nuclear subsidies

Nuclear Power: Still Not Viable Without Subsidies

Conspicuously absent from industry press releases and briefing memos touting nuclear power’s potential as a solution to global warming is any mention of the industry’s long and expensive history of taxpayer subsidies and excessive charges to utility ratepayers. These subsidies not only enabled the nation’s existing reactors to be built in the first place, but have also supported their operation for decades.

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Obama's 2012 budget proposal, released today, continues his multi-year push to boost subsidies to nuclear power.   He continues to push for $36 billion in new loan guarantees for nuclear new-build.  Outside of macro-economic meltdowns these guarantees represent some of the largest government subsidies to single, privately-owned industrial facilities in our nation's history.  Nonetheless, they have been a recurring request by the Administration, so really aren't that big of a surprise.

Tucked in the same paragraph, the budget proosal also requests "an additional $200 million in credit subsidy to support $1 billion to $2 billion in loan guarantees for innovative energy efficiency and renewable energy projects..."  This is quite important, as it provides a data point on the the expected credit subsidies associated with DOE's Title 17 energy loan guarantee program:  10-20% of the loan's face value.

The much larger scale of new nuclear reactors, combined with quite poor historical cost performance of new completions in the US, suggest credit subsidy rates for the nuclear commitments should be even higher.  Nuclear comes under Title 17's self-pay provisions, meaning the credit recipients would need to kick in these amounts as default premiums in advance.  Look for DOE to downplay nuclear default risks dramatically here, rather than upholding the letter and spirit of the Title 17 program in protecting taxpayers.  

Other energy-related items of note in the budget:

  • Increased nuclear R&D, including into the latest industry fad for small, modular reactors.
  • Increased public funding to decommission old enrichment sites.
  • A positive push to eliminate a number of fossil fuel subsidies, worth an estimated $4 billion/year.  Though he targets only a partial list of existing subsidies to fossil fuels, it is nonetheless a good step.  Note, however, that Obama subsidies to carbon capture and sequestration work counter to the objectives of phasing out subsidies to fossil fuels.
  • Shifting to a reverse-auction (lowest subsidy wins) for advanced biofuels.  Again, this has the potential to be innovative, though with some significant caveats.  First, if auctions do not properly integrate life cycle environmental impacts, auction winners may worsen core problems with biofuels and landuse.  Second, if auctions are layered on top of massive subsidies already in existence for biofuels, the lowest bid could simply reflect the fuels with the largest other sources of subsidy, rather than any inherent competitive attributes.  (Both of these issues are significant problems with Clean Energy Standard proposals as well).  Third, it is not clear how one would implement the reverse auction approach without interacting with the similar operations of the Renewable Fuels Standard (lowest RIN prices win market share). 
  • Converts $7,500 per vehicle tax credit for purchasing electric cars to a much more valuable rebate.  Citizens not earning enough income to use this type of tax credit would be unlikely to buy the more expensive electric vehicles in the first place.  Thus, the main beneficiary of this change is likely to be wealthier purchasers who were seeing their credits reduced for other reasons (e.g., the Alternative Minimum Tax).  The budget proposal does not seem to change the rules of what vehicles can earn the credits; if they removed existing limitations per manufacturer, the overall subsidy cost of the program would likely surge.
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Nicholas Donofrio, the keynote speaker at the EnergyBiz Leadership Forum, says nuclear is the key towards solving the US' energy challenges.  Baseload. Green.  All problems soluble with American ingenuity.  Ending subsidies to nuclear power and making it compete with all options on the supply and demand side in order to help focus American ingenuity in the most cost-effective sectors must be in the part of his remarks that EnergyBiz didn't extract.  I can't think of a better way to test all of his assumptions on the importance and viability of the energy resource.

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A wide range of groups on the right and the left properly linking subsidized expansion of the civilian nuclear power sector with what happens on the nuclear proliferation front in this letter to President Obama.  Energy security, after all, has many dimensions.  It is not only about oil imports.

