Kan. Gas & Elec. Co. v. United States

• Citation: 685 F.3d 1361
• Decision Date: 01 October 2012
• Docket Number: Nos. 2011–5044,2011–5045.,s. 2011–5044
• Parties: KANSAS GAS AND ELECTRIC COMPANY, Kansas City Power & Light Company, and Kansas Electric Power Cooperative, Inc., Plaintiffs–Appellants, v. UNITED STATES, Defendant–Cross Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals for the Federal Circuit

685 F.3d 1361

KANSAS GAS AND ELECTRIC COMPANY, Kansas City Power & Light Company, and Kansas Electric Power Cooperative, Inc., Plaintiffs–Appellants,

v.UNITED STATES, Defendant–Cross Appellant.

Nos. 2011–5044, 2011–5045.

United States Court of Appeals,Federal Circuit.

July 12, 2012.

Rehearing Denied Oct. 1, 2012.

Robert L. Shapiro, Hughes Hubbard & Reed LLP, of Washington, DC, argued for plaintiffs-appellants. With him on the brief was Daniel T. Lloyd.

Christopher J. Carney, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-cross appellant. With him on the brief were Tony West, Assistant Attorney General, Jeanne E. Davidson, Director, Harold D. Lester, Jr., Assistant Director, James P. Connor, Jeremiah M. Luongo, and Luke A.E. Pazicky, Trial Attorneys. Of counsel were Andrew V. Averbach and Alan J. Lo Re. Of counsel on the brief was Jane K. Taylor, Office of General Counsel, United States Department of Energy, of Washington, DC.

Before RADER, Chief Judge, BRYSON and LINN, Circuit Judges.

Opinion for the court filed by Chief Judge RADER.

Opinion dissenting-in-part filed by Circuit Judge LINN.

RADER, Chief Judge.

Kansas Gas and Electric Company (“KG & E”), Kansas City Power & Light Company (“KCPL”), and Kansas Electric Power Cooperative, Inc. (“KEPCO”) (collectively “the Kansas Companies”) suffered damages due to the Government's partial breach of the Standard Contract for Disposal of Spent Nuclear Fuel And/Or High–Level Radioactive Waste (“Standard Contract”). In June 2010, the United States Court of Federal Claims conducted a nine-day trial and awarded the Kansas Companies $10,632,454.83.

In determining the amount of damages, the trial court correctly did not award damages for cost of capital and for the costs associated with researching alternative storage options for spent nuclear fuel (“SNF”) and high level radioactive waste (“HLW”). The trial court also appropriately reduced the Kansas Companies' damages by the value of the benefit they received as a result of their mitigation activities. However, the trial court erred by not accepting the Kansas Companies' reasonable method for calculating overhead costs. Therefore, this court affirms-in-part and reverses-in-part the trial court's damages award.

I.

In 1983, Congress enacted the Nuclear Waste Policy Act of 1982 (“NWPA”). Pub. L. No. 97–425, 96 Stat. 2201 (codified at 42 U.S.C. §§ 10101–10270 (2006)). The NWPA authorized the Department of Energy (“DOE”) to enter into contracts for the collection and disposal of SNF and HWL. 42 U.S.C. § 10222(a)(1). The Standard Contract required the owners of SNF and HLW to pay fees into the Nuclear Waste Fund, in exchange for which the DOE would begin to dispose of the SNF and HLW “not later than January 31, 1998.” 42 U.S.C. § 10222(a)(5)(B); 10 C.F.R. § 961.11 (2011).

On October 10, 1984, the Kansas Companies entered into the Standard Contract with DOE. Kan. Gas & Elec. Co. v. United States, 95 Fed.Cl. 257, 260 (2010) (“ KG & E”). The Kansas Companies collectively own Wolf Creek Nuclear Operating Corp., which operates the Wolf Creek Generating Station (“Wolf Creek”), a nuclear power plant located near Burlington, Kansas. Id. at 262. Wolf Creek's nuclear reactor initially operated with 193 fuel assemblies. Id. When fuel assemblies no longer efficiently generate energy, the plant is refueled. The refueling process removes the spent fuel assemblies from the reactor core and places them into storage cells in racks located in Wolf Creek's spent fuel pool. The parties refer to this storage option as “wet storage.” Id.

While Government performance should have begun in 1998, not all utilities would have expected recovery of their spent fuel at this time. See Yankee Atomic Elec. Co. v. United States, 536 F.3d 1268, 1272–73 (Fed.Cir.2008) (explaining the role of the Standard Contract acceptance rate). In this case, the record shows that the Government's first scheduled collection of Wolf Creek's SNF would have been in 2006. KG & E, 95 Fed.Cl. at 260.

