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Fee for nuclear loan guarantees remains controversial as government calculates it

By William Freebairn

March 26 - The nuclear industry and several interest groups are at odds over the level at which the US government should set a fee that will be paid by builders of new nuclear power plants that get federal loan guarantees.

Richard Caperton, an energy policy analyst at the think tank Center for American Progress, or CAP, said in a March 16 interview that the credit subsidy fee the companies will pay in exchange for the loan guarantees should be at least 10%. The Nuclear Energy Institute says Caperton's analysis is flawed and the fee should be much lower.

President Barack Obama's administration has proposed tripling the size of the nuclear loan guarantee program to $56 billion, potentially speeding the development of a new generation of nuclear reactors. Energy Secretary Steven Chu told reporters earlier this month the fee for Southern Company subsidiary Georgia Power is likely to be between 0.5% and 1.5%. Georgia Power and two partners have been offered more than $8 billion in loan guarantees for two new reactors at the Vogtle nuclear power plant site.

Joseph "Buzz" Miller, executive vice president for nuclear development at Southern, said during a March 9 panel at the Nuclear Regulatory Commission's Regulatory Information Conference in Bethesda, Maryland, that Southern expects the subsidy cost to be "on the lower end" of the range mentioned by Chu.

Leslie Kass, NEI's senior director of business policy and programs, in an interview March 16 said that the credit subsidy fee "has caught the attention of the anti-nuclear community. They're using it as an opportunity to try to delay new reactors."

Caperton said the fee must estimate the chances of default correctly. "If the credit subsidy fee is too low, that transfers risk to the taxpayer," he said.

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OMB, DOE working on agreement

Under the 1990 Federal Credit Reform Act, the fee is calculated, using guidance from the Office of Management and Budget, for each company seeking a loan guarantee. It is meant to reflect the risk to the government of issuing the guarantees, and is based in part on an estimate of the probability that the borrower will default as well as an estimate of how much the government could recover in case of default, according to NEI and CAP.

OMB spokeswoman Jean Weinberg said in a March 16 e-mail that OMB is working with DOE "to come to agreement on the underlying assumptions and models, and work together to develop accurate cost estimates, taking all applicable information into account."

Caperton wrote in a March 8 analysis released by CAP that credit subsidy fees for most projects should be about 10% of the loan amount, to adequately reflect the risk to taxpayers. He based that on a 50% default rate mentioned by the Congressional Budget Office in a review of a 2003 bill.

But NEI said in a March 11 rebuttal that the CBO estimate of a 50% default rate came from an analysis of provisions in a loan guarantee bill that never passed and had different requirements. And CBO Director Douglas Elmendorf, in a blog post March 4, said the 2003 estimate for a 50% default rate on nuclear loan guarantees does "not necessarily" hold today.

The actual fees being set may understate the potential cost to the government of issuing the guarantees, Elmendorf also said, requiring Congress to appropriate 1% of the amount of nuclear loan guarantee authority in the budget to compensate.

"From a practical perspective, there is probably a limit on how large a subsidy fee can be charged without jeopardizing the project's financial prospects," Elmendorf wrote.

But Caperton said the CBO posting does not mean the default rate is as low as the nuclear industry thinks.

NEI, which characterized CAP as "openly and determinedly anti-nuclear," said a review of historical default rates for regulated utilities with a credit rating one level below investment grade shows a 20-year cumulative default probability of 6.4%. NEI spokesman Mitch Singer noted that CAP Action Fund analyst Joe Romm, a former Department of Energy official, has criticized nuclear power in his blog, Climate Progress.

'Strong political pressure'

But CAP's Caperton said he is not against nuclear power. "The nuclear industry is clearly going to be part of a low-carbon future," he said. CAP spokeswoman Suzi Emmerling said analysts' blog posts do not always reflect the position of the organization.

Caperton said CAP wants credit subsidy fees to be calculated accurately whether they are for nuclear or renewable projects. "There is strong political pressure to have low nuclear credit subsidy fees," he said.

In his analysis, Caperton wrote that private lenders have been unwilling to finance nuclear projects without government support because of their understanding of the risks of cost overruns, delays and variable material costs.

But NEI disagreed, saying Vogtle project partner Municipal Electric Authority of Georgia sold $2.7 billion of bonds to cover some of its costs. The bond offering was "significantly oversubscribed," NEI said. MEAG Power, as the authority is also known, might not use the federal loan guarantee it was offered, NEI said.

NEI said the chance of cost overruns is less today than in the past, in part because the companies building the new units will be required to have equity at risk in the projects. In addition, most design work will be complete before construction begins, unlike the experience in the 1970s, it said. Engineering, procurement and construction contracts today include provisions for damages for delays and overruns as well as better-defined contingencies, NEI said.

As an example of the industry's recent ability to deliver new nuclear projects in line with estimates, NEI pointed to the Tennessee Valley Authority's refurbishing of Browns Ferry-1, which returned to commercial operation in 2007 after being shut for more than two decades. The restart was completed on schedule and only 5% over the original budget estimate, NEI said.

Experience in South Korea and Japan has shown that construction times and costs decrease as companies gain experience with a particular design, NEI said.

Anti-nuclear group raises FFB issue

But Michael Mariotte, executive director of the anti-nuclear Nuclear Information and Resource Center, said the experience of Areva and Finnish utility TVO is more illustrative of the problems with plant construction. TVO has said the Olkiluoto-3 unit will not enter commercial operation until 2013, instead of the initial target of May 2009.

"If they can't do it on schedule, what reason is there to think a US company that hasn't built one in 30 years will be able to?" Mariotte said.

Kass, at NEI, said factors that hurt that project included the lack of a completed design at the start of construction, a remote location and regulatory changes. The US nuclear industry is trying to capture lessons learned from that project, he said.

In Mariotte's view, the issues involve more than just the loan guarantees being a backstop for lending banks. The loans will be made by the Federal Financing Bank using federal funds, he pointed out. Although the final responsibility for the loans rests with taxpayers either way, "most people would perceive some difference between $10 billion going out of Citibank for these loans and $10 billion going out of the US Treasury," Mariotte said.

Renewable projects using innovative technologies need loan guarantees more than large electric utilities do, because they are trying, in some cases, to show that entirely new classes of technology can work commercially, Mariotte said. New nuclear plant designs are merely evolutions from their predecessors, he said.

One item on which Mariotte, Kass and Caperton agree, however, is that the government should disclose more about the mathematical models it uses to set credit subsidy fees. NEI says the industry is paying fees for being reviewed, but it has never seen the model used by the government.

Caperton called it troubling. Kass said, "it is somewhat a magic number for us. … We don't have access to the specifics. Until everybody does, this debate will rage on."

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