Nuclear Socialism: Energy subsidies—of any kind—are bad business

Interesting article by Amory Lovins in The Weekly Standard examining the history and market-related problems associated with nuclear subsidies past and present.  Lovins suggests that the structure of many of the proposed nuclear programs do a poor job aligning incentives and accountability for proper risk management and oversight, and create a significant risk of recreating conditions similar to those that led to the meltdown in mortgage markets two years ago.  Lovins uses subsidy data from Earth Track, and suggests shifting from always adding new subsidies to various energy forms

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Constellation Energy has announced it will not be continuing its effort to build a third nuclear reactor at its Calvert Cliffs site in Maryland. I looked at the structure of this project, and the associated subsidies, in detail last year in this paper for the Nonproliferation Policy Education Center.

The firm has blamed the US Department of Energy for unreasonably high credit-subsidy payments associated with a $7.5 billion conditional loan guarantee committment to build the new facility.

According to Platt's:

In a letter addressed to DOE Deputy Secretary Daniel Poneman dated  Friday, Constellation Vice Chairman Michael Wallace said the US government's $880 million fee -- 11.6% -- for a loan guarantee to support the $10 billion project was too high.

"Such a sum would clearly destroy the project's economics (or the economics of any nuclear project for that matter), and was dramatically out of line with both our own and independent assessments of what the figure should reasonably be," Wallace wrote.

DOE agreed to cut the credit subsidy amount to 5 percent, in return for $300 million in additional equity from Constellation and power purchase guarantees.  Constellation said no, and thought a credit subsidy on the order of only 1-2% was appropriate.   Christine Tezak, an analyst at Robert W. Baird & Co. in Milwaukee said DOE's terms were no better than those on offer from private funders.  Her claim does not seem credible.   Private funders willing to do 80% debt financing at the risk-free rate in return for an up-front 11.6% payment?  Absent names and details, a good deal of skepticism about these other financing options seems warranted.

Color me skeptical as well on Constellation's claim that the high credit subsidy payment was the main reason for pulling out.  Constellation's own cost models (via presentations done by Constellation Senior VP Joe Turnage in 2008) estimated that the loan guarantees would reduce their cost of power production by 3.7 c/kWh levelized.  Again, using their own operating assumptions for the new reactor, this would have resulted in financing savings of nearly $500 million per reactor per year.  The payback on the "dramatically out of line" loan guarantee fee?  Less than two years.  And that was before rising reactor costs and the credit meltdown made the value of risk-free borrowing even larger than before.

There are two other explanations for Constellation's change of heart that are far more likely:

  • Poor and worsening economics for nuclear new-build.  There is much wider agreement than a few years ago that the economics of nuclear power are just really.  The combination of worsening credit conditions, falling power prices due to the economic recession, the surge in low cost natural gas from fracking, inaction on carbon pricing, and a rather less than stellar delivery schedule on Areva reactors in Europe all suggest caution is greatly needed for an investment of this size.  The Baltimore Sun has a good summary of many of these issues. 
  • Bargaining strategy.  Constellation may be playing project subsidy chicken with partners on both sides of the Atlantic -- with DOE and OMB to get the credit subsidies down to one or two percent; and with the government of France (through their export credit agency Coface) to come forward with the sovereign guarantees that were supposedly pending at earlier stages in the project. 

Hopefully the Obama administration will not intervene here to once again give out the dessert before making sure the spinach has been eaten.  The Administration ought to be indifferent to which low carbon energy options win in the marketplace, and the marketplace seems to have spoken on this project.  However, Platt's indicates DOE is still trying to woo the firm to take the federal billions -- not a great sign for the taxpayers who will ultimately bear the burden of any default.  In contrast, shareholders seemed happy with the change:  Constellation's stock price rose following the announcement and is expected to rise further as a result of the cancellation.

Westinghouse, on the other hand, is still signaling full speed ahead. Time will tell.  It is always so much easier to stay in the game when you are betting other people's money.

Update, 18 October 2010:  It looks like the poor economics may be the leading rationale for Constellation's recent actions, rather than a bargaining strategy to get more favorable terms on loan guarantees.  The firm offered to sell its stake in the nuclear project for $1 plus reimbursement of $117 million in incurred project development costs.

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Clandestine nuclear programs have been at the heart of many difficult international conflicts, and that number seems likely to grow.  Although the overlap in skills, technologies, and equipment between civilian and military programs is both substantial and well-recognized, the push for the expansion of civilian nuclear power -- even when it makes no economic sense -- has continued unabated.  Often, this is justified under the terms of the Nuclear Nonproliferation Treaty (NPT) that came into force in 1970.

