Vogtle

Groups Unearth Documents On Vogtle

Environmental groups are crying foul on loan terms acquired by Southern Company for its Vogtle nuclear plant.

The Southern Alliance for Clean Energy and others are calling for a greater degree of transparency in the federally-backed financing of the delayed and over-budget project.Anti-nuclear activists are drawing comparisons to the failed energy company Solyndra in a report that took three years to complete.

The nuclear plant near Augusta is the first new reactor to be built in the US in over a decade.

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 Image credit:   Construction at Plant Vogtle, as of October 2011.  Photographer: Charles C. Watson, Jr., Creative Commons LIcense.  Accessed via Wikipedia, February 5, 2013.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.  

Review of Documents Pertaining to Department of Energy Conditional Loan Guarantees for Vogtle 3 & 4

Hundreds of documents released from DOE under a Freedom of Information Request and subsequent litigation shed new light onto DOE's management of an $8.33 billion loan guarantee on offer to support the construction of two new nuclear units at the Vogtle reactor in Georgia.  The documents raise questions about how project risks were screened, the loan terms in the conditional committment agreement provided by DOE, the adequacy of the credit subsidy payments from borrowers to the US Treasury under the deal, and involvement by political appointees focused on getting the deal done.

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Congressman Ed Markey (D-MA) sent an interesting letter to Fred Upton (R-MI) late last week.  The correspondence outlined some of the history of the Title 17 loan guarantee program and the nuclear industry's push to make it their own.  It also included examples of the role the Nuclear Energy Institute played to weaken federal recourse in a loan default, and the pressure it brought to bear to expedite loans to its members.  These are indeed crass examples of political lobbying that put billions (and potentially tens of billions) of dollars of taxapayer money at risk. 

However, the most troubling element of this event to me was the political intervention with OMB's traditional role in financial oversight of federal programs by then-Senator Pete Dominici.  This is from Markey's letter:

Additionally, at the July 26, 2007 Senate Budget Committee hearing on the nomination of Congressman Jim Nussle to be the Director of the White House Office of Management and Budget (OMB), then-Senator Peter Domenici raised the pace and problems associated with DOE's implementation of the loan guarantee program:

"But OMB has been dragging their feet and I do not know which cabinet members have been involved.  I surmise as of now the Secretary of Treasury is himself involved.  But I can tell you, Mr. Nussle, that this is one of the most important provisions of the Energy Act.  It should have already been done and it should have had $25 billion to $30 billion in the loan guarantee fund.  It is still not ready and the recommended amount by OMB is $9 billion.  That will not fly...It seems to me all the work that has been done, you have got about 48 hours, to sit down and get this fixed."

On August 2, 2007, Senator Domenici lifted his hold on Mr. Nussle's nomination and voted to confirm him after receiving "a commitment from the Office of Management and Budget to fulfill the vision of Congress with regard to the Department of Energy loan guarantee program."

As I noted in my earlier blog post on Solyndra, this default is not just about subsidies to one industry or another.  It is about what role governments should play in the marketplace; and whether we are able to set up governmental structures that align the incentives of parties properly, and that both establish and retain appropriate checks and balances to reduce the risk of corruption and taxpayer loss. 

Domenici has always felt passionate about nuclear power in this country.  Yet even if we grant him that his promotion of nuclear has been rooted only in his belief of what was good for the country, his actions are inexcusable.  Undermining the program structure for something he likes creates flaws that quickly spread more widely to all sorts of programs, bleeding the country in the process.  Will the appointment of competent fiscal management for OMB now rest upon the whims of key Congressional members pushing for OMB to reinterpret financial reviews in their favor?  What other tests for how many other positions will crop up in its wake?  Parochial interests can very quickly corrode the basic structures we need to govern effectively if they are allowed to run unchecked.

