Last week, the Energy Department approved a $6.5 billion loan guarantee for a new nuclear power facility in Georgia. The guarantee is split between Georgia Power, which owns 45.7% of the two nuclear units, and Oglethorpe, which owns 30%. Georgia Power is a regulated subsidiary of Southern Co. (SO). Oglethorpe is a nonprofit cooperative utility that provides power to 38 Electric Membership Corporations (EMC) and 4.1 million Georgia citizens.
The project's other owners are two other non-profits. One is Municipal Electric Authority of Georgia, which owns 22.7%. The other is Dalton Utilities, which owns 1.6%. MEAG expects to finalize another $1.8 billion in federal guarantees. Together, the federal government is guaranteeing $8.3 billion for two Westinghouse AP1000 nuclear power plants.
Given these plants will be built, federal loan guarantees are a good deal for consumers. Here are some important facts about the package:
- For new power plants, federal guarantees accomplish one important goal: They reduce construction costs. Because interest during construction is capitalized, any reduction in interest expenses reduces construction costs. Federally guaranteed debt lowers interest costs because debt holders assume no risk.
- Unlike other states, Georgia has not deregulated or restructured their utilities. All state-approved construction costs are passed on to consumers. With respect to the new nuclear units, the state already approved approximately $14 billion. Lowering construction costs means Georgia Power's consumers will pay about $200 million less for their electricity.
- The utilities did not receive federal loan guarantees; debt holders received the guarantees. Debt holders are third parties who help finance the construction.
- Before the federal government's guarantee can called by debt holders, utilities involved must default and declare bankruptcy. Any assets in bankruptcy must be used to satisfy outstanding debt.
- Contrary to last week's Washington Post commentary, taxpayers do not assume frontline risks. Owners and shareholders are the primary risk-takers. Only after all owner assets have been completely depleted do taxpayers come to the rescue. In the worst case, taxpayers would likely be liable for pennies on the dollar.
The guarantees are only part of government subsidy package. Once completed, these nuclear units will qualify for special tax incentives. Southern Co. CEO Thomas A. Fanning values those incentives at approximately $2 billion, most of which will benefit consumers.
To be clear, there are several parties in this deal. Consumers are the winners. Owners are betting their company and the taxpayers are the backstop. Debt holders are not risking a penny.
Still, there are concerns. The terms of these large federal loan guarantees are unknown. Taxpayers are not entitled to know. Shareholders are also kept in the dark. Only utility management and government officials have knowledge of the guarantee's terms and conditions. The federal government's process is not transparent to taxpayers. Utility executives are not forthcoming to their owners.
The principals in this deal are neither the utility executives nor government bureaucrats; most of them will likely be gone when this project is completed. The principals are the company's owners, the state's consumers and federal taxpayers. Incredibly, all these principals are being kept in the dark. At a time when trust and confidence in government and nuclear power are at historic lows, a secret deal has been arranged. That deal is supposedly nobody's business except for agents representing the principals.
Anticipating some might believe a nuclear plant is a safe investment not needing disclosure, look at Marble Hill Nuclear Power Plant. Its construction was almost finished but never completed. At the last minute, the owners ran out of money. They could not find any additional financing. A minority owner had a federal loan guarantee and defaulted.
When Marble Hill was abandoned, the project's owners took a financial hit. The majority owner was Public Service of Indiana. In 1994, they were forced to merge with Cinergy for pennies on the dollar. In 2002, Public Service Indiana became part of Duke Energy (DUK). Marble Hill may be a reason why Duke has been reluctant to follow Southern and SCANA (SCG) and start a new nuclear construction project.
Nevertheless, new federal loan guarantees increase the probability that Southern's new nuclear plants will be finished. They may incur schedule delays and cost overruns, but they will likely produce power. The reason is that everyone is committed -- the federal government, the state government, Southern's shareholders, nonprofit members and consumers are all in. When you are all in, there is no place to go but forward.
Finally, with natural gas prices suddenly volatile and coal entering uncertain times, nuclear power begins to look attractive. Under new Environmental Protection Agency rules, capital costs needed for new coal units are almost as costly as new nuclear. The difference is nuclear produces no air pollution.