The specific issue of whether the rights garned in the NPT on "peaceful" nuclear development are absolute, or constrained by other factors like nearly every other legal agreement in existence, including the US Constitution, is one that has not gotten enough attention.

Henry Sokolski, Executive Director of the Nonproliferation Education Center, has taken this on directly as part of a much longer essay on US mis-steps that contributed to the current Iranian nuclear crisis.  His entire essay is worth a read, but I'm grateful for his permission to reprint the section on civilian power and the NPT below:

Exaggerated the value of peaceful nuclear energy and NPT member states’ right to it.

One of the reasons Washington felt so comfortable promoting civilian nuclear energy in the Middle East is that it was a diplomatic path that already was well worn. Back in the l970s, the US endorsed the Shah’s fantastic nuclear plans to assure Iran’s dominate role in the Persian Gulf and its strategic ties to the US. Even after initial plans were dropped to transfer reprocessing technology, Carter subsequently offered the Shah access to this technology again. At the same time, the U.S., Russia, Germany, and France all competed for nuclear sales and political influence in the Middle East by offering nuclear reactors to Jordan, Israel, Turkey, Egypt, Libya, Iraq, Iran, and Algeria. This was the state of play just before the Shah was deposed.

Meanwhile, the US and nuclear supplier states gave up demanding through INFCE that states back off making nuclear fuel and let the market dictate what was safe and dangerous. This meant the US and others winked at Brazil, South Africa, Germany, Holland, Japan as they stood up nuclear fuel making efforts. Finally, when the crisis over Iranian fuel making came in 2002, the US and the EU almost reflexively jumped to affirm Iran’s right to develop “peaceful nuclear energy” in ways that only made Iran’s efforts to make nuclear fuel seem increasingly legitimate.

Thus, the EU was careful in its first offering of incentives to Iran to allow that Iran retained its right to peaceful nuclear energy and to offer it light water reactors. Shortly thereafter, President Bush’s national security advisor conceded Iran had the right to make nuclear fuel for peaceful purposes but suggested that it would be best if Iran could see the wisdom of exercising that right on Russian soil. It was about this time in 2006 that the US backed off its objections to Bushehr as a front for and possible path to acquiring nuclear weapons. Instead, Washington announced that deemed that Bushehr was peaceful and legitimate.

More recently, the U.S and others offered to supply Iran with nuclear fuel enriched to 19.75 percent. When the negotiations for such supplies broke down over differences regarding the swap out of low enriched Iranian fuel, Iran insisted that it must proceed to enrich to 19.75 percent – which technically is on the cusp of being  weaponsgrade. Finally, in May of 2010, the U.S. backed countries’ rights to develop peaceful nuclear energy in the final declaration of the NPT Review Conference. This declaration, though, not only iterates all countries’ right to peaceful nuclear energy. It prohibits reinterpreting the NPT’s protection of peaceful nuclear activities under Article IV in any way that would “limit” these rights. It also affirms the importance of all member states availing themselves of Gen IV International Forum efforts and moving toward a “sustainable fuel cycle” – i.e., all code for recycling nuclear fuel and moving toward fast reactors – technologies historically associated with making nuclear reactor fuels that can be quickly converted into nuclear weapons.

These views and actions  correspond with the conventional wisdom that any reading of the NPT that might curtail NPT members’ rights to peaceful nuclear energy is simply a nonstarter. Such a view, however, is mistaken about how absolute these rights are. In fact, some of the NPT’s peaceful nuclear energy benefits have already been significantly reinterpreted and effectively abolished.

Consider the Article V of the NPT and its call on nuclear weapons states to share the possible benefits of peaceful nuclear explosives. When Article V was first proposed in the 1960s, most nations, including the U.S. and Russia, believed that nuclear explosives could be employed as “ploughshares” to create canals and to complete other civil engineering tasks, including mining and excavation. To assure nonweapons states the possible benefits of such nuclear applications, the NPT allowed nuclear weapons states to share such benefits by supplying nuclear explosive services to nonweapons states on a turn-key basis.

