use of fission products.

Thus statements true about set of economic activities - for example the production, sale and use of medical radioisotopes - may not be true about a different economic activity - for example the manufacture of reactor modified actinides for nuclear weapons use.

The government pays for the research and development of military reactors, but this is not a subsidy, since the government, through its military arm, intends to use the reactors. Many products developed under the auspices of military or other government programs, cannot be spoken of as subsidized. For example, the jet engine originated from civilian developed technology, but the first aircraft uses occurred in a military context. It would not seem however, that government investments in military jet technology was a subsidy for civilian military jet aircraft related industries.

A subsidy is defined as:
Monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest.
assistance given by one person or government to another.
Barron's Business Dictionary defines subsidy as
Payment or other favorable economic stimulus (such as remission of taxation) given by government to certain individuals or groups of economic entities, usually to encourage their continued existence, growth, development, and profitability. In the United States, subsidies are given to the agricultural industry, the very poor, and many other groups.
The Barron's Real Estate Dictionary defines subsidies as
A transfer of wealth intended to encourage specific behavior considered to be beneficial to the public welfare.
The Columbia Encyclopedia states,
The term subsidy has had widely varied usage in the 20th cent. Subsidies may be granted to keep prices low, to maintain incomes, or to preserve employment. They are most important as grants to private corporations for performing some public service, such as to shipping companies and airlines for carrying the mail or to railroads for maintaining passenger service. These are often required where a necessary public service, particularly one that might otherwise not be profitable, is granted funds to remain in operation. . . Other commonly subsidized enterprises include agriculture (see agricultural subsidies), business expansion, and housing and regional development. . . . Medical and educational institutions are among the largest recipients of subsidies. . . Subsidies have also been granted by one country to another country to aid it in pursuing a war effort, to gain its goodwill, or to help stabilize its economy.
Thus subsidies are payments in which the payer does not receive goods or services, or payments in kind. Subsidies may be direct, or indirect. For example, government subsidies to farmers, intended to keep them in business even when food sells at a low price, in effect indirectly subsidizes me as a good purchaser.

In effect everyone is a recipient of indirect subsidies.

It this follows, that short of scrapping the entire system of government subsidies, singling out individuals, businesses or industries to question their subsidies may punish them, and indeed may punish them unfairly.

Now if a government gives an individual money or indirect and receives something, arguably of comparable worth in turn, the arrangement may not involve a subsidy. For examples government payments to sailors in the Navy, are salaries, not subsidies.

In many instances military financed Research and Development, has contributed to private Industry.

