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November 12,1976

Unleashing Nuclear Power
The electorate made an important
decision last week in the field of
energy economics. Following the
example set by their California
counterparts last June, voters in
Arizona, Colorado, Montana, Ohio,
Oregon and Washington all voted
by wide margins—2 to 1 in most
cases—to defeat ballot initiatives
which would have severely restrict­
ed the growth of the nuclear-power
industry. In all of these cases, the
controversy was over safety—
storage of nuclear wastes and pre­
vention of radioactive leakage from
atomic plants. Yet in deciding the
safety issue, the voters also made an
implicit decision about the econom­
ics of alternative energy sources.
Opposing views
During a sometimes heated
election-year controversy, oppo­
nents of nuclear power argued that
nuclear-fission reactors are
unnecessary—even assuming the
disappearance of current reserves
of petroleum and natural gas—
because of the nation's possession
of huge reserves of coal, and be­
cause of the future potential of
such alternatives as fusion power or
solar power. (Some advocated a
major reduction in energy usage,
pointing out that the major nations
of Western Europe use less than
half as much energy per capita as
the U.S. does.) Opponents also
claimed that nuclear reactors are
unreliable and unsafe, in view of
the small but important possibility
of reactor failure. They pointed to
the problem of disposing of radiot



active wastes for thousands of years,
as well as the possibility of sabotage
of reactors or theft of fissionable
material. Some opponents, fearful
about these safety problems, de­
manded the termination of the na­
tion's entire nuclear-development
program; this would have meant
phasing-out about 80 powerplants
now operating or under construc­
tion, and cancelling about 100
plants with existing or impending
construction permits.
In rebuttal, supporters oT nuclear
power argued that alternative
sources of energy cannot be relied
upon, and that many foreign coun­
tries (especially those without coal
reserves) are already acting upon
that conviction. These supporters
also pointed to the unique safety
record of atomic energy, and ar­
gued that deaths due to producing
electricity by coal are likely to be
100 times the deaths due to produc­
tion by nuclear power, even assum­
ing the possibility of occasional
catastrophic failure of nuclear reac­
tors. They claimed that the prob­
lems of theft and sabotage are un­
der control, and that the problem
of waste disposal was irrevocably
accepted with the adoption of a
nuclear-weapons program a gener­
ation ago.
Growing industry
This year's voting on the nuclear
issue has confirmed the view of
most businessmen, that nuclear
(light-water) reactors will be the
next generation's most economically
(continued on page 2)

Opinions expressed in this newsletter do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.

attractive technology for generat­
ing base-load electricity. Conse­
quently, many billions of dollars (or
equivalent) have already been com­
mitted to the construction of sever­
al hundred reactors in this country,
Western Europe and Japan. Indus­
try sources expect nuclear power's
share of U.S. electricity production
to rise from less than 9 percent
today to 50 percent by 1990, replac­
ing fast-disappearing supplies of oil
and natural gas. About 60 nuclear
plants with total capacity of 45,000
megawatts are scheduled to be in
operation in the U.S. in 1977.
An MIT study team led by Irvin
Bupp recently analyzed the eco­
nomic argument for nuclear power
by studying the cost experience of
the plants now operating or under
construction in this country (Febru­
ary 1975 Technology Review). Fuelcycle (variable) costs of nuclear
power have turned out to be quite
low—about 24 cents/million BTUs,
closely in line with earlier predic­
tions. In contrast, fossil-fuel costs in
the past decade have jumped from
24 cents/million BTUs to more than
$2.00 for oil and $1.00 or more for
coal. In many areas of the nation,
notably New England and the Mid­
dle Atlantic states, light-water reac­
tors provide the most economically
attractive technology for generat­
ing base-load electricity.
However, the crucial factor is capi­
tal costs—total costs (including in­
terest) during construction. From
the outset of the Atomic Age, it has
been evident that the key to eco­
nomic success was to prevent a
2




virtually certain fuel-cost advantage
from being wiped out by high con­
struction costs. A certain amount of
fragmentary evidence suggests that
the nuclear industry could lose part
of its cost advantage on this score.
The evidence is incomplete be­
cause the industry has had less than
ten years' experience in construct­
ing large reactors on a completely
commercial basis. Government
subsidies created the nuclearpower industry in the 1950s and
early 1960s, and reactormanufacturer subsidies later sup­
ported the industry, under a “turn­
key" type of contract which stipu­
lated that the nuclear plant would
generate base-load power at a low­
er cost to the purchasing utility than
an equivalent coal- or oil-fired
plant could produce. In addition,
not enough commercial plants have
been built in the past decade to
provide sufficient cost data for eval­
uation. Despite an estimated com­
pletion time of six years for the
average nuclear plant, in 1973 only
6 of the 30 plants ordered six years
before had entered operation.
Increasing cost?
Nonetheless, the MIT economists
concluded that the nuclear-power
industry is operating in an
increasing-cost situation. Based on
their analysis, the capital cost of a
light-water reactor ordered in 1974
for delivery in 1982-83 would prob­
ably be 50 percent higher (perhaps
even double) the $455/kw (in 1974
dollars) estimated by the Federal
Energy Administration in its Project
Independence report.