In the Solyndra bankruptcy, Congressman Upton has been given an opportunity to put the loan guarantee program overall under scrutiny that was not possible back in 2007.  There are records of decisions, a number of commitments, and a broader context of financial failure and recession against which to judge the initiative.  Because I know the Congressman cares about the country, he would do us all a service to ensure his review looks not only at Solyndra, but at the way the other deals were struck as well.  That includes the the $10.3 billion in nuclear deals that Congressman Markey has asked be reviewed, and of course the next largest single commitment as well -- $5.9 billion to Ford Motor Company

Under the terms of Title 17, many of the borrowers must pay advance funds to cover their "credit subsidy."  This has been roughly estimated as the probability of default times the net losses to the feds (after any recoveries in bankruptcy) should one occur.  The industry has consistently pushed for lower credit subsidies, arguing that not only did their deal have a low risk of default, but even if it did default, taxpayer recoveries in bankruptcy would be high.  The Solyndra bankruptcy provides a real-world case study to put test these claims.  Congressman Upton's review of Solyndra should look very carefully at how high those recovery rates really are.  Will they be 50% of the investment?  25%?  Close to zero?  This will provide quite important information by which we can judge credit subsidy estimates in any future deals.

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Those of us who have been railing on the government's increasing push to make massive loan guarantees available to individual energy firms are not surprised to see the first major bankruptcy.  Solyndra went down with $535 million in federal guarantees for lots of reasons.  The marketplace is increasingly competitive.  Power prices have fallen due to recession and fracking-induced reductions in the cost of natural gas.  China subsidizes its solar production, artificially manipulates exchange rates, and there is a growing supply overhang as PV subsidies in Europe get cut.  New technologies look to be better than Solyndra's.  John Hudson in The Atlantic's blog provides a nice overview of the political hemming and hawing as the parties try to frame the issue to protect their interests. 

solyndra logoThough all of these reasons are plausible contributors to the demise of Solyndra, they are hardly surprise risks.  Operational problems, competitors, changes in market conditions:  all are baseline risks for any type of new investment that a venture capital firm might take on. 

The difference isn't the nature of the risks, but rather the nature of the investor -- the federal government, straying far from its domain of demonstrated competance.  This is the core issue I see in the Solyndra situation, but one that seems to be getting overlooked.  The Title 17 loan guarantee program, in all of its various forms including a swath of more recent even larger plans to have a federal "Clean Energy Bank", is poorly structured to achieve success.  It puts a handful of largely invisible bureaucrats and advisors in the position of making unprecedented wealth transfers to fund high risk private ventures.  That last sentence alone should have been enough to doom the program by both the Bush administration (that passed it) and the Obama administration (which has been approving most of the lending commitments).

Yet there are other program weaknesses as well, compounding the barriers to success.  The risk assessments are not subject to much disclosure or vetting on the outside, and the payments from funding recipients (in the form of credit subsidy assessments on borrowers) are widely recognized to be well below the market value of the credit guarantees.  Thus, the riskier the venture, the better the federal guarantees look to the firm, dramatically increasing the adverse selection risks of the resulting portfolio.  Yes, I know -- there is government review of the deals to alleviate those risks.  But this is done by people with only their goodwill to rest upon; they have no personal financial risk bound up with making a good selection, may not always have the appropriate technical expertise, and have limited time.  And because the financial benefits from getting one of these loans are so high, the government review team is arrayed against the best talent money can buy.  There may be conflicts of interest as well; it is really quite hard for the public to know at this point as many of the key decision makers and reviewers are not named.

The structure of this program has many red flags indicating a high risk of failure and corruption.  Other than scoring political points, it hardly matters that a solar firm is the first one to go down.  The Vogtle nuclear reactor loan guarantee is roughly 16x larger, and was done at terms based on market structure prior to Fukushima.  Anybody want to bet on the default risks for that one as the operating requirements for reactors get ratcheted up in response, and natural gas plants continue to undercut everybody's pricing? 

Back in 2007 DOE was taking comments on their notice or proposed rulemaking (NOPR) for Title 17.  I put in a number of comments on program structure, which, as far as I can tell, were entirely ignored by DOE.  The Department focused instead on the comments from the big investment banks that would be financing these deals.  Lehman Brothers and Merrill Lynch, neither of which exist any longer, comprised a two of the six financial institutions that banded together to submit joint comments on how the multi-billion dollar loan guarantees ought to be structured to work for the banks.  Citi, Goldman Sachs, and Morgan Stanley, all of which went through dramatic restructuring and public bailouts, made up most of the rest.  Their comments resulted in even more generous terms for borrowers, and weakened checks and balances for taxpayers.  Below are some excerpts from the comments I submitted.