Radio is an example of how government sponsored development can set the stage for flourishing new markets. During World War I the United States government came ro regard radio as an important military tool. The Government took over control of all aspects of radio, with notable long term results.
During World War One the military took over control of the entire U.S. radio industry, and in conjunction with the major electrical firms made great strides in radio engineering using vacuum-tubes. In addition, wartime work exposed thousands in military service to the changes which were taking place, especially with respect to vacuum-tube equipment. The Vacuum Tubes entry by Major General George O. Squier, in the Signal Corps section of the 1919 edition of War Department Annual Reports, reviewed the advances made in vacuum-tube manufacturing and engineering from 1917 to 1919, with the prediction "That vacuum tubes in various forms and sizes will, within a few years, become widely used in every field of electrical development and application is not to be denied." And shortly after the war ended articles started to appear that showed a comprehensive scientific understanding and explanation of the design and operation of vacuum-tubes, for example L. M. Clement's The Vacuum Tube as a Detector and Amplifier (extract), from the April, 1920 issue of QST. H. Winfield Secor's The Versatile Audion, which appeared in the February, 1920 Electrical Experimenter, reviewed the advances taking place in thirteen areas of vacuum-tube engineering. In April, 1919 American Telephone & Telegraph, employing vacuum-tube versatility from six of Secor's categories, transmitted speeches and entertainment by phone lines and radio to a Victory Liberty Loan drive, as reported by Speeches Through Radiotelephone Inspire New York Crowds, from the May 31, 1919 Electrical Review. By 1922 vacuum-tubes had been firmly established as a major technological advance, and the Vacuum Tubes chapter of William C. Ballard, Jr.'s 1922 Elements of Radio Telephony reviewed the device and its construction.
Thomas H. White noted the emergence of radio as entertainment under government auspices,
While radio remained off-limits for the general public during the war, there were occasional hints of what lay ahead. Wireless Music for Wounded Soldiers from the April, 1918 The Wireless Agereviewed a short-range electrostatic induction system that could be used to entertain hospitalized soldiers with music and news. And between the cessation of hostilities in November, 1918, and the end of the civilian radio restrictions in 1919, there were scattered reports of military personnel firing up transmitters in order to broadcast entertainment to the troops -- for example a February 2, 1919 "Moonlight Witches Dance" transmitted from off the coast of San Diego, California by the battleship Marblehead, reported inMusic by Wireless, in the March, 1919 issue of Telephone Engineer. In addition, the May 7, 1919 Dallas Morning Newsreported that U.S.S. George Washington, during its transatlantic crossing, had employed its radio transmitter to provide nightly aConcert by Wireless for Vessels at Sea.
After the war, government controls of radio were lifted, and commercial broadcasting, boosted by war time government financed Research and development took off with astonishing speed. By some definitions, the government investment in radio R&D could be considered a subsidy to the commercial radio industry.

I have already noted the role that government subsidies played in the development of Jet Aircraft. It should be noted the extent to which the military development of jet aircraft lead to the emergence and growth of the modern commercial passenger Jet aircraft industry. Boeing designed the KC-135 aircraft in response to a military need for fast air tankers, to refuel jet bombers in the air. The KC-135 was powered by the J57 turbojet, first designed for use by B-52 bombers. Although designed for military use, Boeing designed the KC-135 to be wide enough for 6 passenger to a row seating, a feature which Boeing engineers included for commercial rather than military purposes.

The design Boeing 707, the progenitor of the modern Commercial Passenger Jet Industry was derived from the KC-135. Thus it could be argued that the modern passenger jet industry was based on government subsidized research and development programs.

The development of the 707 was not the first time the United States government aided a transportation related industry. The government dredged harbors and navigation channels during the 19th century and continues to do so, thus subsidizing the the shipping industry. During the 19th century the government subsidized railroads by land grants, and though mail shipment contracts. During the early 20th century, airmail shipment contracts were given to early air lines under very generous terms.

Government subsidies have also played an important role in energy related industries. The domestic oil and gas industry was granted three tax code preferences, or subsidies: (1) expensing of intangible drilling costs (IDCs) and dry hole costs, introduced in 1916;
(2) the percentage depletion allowance, first enacted in 1926 (coal was added in 1932);
(3) capital gains treatment of the sale of oil and gas properties.

Oil depletion allowances ammount to a huge government subsidy of the oil and gas business. Robert Bryce described the operation of oil depletion:
An oilman drills a well that costs $100,000. He finds a reservoir containing $10,000,000 worth of oil. The well produces $1 million worth of oil per year for ten years. In the very first year, thanks to the depletion allowance, the oilman could deduct 27.5 per cent, or $275,000, of that $1 million in income from his taxable income. Thus, in just one year, he's deducted nearly three times his initial investment. But the depletion allowance continues to pay off. For each of the next nine years, he gets to continue taking the $275,000 depletion deduction. By the end of the tenth year, the oilman has deducted $2.75 million from his taxable income, even though his initial investment was only $100,000.
President John Kennedy was fighting to repeal the oil depletion allowance at the time of his death, and a Democratic attempt to repeal it was recently killed in the Senate. billionairs are the oilmen of the 21st century, and they seek tax advantages too. Nashville Scene tels us,
Amazon, as you may have heard, is sitting on a massive tax-abatement package and other incentives that could ultimately cost Tennessee more than $100 million in revenue over the next decade. In exchange, the company is offering to create about 1,200 full-time jobs at two distribution facilities in or near Chattanooga.
Of course Tennesseans who shop from Amazon benefit too, by avoiding taxes on locally bought goods.