The fault does not lie with the cost
of manufactured components, be­
cause this cost has been falling in
constant-dollar terms. Despite sig­
nificant design changes and scale
modifications, there has evidently
been a learning process in this area,
especially in the manufacture of
turbine generators. On the other
hand, some fault does lie with
sharply increasing labor costs, be­
cause of wage increases, manpower
shortages and declines in labor pro­
ductivity. Thus, reactors going into
operation in the 1970s required
about 3.5 manhours per kilowatt to
build, while those slated for the
1980s will require about 8.5 man­
hours per kilowatt. However, this
problem has affected all major con­
struction projects, and so fails to
explain why nuclear-construction
costs have far outdistanced both
fossil-plant and oil-refinery costs.
The nuclear industry's increasingcost situation instead is attributable
to the procedural delays and design
changes arising out of the nuclearsafety issue. For example, stricter
design criteria caused a reversal in
the late 1960s of an earlier trend
toward decreased use of steel and
concrete per kilowatt, despite the
growing size of reactors and conse­
quent increasing economies of
scale. More importantly, reactor
construction times have increased,
from an average of 85 months for
reactors ordered in 1965 to 115
months for those ordered in 1969.
(In the last half of 1974 alone, con­
struction was deferred on 94 plants
and cancelled completely in the
case of 14 plants.) These delays have
3




caused extra construction costs and
extra borrowing costs, in addition
to unexpected inflationary effects.
The MIT study underlines the
strong correlation between plant
costs and total project length. For a
given project length, the longer the
licensing period arising from pro­
cedural delays, the higher the total
cost. According to the MIT group,
“ Present trends in nuclear reactor
costs can be interpreted as the eco­
nomic result of a fundamental de­
bate on nuclear power within the
U.S. community."
The MIT economists thus suggest
that engineering estimates of reac­
tor capital costs are insufficient
guides for predicting actual future
costs, because of the noneconomic
factors forcing construction delays
and design changes. Another con­
sequence is the increased potential
competitiveness of coal-fueled
plants, since the present trends in
reactor capital costs are significantly
narrowing the economic gap be­
tween the two technologies. Con­
struction costs for coal-fueled pow­
er plants have been rising also, but
less than half as fast as for nuclear.
But a different conclusion could be
reached now that one-fifth of the
nation's voters have decided
strongly in favor of nuclear-power
development, since this suggests
some reduction of the delays in­
volved in debate and litigation. The
nuclear industry's obvious advan­
tage in fuel-cycle costs henceforth
might not be offset by any capitalcost differential in coal's favor.
William Burke

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BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks

Amount
Outstanding
10/27/76

Loans (gross, adjusted) and investments'"
Loans (gross, adjusted)—total
Security loans
Commercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
Other securities
Deposits (less cash items)—total*
Demand deposits (adjusted)
U.S. Government deposits
Time deposits—total*
States and political subdivisions
Savings deposits
Other time deposits!
Large negotiable CD's

90,170
68,828
1,471
22,450
20,954
11,590
8,879
12,463
90,068
25,847
383
62,177
4,978
28,375
26,589
10,490

Weekly Averages
of Daily Figures

W eek ended
10/27/76

Member Bank Reserve Position
Excess Reserves
Borrowings
Net free(+)/Net borrowed (-)
Federal Funds—Seven Large Banks
Interbank Federal fund transactions
Net purchases (+)/Net sales (-)
Transactions of U.S. security dealers
Net loans (+)/Net borrowings (-)

Change
from
10/20/76
-

+
-

+
+
+
+
-

+
+
-

+
-

-

42
12
117
94
53
37
121
175
0
38
63
187
89
151
156
324

+ 4,732
+ 4,912
+ 688
208
+ 1,295
+ 1,285
+ 192
372
+ 3,364
+ 1,824
+
58
+ 1,466
857
+ 7,032
- 3,423
- 5,198

W eek ended
10/20/76

+
+
+
+
+
+
+
+
+
+
+
-

5.54
7.69
87.87
0.92
6.59
12.47
2.21
2.90
3.88
7.59
17.85
2.41
14.69
32.95
11.41
33.13

Comparable
year-ago period
+

-

37
1
38

+

31
1
30

223

+

12

+

301

270

+

114

+

213

-

-

7
54
47

+
+

+

Change from
year ago
Dollar
Percent

■"Includes items not shown separately. ^Individuals, partnerships and corporations.
Editorial comments may be addressed to the editor (William Burke) or to the author. . . .
Information on this and other publications can be obtained by calling or writing the Public
Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120.
Phone (415) 544-2184.




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