Timing Uncertain for Federal Nuclear Loan Guarantees

By Nancy Spring, Senior Editor, Power Engineering

Concern about how the federal loan guarantees for new nuclear power projects are being handled has grown in recent months and timelines for decision-making have become less certain.

The New York Times reported in November that, according to industry and government officials, awarding the loan guarantees was being held up by "an ongoing dispute within the Obama administration" over the financial risk the new reactors pose for the government and taxpayers. The article said the Department of Energy and the Office of Management and Budget (OMB) were at odds over how to determine the risk of loan defaults and how to calculate the credit subsidy cost.

The credit subsidy cost is one of several fees (along with an application fee, a facility fee and a maintenance fee) loan guarantee applicants will be assessed and is expected to be the most significant, although its exact size has not been clearly defined. Only the nuclear and fuel cycle loan guarantees face the subsidy cost issue.

One additional loan guarantee program change came when Congress last year extended the original deadline of September 2009 to issue loan guarantees.

Conditional Commitments "Soon"
The Omnibus Appropriations Act of 2009 (under Title 17, Innovative Technology Loan Guarantee Program) included the language "available until committed" to extend the deadline. In a Dec. 22, 2009, letter to Rep. Edward Markey, DOE Secretary Steven Chu wrote, "We hope to be able to announce conditional commitments soon." But even if a conditional agreement were signed tomorrow, the federal loan guarantee likely will not close until 2011 or later.

Edward Kee, vice president, NERA Economic Consulting, said this stage of the process involves conducting due diligence and developing a detailed term sheet for loan guarantees. Those guarantees will not be funded until COL (construction and operating license) approvals have been released by the Nuclear Regulatory Commission. Kee said those approvals could come "years from now."

The DOE has reviewed the applications, come up with a short list and is conducting due diligence and starting negotiations on terms. Much like a bank issuing a big loan, the DOE has engaged outside consultants to complete due diligence studies and is working on term sheets. When negotiations on the term sheets start, the applicant will pay a 1/2 of 1 percent facility fee. That will be followed by a conditional commitment by the DOE for the loan guarantee.

The credit subsidy cost will be paid at or just prior to closing the loan guarantee. No loan guarantee will close until the applicant has received an approved COL from the NRC, which published schedules targeting late 2011 for approving COL applications.

DOE appears to be implementing the loan guarantee program consistent with the laws and the rules that have been approved. Likewise, the OMB has a role to ensure the subsidy cost is consistent with the Federal Credit Reform Act. How the credit subsidy cost will be calculated is the big question because it determines how much upfront cash an applicant would pay for the loan guarantee.

Looking at past experience with nuclear project defaults on Rural Electrification Administration (REA)/Rural Utilities Service (RUS) loans, a high subsidy cost might seem reasonable. But the nuclear industry has changed since the earlier round of nuclear projects in ways that should reduce the potential for project defaults.

Cost Certainty
The DOE is moving toward conditional commitments and applicants want to know how big the credit subsidy cost will be before they sign. "The approach to calculating subsidy cost, if not the actual amount, should be a part of the loan guarantee term sheet and the conditional commitment," said Kee.

On page 18 of the DOE's Federal Loan Guarantees for Nuclear Power Facilities solicitation announcement, June 30, 2008, the credit subsidy cost is described as "the net present value of the estimated long-term cost to the U.S. government of the loan guaranteed as determined under the applicable provisions of the Federal Credit Reform Act of 1990, as amended."

Not surprisingly, a more precise definition has been called for. In late December, six senators sent a letter to DOE Secretary Steven Chu and the director of the OMB asking for clarification and some idea of when to expect details. "We would appreciate an explanation of why it is taking so long to come to reasonable closure on the issue of subsidy cost," they wrote.

The subsidy cost fee has to be paid upfront and is nonrefundable, so a balance has to be struck to solve what has almost become an untenable problem: making it high enough so there's no risk for the government but low enough to be attractive to the applicant.

Impact on Project Developers
The subsidy fee may affect the two regulated companies on the DOE's due diligence short list, SCANA unit South Carolina Electric & Gas and Southern Co. unit Georgia Power, less than the two unregulated companies, NRG and UniStar.

Regulated utilities can recover capital costs in rates and enjoy good credit ratings. For them, the loan guarantee may provide a way to lower borrowing costs. However, if the subsidy fee is too high, they could decide to put the project on their balance sheets instead. These companies can afford to negotiate for a while, given the COL timing and their financing alternatives.

Southern Co. is not relying on the program to go forward. Jim Miller, chairman, president and CEO of Southern Nuclear Operating, told Power Engineering magazine in an interview published in the November 2009 issue, that the DOE loan guarantees are helpful to get the nuclear power industry started again but not necessary for Vogtle Units 3 & 4.

"The Vogtle project is a finalist in the loan guarantee program, but you ought to know, and I've said this on Capitol Hill, in the final analysis we are not depending on it to go forward."

The unregulated nuclear projects face a different situation. For these companies, a loan guarantee may be an essential part of project financing. If the subsidy cost is too high, the project may have trouble finding an alternate source of financing. The sense of urgency may be higher with these projects.

"Federal loan guarantees are absolutely critical to our proposed new project at Calvert Cliffs in southern Maryland," said George Vanderheyden, president and CEO, UniStar Nuclear Energy, during the Power Engineering interview. "It's become very clear to us given what's going on in the greater economy-not just the U.S., the global economy-that private equity has no interest in investing in this project right now and the financial markets are not able to support a nuclear energy facility at this stage."