Sales Tax is hardly the only local and state tax that Tennessee forgoes in order to attract industry according to the Columbia Daily Tribune:
Tennessee has given generous incentives to manufacturers — the usual free real estate, property tax abatements, infrastructure improvements and training for workers. In addition, the state has included the unusual and highly questionable behind-closed-doors private letter rulings to exempt new industries from collecting Tennessee sales tax or paying other taxes that long-established businesses pay.
If Dot-com billionaires are the new Texas Oil men, the renewables business is the new Texas oil business. Glenn Schleede has made important points about wind energy subsidies over the last decade, and the public should be listening to what he says. Mr Schleede has repeatedly argued that:
The true cost of electricity from wind energy is much higher than wind advocates admit. Wind energy advocates like to ignore key elements of the true cost of electricity from wind, including:
* The cost of tax breaks and subsidies which, as indicated above, shift tax burden and costs from “wind farm” owners to ordinary taxpayers and electric customers.
* The cost of providing backup power to balance the intermittent and volatile output from wind turbines.
• The full, true cost of transmitting electricity from “wind farms” to electric customers. “Wind farms” are highly inefficient users of transmission capacity. Capacity must be available to accommodate the total rated output but, because the output is intermittent and volatile, that transmission capacity is used only part time. The wind industry seeks to avoid these costs by shifting them to electric customers.
* The extra burden on grid management.
In response to a report on the Cape Wind project prepared by the Charles River Association, Schleede disagreed with the claims,
Adding Cape Wind would lead to a reduction in the wholesale cost of power averaging $185 million annually over the 2013-2037 time period, resulting in an aggregate savings of $4.6 billion over 25 years.

With Cape Wind in service, over the 2013-2037 time period, the price of power in the New England wholesale market would be $1.22/MWh lower on average.
Schleede argues in a letter to the Editor of the Cape Cod Times posted yesterday on MasterResources
Frankly, the numbers in the slick 9-page “consultant” study released by the developer of the Cape Wind project of $4.6 billion in savings over 25 years just don’t add up ,
Schleede notes,
The true cost of electricity from wind – particularly offshore wind — is huge. No one who is paying attention expects the price that Cape Wind charges for its electricity to be cheap. In fact, over 25 years, the wholesale cost to New England utilities for electricity from Cape Wind apparently will be well over $5.75 billion and probably much more.

The arithmetic is simple: The CRA “study” (table 1, page 6), shows that the developer expects to produce about 1,150,000,000 kilowatt-hours (kWh) of electricity per year. If utilities are forced to pay even $0.20 per kWh, the utilities cost over 25 years would be $5.75 billion. [1] The cost would be $6.9 billion if utilities have to pay the $0.24 per kWh that NatGrid apparently agreed to pay for electricity from the planned Rhode Island offshore “wind farm.”
Does anyone in New England seriously expect that the WHOLESALE price of non-Cape Wind electricity in New England will average $0.20 or $0.24 per kWh over the next 25 years (up from about $0.08 per kWh in 2008.
Schleede also noted that the CRA study was flawed by a choice to use old rather than newer data, a doubtful assumption that a Federal tax of $30 to $60 per ton charge on carbon emissions. Finally the CRA study failed to account for many hidden costs of the Cape Cod wind project, including the cost of building transmission lines, for the Cape Cod Wind project, and the costs of various Federal and State Tax breaks, which ammounts to a huge subsidy for the Cape Code wind project. These Breaks include
a. Production tax credit (PTC). The Cape Wind project owners would be eligible to receive a federal tax credit, currently $0.021 per kWh for electricity produced during the first 10 years of the project life. Using the production apparently expected by Cape Wind (1,150,000,000 per year) a $0.021 per kWh credit (which is adjustable for inflation), would permit the owners to avoid federal corporate income taxes of $24,150,000 per year or $241,500,000 over 10 years.

