$8.33 billion loan guarantee to Vogtle nuclear units 3 &4: insights from documents forced out by litigation
Three years of freedom of information act (FOIA) requests by the Southern Alliance for Clean Energy (SACE), along with a fair bit of litigation when FOIA docs came back mostly black with redactions, have met with some success. SACE's efforts have unearthed a sizeable cache of documents related to the construction of two new nuclear reactors at Plant Vogtle in Georgia and the $8.33 billion conditional loan guarantee by the US Department of Energy that would finance a big chunk of the deal. While the funding on offer is commonly referred to as a loan guarantee, it is actually a direct government loan: the Federal Financing Bank, part of the US Treasury, is the source of the funds.
Earth Track and Synapse Energy Economics teamed up to take a first look at the release documents. Despite widespread redactions (many pages were still mostly black; critical data on key inputs underlying DOE's credit risk estimates were systematically blocked as well), there was nonetheless quite a bit there. You can read the full study here, and other study-related documents such as the press release and conference, and links to key documents, can be accessed here. Some key findings are below.
- Indications of involvement in the loan guarantee process and terms by political appointees. Top political appointees in the Departments of Energy, Labor, and Treasury were directly involved to make the deal a go. The White House was also involved. DOE staff were under pressure to expedite the deal as well. An e-mail from December 2010 points to unspecified communication between the White House and the Nuclear Energy Institute over issues of concern. (In this and other cases, extensive redactions in the FOIA documents make the precise focus of the meetings and discussion unclear.) An email from February 2010 notes that DOE did not “deal” with Shaw [the firm slated to do much of the reactor construction]; rather, “the [W]hite [H]ouse did.” Efforts for DOE to close out consultation, most likely on loan terms, was handled “at the political level” of the Department of the Treasury, according to another email. Emails from DOE staff indicate that Secretary Chu was involved in discussions with key Vogtle Project players over loans details as well. “MEAG’s CEO, Bob Johnston got a call on Friday from Secretary Chu and they discussed the progress that had been made with Southern and where we stood on our [the MEAG] term sheet negotiation,” read one email. These contacts and interventions were a potentially troubling blurring of financial risk review, political discussion, and potential modification of loan terms.
We don't know how these contacts affected the terms of the deal. However, the bigger the pile of money on the table, the more transparent the decision process should be, and the more completely financial analysis must be separated from political and policy goals in driving funding decisions. These divisions were not properly respected, even though taxpayer support to Vogtle 3&4 is a big pile of money indeed: by far the largest of DOE's Title XVII loan guarantee program, and much larger than funding through other venues such as venture capital investment in energy and export credit support via the Export Import Bank.
- Credit subsidy payments appear too low to offer adequate protection to taxpayers in the event of a default. A key taxpayer protection under Title XVII is an up-front payment borrowers make to DOE to cover the expected risk of default. Yet, it is clear that the most current estimates for these payments are unlikely to provide adequate protection for taxpayers. Even the high estimate for Georgia Power ($52 million), for example, would add only about 1/8% to borrowing costs over the life of the loan. This increment, which is supposed to protect taxpayers from the risk of default on the first nuclear reactors built in the U.S. in 30 years, is likely less than the Federal Financing Bank (FFB) markup on the loan relative to the Department of the Treasury’s base cost of borrowing. While the other investment partners were offered a conditional loan guarantee with substantially higher credit subsidy fees than Georgia Power, they were still not protective of taxpayers. Oglethorpe Power’s fee was 2.5-4.3% for a range of $70-132 million and MEAG’s fee was 5-11.1% for a range of $108-186 million. The top end of this range is still lower than the average credit subsidy rate assumed on other Title XVII commitments, according to data from the US Government Accountability Office last year.
- Favorable repayment terms. Taxpayer risk was also increased by loan repayment terms that allow Georgia Power to repay no principal at all on its multi-billion dollar loan until years 29 and 30 of the loan term. Oglethorpe and MEAG do repay principal over the course of the loan, but assuming 40-year amortization period even though the loan term is only 30 years. As a result, both will still owe substantial principal to DOE at the end of the loan term, requiring refinancing. This structure increases the time over which the borrowers benefit from taxpayer subsidies on borrowing, and increases nonpayment risk to taxpayers should something on the project go wrong.
- Stale credit subsidy values. Over the past two years, there have been continuing changes to the loan terms, a deteriorating power market, and widespread changes in the prospects and operating procedures for nuclear power following the Fukushima accident. All of these shifts would be expected to change the projected default risks of the Vogtle project. Yet the DOE and OMB have both stated that there have been no subsequent adjustments to credit subsidy estimates to incorporate these market and deal shifts.
- Over-reliance on external contractors for key risk evaluations. DOE appears not to have built sufficient analytic tools and staff expertise internally to properly assess credit risks and deal structure.
- Inadequate control of credit subsidy assessment process. Credit subsidy values were issued to borrowers before the credit subsidy model was finalized, and there is some indication that Vogtle Project borrowers may have been given access to the analytic models DOE used to assess credit risks and subsidy rates.
All told, the documents released do not generate confidence that decisions have been made in a systematic, objective, and independent way; or that the more than $8 billion that taxpayers are putting at risk is being adequately protected. Press coverage of our study has been fairly broad, and in a number of the stories Southern Company officials have noted that the project is not dependent on federal loan guarantees to continue.
DOE ought to take Southern up on this statement. Having Vogtle 3 and 4 move forward without Title XVII loan guarantees would certainly be a good outcome for taxpayers, as we bear much of the risk of default but share none of the upside if the project is successful. However, I think that self-financing the deal would actually be better for the long-term viability of the nuclear industry as well. True: eliminating subsidized Title XVII loans will still leave many other props to the project in place: advance nuclear surcharges on Georgia Power customers -- Georgia's form of CWIP; long-term take-or-pay power purchase agreements that remain in force even if the plant is never completed; more than $2 billion in tax-advantaged Build America Bonds; and access to existing nuclear subsidies in the form of production tax credits, socialized nuclear waste management, tax favored nuclear decommissioning trusts, and liability caps on accidents. But demonstrating they can tap into private capital markets for the rest would help establish a more replicable financing model going forward.