The NOPR did not go far enough in outlining how DOE would ensure non-political allocation of resources and protection of taxpayer capital. Many of the ways these issues were addressed in the current version were mostly descriptive in nature, leaving too much guesswork about how actual implementation and institutional oversight will proceed.

...

A combination of wide latitude in determining project eligibility to participate in funding rounds with imprecision on how performance "improvement" will be measured create the conditions for skewed and politicized distribution of billions of dollars in guarantees. These conditions bode poorly for the long-term success of this program.

...

DOE acknowledges wide latitude in targeting loan guarantees and acknowledges they are under no obligation to run open contests across all energy sources authorized under Title XVII of the Energy Policy Act. The NOPR is mostly silent on the establishment of rigorous project comparison metrics and robust institutions that would ensure the billions in guarantees are effectively targeted.

Not all energy resources eligible under the Energy Policy Act of 2005 (EPACT) are necessarily eligible in particular -- or indeed any -- funding rounds. In fact, DOE's NOPR lists specific programmatic objectives, loan guarantee authority or available funds as possible criteria by which guarantees under Title XVII can be awarded. The NOPR includes the example (p.7) of the Administration's 2008 budget that proposes $4 billion in guarantees for centralized power, $4 billion for biofuels and other clean fuels, and $1 billion for new electric transmission or renewable energy power systems. This example is an early indication of the power that the legislative or executive branches will seek to exert in earmarking funding to favored interest groups. The political influence leveraged by these groups is greatly enhanced by DOE's view that Congressional appropriations are needed to support DOE's credit authority under Title XVII, and that Congress can structure these appropriations however it sees fit. While in theory the executive and legislative branches could choose to exert their influence based on the technical merit of the projects alone, assuming they will in fact do so would be both imprudent and naïve.

The risks of political influence are further compounded by the fact that funding under Title XVII will be in the form of loan guarantees, for which valuation and transparency are far more difficult to attain than with direct payments. In addition, recent mandates to publish legislative earmarks (albeit only partially effective thus far even for direct payments) would not seem to apply at all to Title XVII loan guarantee decisions.

By the time the larger lending proposals under CEDA started to surface in 2009, I was a bit more blunt in my concerns about corruption:

CEDA risk profile likely to be far more concentrated than conventional banks, increasing potential problems with systemic risks and corruption. The multi-billion dollar scale of centralized energy technologies suggest the size of the credit commitments for individual projects under CEDA will be far larger than undertaken in other areas of federal credit  guarantees. This opens the initiative to higher systemic risks and potential corruption.

It will be interesting to see what surfaces in the FBI review of documents.  It's a pity we can't learn about potential political influence on the nuclear deals at the same time, but Congressional sources tell me it is not about to happen.  At least the Solyndra failure can serve as a wake-up call on the incentive problems for these mega-lending initiatives, and help us avoid far worse financial blow-ups were we to have followed industry's lead in ramping up lending to nuclear or establishing a large scale "green energy bank" such as CEDA.

UPDATE, September 19th.  Michael Grunwald at Time Magazine has a nice overview of the problems with shining a light only into a small part of a big swamp.  Focusing on Louisana Senator David Vitter, Grunwald documents how Vitter's bill to increase scrutiny only of loan guarantees to renewable energy projects side-steps Vitter's own efforts to bring home the loan guarantee pork to his own constituents -- including for renewable energy projects.  We've got systemic problems here, and piece-meal solutions generally just shift the problem rather than solve it.

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Ben Gemen over at The Hill describes as "hardball" the effort by House Republicans to bring to light documents and decision making behind a $535 million loan guarantee for a new facility to be built by Solyndra. Hardball is appropriate for an unprecedented level of taxpayer exposure for investment into individual, privately-owned assets. 

I hope the Congressional effort is successful in teasing out real documents that would allow real oversight of DOE's loan guarantee program.  DOE's Loan Programs Office has been notoriously resistant to transparency, despite operating at a scale that already runs into the tens of billions of dollars of commitments ($39.8 billion as of July 2011).  Proposals to extend this federal-financing approach through a "clean energy" bank of sorts have been floated with figures in the hundreds of billions. This is not a program to be glossed over.

