May 31, 2012
The builders of the first new U.S. nuclear power plant in more than a generation – barely under construction but already over budget – are nearing an agreement with the Department of Energy for a massive federal loan whose cost assumes the industry will suffer almost no defaults over the next three decades.
It is the first of a number of new nuclear power plants on the drawing boards that are angling to take advantage of the loan program, which is an obligation of the U.S. Treasury subject to the debt limit.
At the same time, the electric utilities building the nuclear power plants, which are mostly in the Deep South, have lobbied Republican-led legislatures in the region to pass or consider laws that would require consumers to pay for the loans long before the plants generate a single kilowatt-hour of electricity.
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The issue, which is causing controversy in at least a half dozen state legislatures, is called “construction work in progress” or CWIP, a financing technique that caused electricity rates to soar in the 1970s when the last generation of nuclear plants built in the U.S. went far over budget. Higher construction costs from increased safety standards in the wake of the 1979 near nuclear meltdown at Pennsylvania’s Three Mile Island put an end to nuclear power plant construction for over 30 years.
Rising electricity demand, allegedly safer designs, industry lobbying and the allure of a non-carbon-polluting source of energy has triggered a “nuclear renaissance” in recent years. The 2005 Energy Act, signed into law by President George W. Bush, authorized $18.5 billion in loans for new nuclear construction.
Since the law passed, however, the Great Recession has flattened the growth of electricity demand, and natural gas has emerged as a less costly alternative. Yet a number of new nuclear plants, mostly planned before the downturn, are proceeding.
Since February, the Nuclear Regulatory Commission has approved two applications for four new reactors and has at least 10 more applications under review. NRC chairman, Gregory Jaczko, the sole vote against the new reactors on the five-member commission, announced his resignation last week after repeated run-ins with staff and legislators on Capitol Hill.
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The first out of the box is the Atlanta-based Southern Company, which, along with regional co-operatives and municipal utilities, is building two additional reactor vessels at its Alvin W. Vogtle nuclear power station in Augusta, Ga. The utilities have jointly applied for $8.3 billion in government loans for the $14 billion project. Southern revealed in a Securities and Exchange Commission filing earlier this month that the project may cost $900 million more than originally estimated. A DOE decision is expected before the end of June.
The Vogtle project isn’t the only nuclear construction zone experiencing rising costs in the wake of last year’s nuclear disaster in Japan, which raised concern about nuclear safety around the world.
Japan’s 54 reactors remain shuttered, and earlier this month former Prime Minister Naoto Kan revealed he briefly considered evacuating 30 million people from metropolitan Tokyo.
Scana Corp. is leading a $9 billion expansion of its Virgil Summer nuclear power station near Jenkinville, S.C. After receiving an NRC license in late March, the company announced the project, whose costs will be shared by utilities in North and South Carolina, was $300 million over budget because components did not meet shifting safety standards.
Progress Energy is bogged down in an increasingly costly project along Florida’s northwest Gulf Coast. The Levy County nuclear power station, originally a $5 billion project that was slated to open later this decade, is now a $19 billion to $24 billion project that won’t open until sometime in the 2020s. Its engineering design still hasn’t received NRC approval.
A Tampa Bay Times investigation in March revealed that the CWIP law passed by the Florida legislature in 2006 to help finance the project could wind up costing ratepayers in the region, many of whom are elderly and living on fixed incomes, as much as $50 a month in higher electricity bills before the plant even opens. Though it originally passed the Florida legislature by a near unanimous margin, a Republican legislator from the district is now leading the charge for CWIP’s repeal.
“It is inherently unfair for utilities to ask their customers, our constituents, to front the costs of massive and expensive construction projects that are not even guaranteed to be completed,” State Sen. Mike Fasano wrote last year to North Carolina Gov. Bev Perdue, when that state’s legislature was considering a similar bill to pay for the Scana project. “These risky investments ought to be the responsibility of utility shareholders and their investment partners, not the average ratepayer that is already struggling to pay their monthly utility bill or keep their business afloat.”
A spokesman for Fasano, who calls himself “a conservative, pro-business legislator,” said the Republican-led Florida legislature has turned a deaf ear to his complaints about rising rates. Earlier this month, the state senator participated in press conferences in Missouri and Iowa, where similar bills are being promoted to help finance nuclear power plant construction. Georgia also has a CWIP law, which will help finance the Vogtle project, which isn’t slated to come on line until 2016.
The federal subsidy for nuclear power construction comes in the form of lower interest rates available through Treasury financing. The federal debt is guaranteed by a “credit subsidy fee” that insures against default. The Nuclear Energy Institute claims the fee differentiates nuclear subsidies from alternative energy loan guarantees that went to companies like Solyndra, which set aside a portion of the appropriation for defaults and didn’t charge the cash-poor companies, many of them start-ups, an upfront insurance fee.
“Southern Company’s exceptional financial strength and 30-year history of safely operating nuclear plants makes it a solid, credit-worthy candidate for the DOE loan guarantee,” Steve Higginbottom, a company spokesman said in an email. “DOE would be first in line to recover taxpayer money.”
But the industry trade group, currently headed by Progress Energy’s chief executive officer, William J. Johnson, engaged in a fierce behind-the-scenes lobbying campaign to lower the credit subsidy fees charged by DOE. A February 2010 white paper attacked the agency’s initial projection for nuclear power loan losses as “flawed.”
“The 55 percent recovery rate used by DOE and OMB has no factual basis and is unrealistically low for regulated utilities and for project finance debt,” the white paper said. It cited a Moody’s report on utility industry debt that suggested industry project defaults, which cover every form of energy production, historically hovered around 1.5 percent.
Last week, the Southern Alliance for Clean Energy, a consumer and environmental group opposed to the Vogtle expansion, released documents obtained under a Freedom of Information Act lawsuit that showed DOE plans to charge Southern Co. a credit subsidy fee of 0.5 percent to 1.5 percent for its share of the $8.3 billion loan – slightly less than Moody’s estimate for the industry average for all debt. A Department of Energy spokesman refused to comment on the details of the loan negotiations.
“It is still unclear why DOE has entertained this level of favoritism to this particular company,” said Stephen Smith, executive director of the watchdog group. “More information needs to be revealed about any terms of the loan guarantees . . . in order to learn whether any undue influence was brought to bear on DOE to accept this high-risk venture on the backs of taxpayers.”