NOTE 3—Accounting for Asset Retirement and Environmental Obligations

We account for our asset retirement obligations in accordance with Accounting for Asset Retirement and Environmental Obligations. This requires that legal obligations associated with the retirement of long-lived assets be recognized at fair value when incurred and capitalized as part of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized asset is depreciated over the useful life of the long-lived asset.

In the absence of quoted market prices, we estimate the fair value of our asset retirement obligations by using present value techniques, in which estimates of future cash flows associated with retirement activities are discounted using a credit-adjusted risk-free rate. Our estimated liability could change significantly if actual costs vary from assumptions or if governmental regulations change significantly.

A significant portion of our asset retirement obligations relate to our share of the future costs to decommission North Anna. At December 31, 2016 and 2015, North Anna’s nuclear decommissioning asset retirement obligation totaled $101.6 million and $97.6 million, respectively. Approximately every four years, a new decommissioning study for North Anna is performed by third-party experts. A new study was performed in 2014, and we adopted it effective December 1, 2014, which resulted in an additional layer related to the asset retirement obligation associated with North Anna. The additional layer resulted in an increase to our asset retirement cost and our asset retirement obligation of $18.0 million. Increased spent fuel costs, including interim storage, insurance premiums, and regulatory and environmental permits and fees, as a result of the DOE delay for acceptance of spent fuel, is the primary driver for the increase in the asset retirement obligation. We are not aware of any events that have occurred since the 2014 study that would materially impact our estimate. We are required to maintain a funded trust to satisfy our future obligation to decommission the North Anna facility. See Note 9—Investments.

In December 2014, the EPA issued the final rule regulating the disposal of CCRs, commonly known as coal ash. The rule establishes technical requirements for CCR landfills and surface impoundments under Subtitle D of the Resource Conservation and Recovery Act. The final rule was published in the Federal Register in April 2015 and, as a result, we established two asset retirement obligations totaling $8.6 million during the second quarter of 2015. In 2016, we recorded a $2.9 million decrease to one of these asset retirement obligations related to a change in estimate as a result of more refined cost information obtained during the contract bidding process.

The following represents changes in our asset retirement obligations for the years ended December 31, 2016 and 2015 (in thousands):

Asset retirement obligations as of December 31, 2014	$	104,936
Accretion expense		4,695
Additional asset retirement obligations		8,569
Asset retirement obligations as of December 31, 2015	$	118,200
Accretion expense		4,839
Decrease in asset retirement obligations		(2,869	)
Payments		(87	)
Asset retirement obligations as of December 31, 2016	$	120,083

The cash flow estimates for North Anna’s asset retirement obligations are based upon the 20-year life extension which was granted in 2003 and extends the life of Unit 1 to April 1, 2038, and the life of Unit 2 to August 21, 2040. Given the life extension, the nuclear decommissioning trust was, and currently is, estimated to be adequate to fund North Anna’s asset retirement obligations and no additional funding was, or is, currently required. We ceased collection of decommissioning expense in August 2003 with the approval of FERC. As we are not currently collecting decommissioning expense in our rates, we are deferring the difference between the earnings on the nuclear decommissioning trust and the total asset retirement obligation related depreciation and accretion expense for North Anna as part of our asset retirement obligation regulatory liability. See Note 10—Regulatory Assets and Liabilities.