To date, no state, though, has applied for such assistance nor has any state offered it for two unanticipated reasons. First, the “possible benefits of peaceful nuclear explosives” turned out to be negative: Given the costs of cleaning up the radioactive debris that the use of peaceful nuclear explosives would produce, it became clear that it would be far cheaper to use conventional explosives for civil engineering applications. In short, there were no “benefits” to share.

Second and closely related, the few states that insisted on conducting their own “peaceful nuclear test explosions” – India and Russia – were strongly suspected of using Article V as a cover for nuclear weapons testing. Certainly, the U.S. and most nuclear supplying states sanctioned India for its 1974 test of a “peaceful nuclear device” by depriving it access to most controlled civilian nuclear supplies and, in time, any nuclear explosion, “peaceful” or not, was seen as a violation of a norm against any form of nuclear testing.

This example of Article V’s reinterpretation speaks directly to several of the NPT’s most pressing current difficulties. As already noted, the prevailing view of the “inalienable right” to “peaceful nuclear energy” recognized by the NPT is that this right automatically allows states to participate in any nuclear activity, no matter how uneconomical or dangerous, so long as it has some conceivable civilian application and the materials or activities in questions are occasionally inspected by IAEA inspectors or their equivalent. This is Japan’s view, and that of the Netherlands, Germany, South Africa, Brazil, Iran, and the US.

Yet, how Article V is now read suggests that there is another more sensible way to interpret Article IV. This interpretation recognizes the explicit qualifications made in the NPT on exercising the inalienable right to peaceful nuclear energy. This right, the NPT notes in Article IV, must be implemented “in conformity” with the treaty’s clear strictures in Articles I and II. These two articles, in turn, prohibit nuclear weapons states “in any way to assist, encourage, or induce any non-nuclear-weapon State to manufacture or otherwise acquire nuclear weapons or other nuclear explosive devices,” and ban nonweapons states from seeking or receiving “any assistance in the manufacture of nuclear weapons.”

Properly understood, being “in conformity” with Articles I and II implies also being in conformity with Article III, the NPT requirement that all nonweapons states accept the imposition of international nuclear safeguards on all of their civilian nuclear activities and materials to prevent their military diversion to make bombs. Certainly a nonweapons state refusing such safeguards would be an implicit violation of Article II. Thus, the final statement of the 2000 NPT Review Conference refers to the need for nonweapons state members to exercise their Article IV activities in conformity with Articles I, II and III.

Technically, this condition is difficult to meet. Not all nuclear activities and materials can in fact be safeguarded to prevent their diversion to make bombs. Some activities, e.g., nuclear fuel making and operating large nuclear programs in hostile, noncooperative states (e.g., North Korea or Iran), cannot be inspected in a fashion that can reliably assure detection of a possible military diversion early enough to provide sufficient time to intervene to prevent the production of a bomb. Similarly, some nuclear materials are so weapons usable (e.g., highly enriched uranium, separated plutonium or plutonium based fuels) that reliable and timely detection of their diversion to make bombs is simply not possible.

This, then, raises the question: If a nuclear activity or material is so close to bomb making that it cannot be safeguarded against military diversion, is it protected as being “peaceful”  under Article IV of the NPT? In the 1970s, it was hoped that nuclear fuel making in Japan, Brazil, South Africa,  the Netherlands, and Germany could be safeguarded. Yet, recent discoveries of nuclear weapons usable materials unaccounted for (MUF) in Japan and the UK raise serious questions as to whether or not these assumptions were ever sound. We also know from experience in Iraq, Libya, Iran, Syria, and North Korea that the IAEA inspections system cannot be relied upon to find covert nuclear weapon related activities in states that refuse to cooperate fully with IAEA inspectors.

Many less developed states would answer, as  Iran has, that the NPT’s preamble explicitly stipulates that all of peaceful nuclear energy’s benefits, including  “any technological by products which may be derived from the development of nuclear explosives” should be “available” for civilian purposes to all states. This would suggest that the NPT recognizes and protects a per  se right of all states to get to the very brink of making bombs.