Gemen reports that

In a letter to [Rep. Cliff] Stearns Tuesday, OMB Deputy General Counsel William Richardson, Jr. notes that OMB "made available" 1,400 pages of emails and attachments this week, which follows hundreds of other pages made available earlier.

It is impossible from the outside to tell how material this information is, and whether the critical items on risk management, potential conflicts of interest, and likelihood of market success have been provided. 

Nonetheless, I'm guessing that the data dump on Solyndra is about 1,400 pages more than what has been provided for DOE's commitment to the Vogtle nuclear power project in Georgia.  At roughly $8.3 billion (which is really a direct loan, as program rules require a loan of this scale come from the Federal Financing Bank), DOE's support for Vogtle is nearly 16 times as large as what taxpayers are risking for Solyndra.  Surely if a subpoena is warranted for gathering data on the Solyndra project, it is warranted for Vogtle as well.

I have been critical of the weak structure of DOE's foray into large scale loan guarantees for energy infrastructure since the program's inception.  It is not as though the Department has a robust and successful history of this type of capital deployment.  Here are the my formal comments to DOE on the proposed program structure back in 2007.  They were ignored then; DOE focused mostly on loosening program rules during that round of comments based on input from interested investment banks, firms that did or would represent many of the beneficiaries of the guarantee program itself.  Some of these banks (e.g., Merrill and Lehman) imploded soon after due to the very types of conflicts of interest and weak oversight that remain a concern in the DOE lending initiative. 

Though DOE remains under pressure to push money out the door, and in the process continues to ignore most of these structural issues today, the problems -- and the financial exposure -- remain.  It would be a service to all taxpayers if Cliff Stearns extended his interest in fiscal prudence and oversight beyond a single project and to the program overall.

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It is hard to imagine the executives of a public company extending an $8.3 billion line of credit to a risky new venture, and then be unwilling to provide any detail to shareholders on how they evaluated the benefits and risks of the deal, and what they were expecting to get paid for taking on that risk.

Yet, this is effectively what the US Department of Energy has done for an $8.3 billion loan guarantee package to support the construction of two new nuclear reactors in Georgia.  We know that DOE is required by statute to have gotten an independent assessment of the project risks without guarantees, yet no details on who did that analysis (to gauge their reputation and potential conflicts of interest) or its findings have been released.  

A key element of the loan guarantees relates to the size of the expected "credit subsidy" that the borrower is expected to prepay to the government.  (This metric is supposed to assess expected losses relative to the "risk-free" government cost of borrowing; even with no default, the utilities will recieve very large subsidies relative to the private borrowing rate on the proposed projects). DOE, with a strong goal of pushing loan guarantees out the door, has an incentive to down play the risks of initial guarantees.  Since actual risks will become evident only years from now if the projects start to veer off course (as has occurred with new reactors in both Finland and France), understating risks now increases the benefits to borrowers, expands the number of deals DOE can do with its pool of capital, and delays the day of reckoning. 

Taxpayers have exactly the opposite interest, since the point of greatest control over our ultimate bailout tab is in the terms of the initial guarantees, and whether or not to extend the credit at all.

In March, a group of environmental groups issued this letter as a followup to a number of freedom of information act (FOIA) requests that DOE had effectively ignored.  Here is one of the rejections to an NRDC request as an example.  The goal of the FOIA's was to obtain the necessary detail on the loan agreements with which to assess the quality of DOE's due diligence, and their assumptions regarding the risk of the loan. 

DOE's Office of the Loan Guarantee, under the Executive Directorship of Jonathan Silver, has continued to release nothing.  As a result, the Southern Alliance for Clean Energy has moved from FOIA to litigation in an effort to ensure transparency and accountability in this massive lending program.   It is surprising that these actions have not yet engaged the imaginations and lawyers from groups focused solely on good governance and fiscal controls.  There are clearly important principles at play that will affect government accountability well beyond the energy area.  This is well illustrated by the conflict between DOE and the Office of Management and Budget on the proper way to calculate credit subsidies, though I've seen little in the public sphere since this article late last year. 

With total energy loan guarantee commitments reaching $111 billion, and much more on the way if the administration is successful, the scale of this program certaintly warrants attention even by those concerned only about the fiscal rules by which our government operates.