Dominion Power 2004 Annual Report Download - page 90

Notes to Consolidated Financial Statements, Continued
Nuclear Insurance
— The Price-Anderson Act provides the public up to
$10.8 billion of protection per nuclear incident via obligations required of
owners of nuclear power plants. The Price-Anderson Act Amendment of
1988 allows for an inflationary provision adjustment every five years.
Dominion has purchased $300 million of coverage from the commercial
insurance pools with the remainder provided through a mandatory industry
risk-sharing program. The NRC exempted Millstone’s Unit 1 on March 30,
2004 from the Secondary Financial Retrospective Assessment, reducing
Dominion’s licensed reactors to six. In the event of a nuclear incident at any
licensed nuclear reactor in the United States, Dominion could be assessed
up to $100.6 million for each of its six licensed reactors not to exceed $10
million per year per reactor. There is no limit to the number of incidents for
which this retrospective premium can be assessed.
The Price-Anderson Act was first enacted in 1957 and has been
renewed three times
— in 1967, 1975 and 1998. The Price-Anderson Act
expired on August 31, 2002, but operating nuclear reactors continue to be
covered by the law. Congress is currently holding hearings to reauthorize
the legislation.
Dominion’s current level of property insurance coverage ($2.55 billion
for North Anna, $2.55 billion for Surry, and $2.75 billion for Millstone)
exceeds the NRC’s minimum requirement for nuclear power plant licensees
of $1.06 billion per reactor site and includes coverage for premature decom-
missioning and functional total loss. The NRC requires that the proceeds
from this insurance be used first to return the reactor to and maintain it in a
safe and stable condition and second to decontaminate the reactor and
station site in accordance with a plan approved by the NRC. Dominion’s
nuclear property insurance is provided by the Nuclear Electric Insurance
Limited (NEIL), a mutual insurance company, and is subject to retrospective
premium assessments in any policy year in which losses exceed the funds
available to the insurance company. The maximum assessment for the cur-
rent policy period is $83 million. Based on the severity of the incident, the
board of directors of Dominion’s nuclear insurer has the discretion to lower
or eliminate the maximum retrospective premium assessment. Dominion
has the financial responsibility for any losses that exceed the limits or for
which insurance proceeds are not available because they must first be
used for stabilization and decontamination.
Dominion purchases insurance from NEIL to cover the cost of replace-
ment power during the prolonged outage of a nuclear unit due to direct
physical damage of the unit. Under this program, Dominion is subject to a
retrospective premium assessment for any policy year in which losses
exceed funds available to NEIL. The current policy period’s maximum
assessment is $30 million.
Old Dominion Electric Cooperative, a part owner of North Anna Power
Station, and Massachusetts Municipal Wholesale Electric Company and
Central Vermont Public Service Corporation, part owners of Millstone’s Unit
3, are responsible for their share of the nuclear decommissioning obliga-
tion and insurance premiums on applicable units, including any retrospec-
tive premium assessments and any losses not covered by insurance.
Spent Nuclear Fuel
— Under provisions of the Nuclear Waste Policy Act
of 1982, Dominion has entered into contracts with the Department of
Energy (DOE) for the disposal of spent nuclear fuel. The DOE failed to begin
accepting the spent fuel on January 31, 1998, the date provided by the
Nuclear Waste Policy Act and by Dominion’s contracts with the DOE. In
January 2004, Dominion and certain of its direct and indirect subsidiaries
filed a lawsuit in the United States Court of Federal Claims against the
DOE in connection with its failure to commence accepting spent nuclear
fuel. Dominion will continue to safely manage its spent fuel until it is
accepted by the DOE.
Litigation
Virginia Power and Dominion Telecom were defendants in a class action
lawsuit whereby the plaintiffs claimed that Virginia Power and Dominion
Telecom strung fiber-optic cable across their land, along an electric trans-
mission corridor without paying compensation. The plaintiffs sought dam-
ages for trespass and “unjust enrichment,” as well as punitive damages
from the defendants. In April 2004, the parties entered into a settlement
agreement that was subsequently approved by the court in July 2004.
Under the terms of the settlement, a fund of $20 million has been estab-
lished by Virginia Power to pay claims of current and former landowners as
well as fees of lawyers for the class. Costs of notice to the class and
administration of claims will be borne separately by Virginia Power. The
settlement agreement resulted in an after-tax charge of $7 million in the
first quarter of 2004.
Enron Bankruptcy
During 2002, Dominion terminated all outstanding and open positions with
Enron. Dominion submitted a claim in the Enron bankruptcy case for the
value of such contracts, measured at the effective dates of contract termi-
nation. During the first quarter of 2004, the bankruptcy court approved a
settlement of Dominion’s claim in the proceeding, resulting in a $2 million
after-tax benefit.
Guarantees, Surety Bonds and Letters of Credit
Guarantees
As of December 31, 2004, Dominion and its subsidiaries had issued
$7.8 billion of guarantees, including:
•$3.6 billion to support commodity transactions of subsidiaries;
•$1.7 billion for subsidiary debt reflected on the Consolidated
Balance Sheets;
•$898 million related to a subsidiary leasing obligation for a new power
generation project;
•$656 million associated with a subsidiary’s commitment to purchase
three electric power generating facilities from USGen. The guarantee
expired when Dominion completed the acquisition on January 1, 2005;
•$509 million related to subsidiaries’ nuclear decommissioning
obligations;
•$408 million for guarantees supporting other agreements of
subsidiaries; and
•$31 million for guarantees supporting third parties and equity
method investees.
The commodity transaction guarantees are put in place to allow
Dominion’s subsidiaries the flexibility to conduct business with counterpar-
ties without having to post substantial cash collateral. In order for
Dominion to experience a liability for the $3.6 billion capacity of the guar-
antees, Dominion would have to fully utilize credit with every counterparty
it has issued a guarantee, which management believes would be highly
unlikely to occur. As of December 31, 2004, Dominion had entered into
transactions with counterparties, whereby the net exposure under the
guarantees related to these transactions was $678 million, which is
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