Yet, if The NPT is dedicated to sharing the  “benefits” of peaceful nuclear energy, these benefits presumably must be measurably “beneficial” and be  distant enough from bomb making or the risk of being easily diverted to that purpose so that inspections  could reliably detect their military conversion in a timely fashion (i.e., well before any bombs might be made). At the very least, what is protected ought not to be both dangerous and unprofitable. That, after all, is why the NPT bans the transfer of civilian nuclear explosives, only allowed the sharing of civilian nuclear explosive  services on a turn key basis, and why ultimately this offer was never acted upon.

In the first term of the Bush  administration, the State Department went out of its way to point out just how uneconomical Iran’s nuclear power program was. It, questioned the need for nuclear power in gas rich nations, such as Iran and Saudi  Arabia. Economic analyses were conducted to determine just how uneconomical such nuclear programs were when compared to making power with readily available natural gas. This line of inquiry, however, was hardly allowed to proceed very far and was almost entirely shut off in Bush’s second term.

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So is the logic of recycling uranium as straightforward as that for recycling an aluminum can?  Philosophy Professor Benham Taebi at the Delft University of Technology in the Netherlands has argued in a recent International Herald Tribune op-ed that reprocessing is the way to go:

But what is most striking in this controversy is the “missing nuclear debate.” Little is said about the major distinctions between the various production methods, or nuclear fuel cycles. Rather than reducing nuclear power to a simple yes/no, good/bad dichotomy, we need to focus first on the advantages and disadvantages of each nuclear energy production method, including the burdens and benefits they pose now and in generations to come.

He notes that a key benefit of these alternative fuel cycles is to shorten the period of radioactivity from 200,000 years to a mere 10,000.  An improvement to be sure, but still sobering given that the earlist forms of picture writing were invented less than 10,000 years ago; and the first phonetic writing systems only about 5,500 years ago.  Further, shouldn't we be focusing not on the advantages and disadvantages of each nuclear energy production method, but rather on a broad competition amongst all potential technologies claiming an ability for cost-efficient, low-carbon power?

A number of industry executives made many of the same general points as Taebi in presentations to the a US panel focused on restarting the nuclear industry.  Chairman of GE-Hitachi Nuclear Energy (GEH) Jack Fuller actually compared complex nuclear fuel cycles with highly radioactive wastes and simple old household garbage:

We have been tempted in the United States to believe that the back-end of the fuel cycle is too complex to solve. However, on a simple level, it is no more difficult than what we do at home - recycle and reuse waste.

No more difficult indeed.

It is instructive that none of the executives seem to suggest paying for these new approaches themselves, normally what an industry would do with its lineup of exciting and common sense innovations.  Fuller noted that his firm "strongly believes that recycling is the best policy and technology option for the US to pursue." He added, "The question now is how to develop the policy framework so that this proven option can be brought to the marketplace."

How about a policy framework such as (a) remove subsidies; (b) tax greenhouse gas emissions; and (c) ensure fees paid by the nuclear industry to transfer long-tail risks of their fuel cycle onto the public are actuarily accurate and financially fair?  Then, this "proven option" can have its day or not.

Instead, Fuller suggests diverting accrued money in the Nuclear Waste Fund (NWF) to cover startup costs.  While the NWF was funded by ratepayers not taxpayers (a good thing), there is already concern that the collections will not support the long-term financial costs of the needed nuclear waste repository (or repositories).

In addition, given the scale of past investments into reprocessing, it is hard to imagine using the NWF very long without bankrupting funding for the still-needed long-term waste repository.   The estimated cost of the Clinch River Breeder Reactor alone at the time it was cancelled was $8-11 billion, roughly $16-22 billion in today's dollars.  In contrast, the current funding balance of the Nuclear Waste Fund is only about $24 billion.

Fuller did acknowledge the proliferation concerns around reprocessing, as did Taebi.  However, both believe they can be managed relatively easily, an optimism I don't share.  Fuller further remarked that proliferation concerns were 

the ostensible reason why the US turned its back on recycling three decades ago. But that US policy did not prevent Britain, France, Japan or Russia from building domestic recycling facilities, nor will it prevent China or India from following suit.

Whither economics?  Do higher costs, low capacity utilization, poor operating efficiency and safety problems have no role in the world of reprocessing at all?  Have these foreign investments been technical and commercial successes?  A review of some of the problems these reprocessing plants have experienced can be found here.