The recent federal “stimulus” legislation– The American Recovery and Reinvestment Act of 2009–gives “wind farm” developers the option of selecting an investment tax credit in lieu of the PTC or electing to receive from the US Treasury a cash grant equal to 30% of eligible capital costs! Again, ordinary taxpayers pick up the tab.

b. Accelerated depreciation. “Wind farm” owners are also permitted by the IRS to use the lucrative “5-year double declining balance accelerated depreciation” (5-yr; 200%DB) to recover the capital costs from their otherwise taxable income. Depreciation deductions would permit the owners to avoid $490 million in federal corporate income taxes – in addition to the Production Tax Credit – again shifting the tax burden to ordinary taxpayers.

c. Additional [state] tax break
Thus the Cape Cod Wind Project is assured of at least a $730 million dollar subsidy from the Federal government, half of its total costs. In addition,
a study by the Beacon Hill Institute at Suffolk University
Massachusetts green credits, totaling $1.7 billion over the entire 25-year lifespan [projected Cape Wind generator lifespan], would be worth $487 million.
Despite this huge subsidy, Jay Fitzgerald reported to Boston Harold readers,
National Grid customers will experience sticker shock after the giant utility negotiates a long-term electric contract with Cape Wind developers, energy experts warn.

Business groups worry that a National Grid contract with Cape Wind, which needs a long-term deal to secure funds to build a giant wind farm off Cape Cod, could add tens of millions of dollars per year to electric bills.

They point to a recent price agreement between National Grid and a Rhode Island wind-farm developer as cause for alarm.

The Rhode Island deal calls for National Grid to pay an eye-popping 24 cents per kilowatt hour for electricity from Deepwater Wind’s proposed wind farm off Block Island for 20 years. That’s three times higher than the current price of natural-gas generated electricty – and the Rhode Island deal includes a 3.5 percent annual price increase over the life of the contract.

Rhode Island officials have estimated the small Deepwater contract will add about $1.35 per month in the first year to an average residental customer’s bill – and it will add far more to the bills of big energy-using companies.

Analysts say a Cape Wind contract could come in at about 15 cents per kilowatt hour – about twice as high as current prices for natural-gas generated electricity.

“It’s still double the price – and the ratepayers will be picking up the tab for it for 20 years,” said Robert Rio, a senior vice president at Associated Industries of Massachusetts.

One source, who supports the Cape Wind project, said officials are hoping National Grid can negotiate a price at about 12 to 14 cents per kilowatt hour in the first year – but that’s still far above today’s 6 to 8 cents for natural-gas generated electricity.

Dennis Duffy, a vice president at Cape Wind, cautioned that the price of natural gas is volatile and was much higher only a few years ago, before the global recession dramatically reduced energy prices.

Cape Wind stands by its assertion that it will eventually save customers an average $25 million a year, when the long-term advantage of free wind starts to exert competitive pressure on other power generators, Duffy said.

The $1 billion-plus price of building and installing Cape Wind’s 130 giant turbines on Nantucket Sound will have to be paid for, he said. But the long-term price and environmental benefits of wind farms will a huge plus, he said.

Peter Beutel, an analyst with Cameron Hanover, said he agrees wind farms are “worthwhile in the long run” for energy markets.

“But can I justify (wind energy) financially today? No I can’t,” he said.
The hoped for 12 to 14 cents per kWh for heavily subsidized Cape Wind electricity must be contrasted with a statement which the American Wind Energy Association made in an attack on Schleede,
“The cost of electricity from new wind plants is competitive with the cost of new conventional power plants, when the federal wind energy production tax credit is taken into account,”
This then is a context in which the topic of nuclear subsidies can be properly discussed.

In the second part of this discussion I will discuss the Analysis of nuclear subsidies made by Doug Koplow in "Nuclear Power: Still not viable without subsidies."

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