Tuesday, March 2, 2010

Nuclear Loan Guarantees


By Michael Mariotte

Imagine for a moment that you want to build a house and need a loan. Your financial track record is shaky: Last time you tried to build a home you went over budget by 800 percent and the project took years to complete. Based on past performance, the odds are about 50-50 or better that you’ll default on this loan.

Adding to your problems is the fact that nobody’s ever built a big, complicated house like this one. Engineers have identified serious safety flaws in design that must be corrected before plans are approved. It’s anybody’s guess how much those changes will add to the price tag. Even without the mandated safety changes, costs have increased.

Forget about getting your loan from a bank. No private lender would touch this. Indeed, Wall Street calls this type of project a “bet-the-farm” investment, so risky it could be a “corporate killer.” Where do you turn? The U.S. taxpayer, of course.

In recent months, taxpayers have bailed out investment firms and car manufacturers. Why not your home project? That’s exactly what the nuclear industry – with Obama Administration blessings – wants to do with a new generation of reactors. Instead of calling them loans, the handouts will be characterized as loan guarantees. The first conditional “guarantee” of $8.3 billion was awarded Feb. 16 to the Southern Company for two nuclear reactors in Georgia, estimated to cost $14 billion. The award is the beginning of what ultimately may be $54.5 billion in federal “guarantees” doled out to fund other new reactor projects.

The idea that these are loan guarantees is pure fiction -- a political semantic to calm deficit-weary taxpayers. They are high-risk loans, pure and simple, to be granted by a little-known government agency called the Federal Financing Bank. They are so high-risk, in fact, that the private sector wants no part of them. Hence, the need for federal backing. If the project goes bust, U.S. taxpayers will wind up holding the bag.

There are warning flags all over this deal. These are loans to an industry that has never delivered a project on budget and very rarely on time, an industry that has not been able to solve either the problem of its toxic radioactive waste or of routine emissions of carcinogenic substances into our environment. They are loans to an industry that since day one has depended on public subsidies – and political clout – simply to stay alive. These are loans for reactors that remain unproved.

The recent announcement of $8.3 billion for the Southern Company’s two new reactors at Plant Vogtle, near Augusta, was just the beginning. Several other projects also are vying to tap the Treasury.

Overseeing this sweepstakes is the Department of Energy (DOE), which has been assigned the task of rating the new reactor projects most likely to succeed, thereby qualifying them for a piece of the $54.5 billion pie. (It’s worth remembering that the last time the DOE picked winners and losers in an energy giveaway it was for the abysmally flawed – and costly – synfuels program of the 1970s.) In making his recent announcement, Secretary of Energy Steven Chu didn’t instill much confidence that DOE had done its homework before embarking on this lottery. He confessed to reporters that he was unaware of findings by the Congressional Budget Office that half or more of reactor projects receiving loan guarantees will likely default.

The Office of Management and Budget (OMB) has been charged with setting what’s known as the “credit subsidy cost” for these nuclear loans, the amount of equity the utilities are required to put up to ensure that taxpayers don’t get stuck footing 100 percent of the bill. Given the predicted default rate and level of unknowns, taxpayers might expect a fairly high percentage of equity – say 20 percent, the typical down payment on a house. Not likely. The utilities have been pushing for 1 percent or even less.

Congress may go one step better. The Senate Energy Committee proposes creating a Clean Energy Development Administration that would get around any OMB requirements. If the proposal becomes law, utilities would make no down payment and have access to unlimited federal loans to build new nuclear reactors. (That other high-risk, high-price global warming “solution” -- “clean” coal plants – also would be eligible).

If you walked into your local bank with a loan request as ill-conceived and fraught with risk as this one, you’d be shown the door. That’s what this nuclear loan “guarantee” plan deserves. And that’s what bailout-weary U.S. taxpayers must demand.

Mariotte is executive director of the Nuclear Information and Resource Service (NIRS). He lives in Takoma Park.
Copyright (C) 2009 by the American Forum. 02/10


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