There is another way of looking at the reprocessing issue.  If nuclear power, even with reprocessing, is too expensive to compete on its own merits -- even ignoring the proliferation risks; and if the industry is unwilling to cover the cost of its own R&D to bring the proven, safer, and cheaper approaches they are claiming in these public meetings into operation; what possible justification is there for us to subsidize, ignore, or downplay the proliferation risks?  For a concise rebuttal to many of the arguments made by industry, consider the statement made by Ed Lyman of the Union of Concerned Scientists before this same panel:

UCS is not aware of any reprocessing-based technology option currently being put forward for near-term deployment that would have a significant and beneficial impact on the storage and disposal of spent fuel. To have a significant and beneficial impact, a technology should have a demonstrated potential to substantially reduce, in a reasonable time frame (one or two generations), the risks to public health and safety from the nuclear fuel cycle without increasing the risks of proliferation and nuclear terrorism.

In our view, current evidence indicates that fuel cycle options that entail reprocessing and recycling of weapon-usable materials fail on all of these counts and should be not be adopted in the United States. This is the case even for options utilizing modifications of conventional aqueous (PUREX) reprocessing, such COEX and NUEX, or non-aqueous processes such as pyroprocessing, and applies to scenarios employing thermal reactors, fast reactors or accelerators. Relative to the once-through cycle, these options would

  • Increase the complexity and cost of nuclear waste management and disposal;
  • Increase risk to the public from routine releases, accidents and sabotage attacks;
  • Increase the risk that terrorists will obtain materials usable in a crude nuclear explosive device; and,
  • Continue to leave a substantial burden on future populations for management of wastes produced by the current generation, contravening the principle of intergenerational equity.

 

 

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It is hard to imagine the executives of a public company extending an $8.3 billion line of credit to a risky new venture, and then be unwilling to provide any detail to shareholders on how they evaluated the benefits and risks of the deal, and what they were expecting to get paid for taking on that risk.

Yet, this is effectively what the US Department of Energy has done for an $8.3 billion loan guarantee package to support the construction of two new nuclear reactors in Georgia.  We know that DOE is required by statute to have gotten an independent assessment of the project risks without guarantees, yet no details on who did that analysis (to gauge their reputation and potential conflicts of interest) or its findings have been released.  

A key element of the loan guarantees relates to the size of the expected "credit subsidy" that the borrower is expected to prepay to the government.  (This metric is supposed to assess expected losses relative to the "risk-free" government cost of borrowing; even with no default, the utilities will recieve very large subsidies relative to the private borrowing rate on the proposed projects). DOE, with a strong goal of pushing loan guarantees out the door, has an incentive to down play the risks of initial guarantees.  Since actual risks will become evident only years from now if the projects start to veer off course (as has occurred with new reactors in both Finland and France), understating risks now increases the benefits to borrowers, expands the number of deals DOE can do with its pool of capital, and delays the day of reckoning. 

Taxpayers have exactly the opposite interest, since the point of greatest control over our ultimate bailout tab is in the terms of the initial guarantees, and whether or not to extend the credit at all.

In March, a group of environmental groups issued this letter as a followup to a number of freedom of information act (FOIA) requests that DOE had effectively ignored.  Here is one of the rejections to an NRDC request as an example.  The goal of the FOIA's was to obtain the necessary detail on the loan agreements with which to assess the quality of DOE's due diligence, and their assumptions regarding the risk of the loan. 

DOE's Office of the Loan Guarantee, under the Executive Directorship of Jonathan Silver, has continued to release nothing.  As a result, the Southern Alliance for Clean Energy has moved from FOIA to litigation in an effort to ensure transparency and accountability in this massive lending program.   It is surprising that these actions have not yet engaged the imaginations and lawyers from groups focused solely on good governance and fiscal controls.  There are clearly important principles at play that will affect government accountability well beyond the energy area.  This is well illustrated by the conflict between DOE and the Office of Management and Budget on the proper way to calculate credit subsidies, though I've seen little in the public sphere since this article late last year. 

With total energy loan guarantee commitments reaching $111 billion, and much more on the way if the administration is successful, the scale of this program certaintly warrants attention even by those concerned only about the fiscal rules by which our government operates.