As early as 1993, the Kansas Companies anticipated they would need to pursue alternative storage options for Wolf Creek if DOE declined to accept spent fuel by 1998. Id. at 264. The Kansas Companies tasked Mr. Matthew K. Morris, the nuclear engineer responsible for administering the Standard Contract at Wolf Creek, with exploring options to create more available space in Wolf Creek's spent fuel pool. Id. Wolf Creek's Principal Engineer for Nuclear Fuels, Mr. Scott Ferguson, also researched additional storage options. Id. at 261, 296.

The Kansas Companies concluded their spent fuel storage study in 1995. The report evaluated six options: (1) plant operations/fuel design; (2) increased in-pool storage; (3) dry storage technologies; (4) shipment to private interim storage facilities; (5) shipment to a federal facility; and (6), combinations of the first five alternatives. Id. at 264. The report concluded that the best three options were reracking the storage pool, dry cask storage, or a combination of the two. Id. at 266.

The Kansas Companies ultimately decided to rerack the storage pool. Id. Under this option, they removed the existing racks from the pool, replaced them with higher density racks, and placed them closer together while still maintaining sufficient cooling flow. Id. The Kansas Companies installed the racks with the help of a contractor, Holtec International.

While conducting the rerack, the Kansas Companies both increased their storage capacity and used racks that could support higher enrichment fuel assemblies. Joint App. at 120; 311; 638–39. These higher enrichment fuel assemblies allowed Wolf Creek to achieve the same energy output from the reactor with fewer fuel assemblies. This reduced the number of assemblies purchased and discharged. Id. at 122. The rerack project was completed in the spring of 2000. KG & E, 95 Fed.Cl. at 268.

Of course, the Government did not proceed to collect and dispose of SNF and HLW on January 31, 1998. This court has previously held that the Government thus partially breached the Standard Contract with the nuclear energy industry. See N. States Power Co. v. United States, 224 F.3d 1361, 1367 (Fed.Cir.2000) and Me. Yankee Atomic Power Co. v. United States, 225 F.3d 1336, 1343 (Fed.Cir.2000). Therefore, the trial court in this case focused on the quantum of damages owed to the Kansas Companies on account of the Government's breach. The trial court found that even if the Government had not breached the Standard Contract, Wolf Creek would have run out of wet storage by 2005, “necessitating alternative storage measures.” Id. at 278. Thus, the trial court, in applying this court's precedent in Yankee Atomic Power Co. v. United States, 536 F.3d 1268 (Fed.Cir.2008), required the Kansas Companies to both prove their damages and show what costs, if any, they would have experienced absent the breach. KG & E, 95 Fed.Cl. at 273–74, 277.

The Kansas Companies presented numerous alternative storage measures they would have pursued in the non-breach world. The trial court found that the Kansas Companies would have pursued a low-cost measure wherein Wolf Creek would receive credit for the soluble boron already present in the water in the spent fuel storage pool. Id. at 295–96. Boron is a neutron absorber that can control the reactivity of spent fuel, and the Nuclear Regulatory Commission had issued “criticality credit” to several utilities for the boron present in their pools. This credit would have allowed Wolf Creek to store fuel assemblies at a greater density, thus resolving its short-term storage issues.

The trial court also found that the Kansas Companies would have performed “a gate-drop analysis” in the non-breach world. Id. at 280, 298. Due to the structure of Wolf Creek's pool, 18 storage cells were directly under a large moveable gate which, if it accidently fell into the pool, could have damaged fuel assemblies stored below. Id. at 279–80. These storage cells could not be used without “doing the appropriate analysis to show that, if [the gate] was to drop, that it would not damage the fuel causing a release.” Id. at 280. This analysis would have occurred in the non-breach world, allowing Wolf Creek to store fuel in these 18 cells. The trial court found such an analysis would have cost at least $100,000. Id. at 298.

After determining the costs in the non-breach world, the trial court examined the Kansas Companies' direct costs of mitigating the Government's breach. The trial court awarded $9.7 million for the rerack project, “less $100,000 in costs that [the Kansas Companies] minimally would have incurred but for the breach....” Id. The trial court disallowed the Kansas Companies' claim for the costs associated with the alternative storage options study conducted by Messrs. Morris and Ferguson. Specifically, the trial court noted that Morris and Ferguson adequately accounted for their time in studying all options, but made “no effort ... to apportion this time to the rerack alternative....” Id. at 297.

The trial court also awarded overhead costs. The Kansas Companies divided overhead into three pools of costs: labor overhead ($160,467.99), material overhead ($260,725.47), and construction overhead ($3,420,935.18). Id. at 298. The parties did not dispute the labor overhead. Id. In operating Wolf Creek, the Kansas Companies account for overhead costs using a “total-cost allocation method.” Id. at 299. They have used this method since 1987, and the method complies with Federal Energy Regulatory Commission (“FERC”) regulations regarding the allocation of costs between a particular capital project versus the applicable overhead account. Id. at 298–99.

The trial court concluded that the Kansas Companies' use of total-cost accounting was reasonable for business purposes, but stated that “what makes for good business accounting does not translate...