title 17

1) Earth Track congressional testimony.  Read Earth Track's testimony to the Subcommittee on Energy of the Committee on Energy and Commerce, U.S. House of Representatives: Federal Energy-Related Tax Policy and its Effects on Markets, Prices, and Consumers. 

2) New work on subsidies:  US public lands, European coal, Asian fossil fuels. 

• A review of subsidies to fossil fuel extraction on public lands released by Oil Change International.
• Coal subsidies in ten European countries released by the Overseas Development Institute.
• IEA's review of subsidies within APEC:  Tracking fossil fuel subsidies in APEC economies: toward a sustained subsidy reform

3)  Exelon fails to clear latest capacity auction with two of its reactors.  Exelon's Three Island Mile and Quad Cities nuclear facilities failed to clear the latest PJM auction.  Trade publication Utility Dive noted that Exelon said the loss "stemmed from 'the lack of federal or Pennsylvania energy policies that value zero-emissions nuclear energy,' and, in the case of Quad Cities, not falling under Illinois ZECs program." 

Reliability is the main selling point of baseload nukes facing increasing operating and maintenance costs.  Thus, it is notable that while nuclear blames renewables for its heartache, non-hydro renewables comprise a tiny portion of the PJM capacity market. 

A cynical view of the politics of nuclear power leads one to at least consider that perhaps Exelon is playing a bigger game.  The only way for the firm to extract multi-billion dollar subsidies to keep its aging fleet open is to present as realistic a case of distress as they possibly can.  Strategic losses in capacity auctions could be part of this.  Indeed, the firm's management may well decide that its highest return "new" line of business is extracting subsidies from taxpayers to prop up their old plants.  Here's Crain's, which has long tracked the political strategy of Exelon:

Fresh from winning subsidies in New York and Illinois, Exelon wants ratepayers in other states to pony up more to keep nuclear plants open... In an email, Exelon says only that it "continually evaluates strategic opportunities to add value for our shareholders and customers." Speaking generally of its desire to subsidize nuclear power beyond Illinois and New York, Exelon says, "Right now, active discussions on the economic and environmental advantages of nuclear power are occurring in Connecticut, Ohio, New Jersey and Pennsylvania."

And their strategy seems to be working.  According to Crain's:  "Exelon's stock has risen 36 percent since the Dec. 1 agreement in Illinois, well above the 20 percent increase for the Standard & Poor's 500 Utilities Index."  UPENN's Kleinman Center for Energy Policy noted in a recent blog post that it is quite difficult to ensure the subsidies flowing to old nuclear reactors (which are often part of a complicated corporate network) are actually needed rather than simply juicing corporate returns. 

4)  Sounds of silence: G7 and fossil fuel subsidy reform.  The G7's 2016 pledge to end harmful subsidies to fossil fuels by 2025 was not re-affirmed in their most recent meeting in Italy.  While it was agreed to in April, the issue was not included in the formal ministerial communique in May, an omission bleakly noted by fuel subsidy research NGO, Oil Change International.  These things aren't particularly binding, so the inability even to make clear statements of direction is troubling.

5)  The persistent areas of overlap between civilian and military nukes.  A sobering review of Japan's plutonium stockpile, its civilian origin, and the weapons proliferation risks going forward.

6)  Westinghouse bankruptcy: about that $8.3 billion they owe Uncle Sam...  Turns out the last sliver of the "nuclear renaissance" in the US is at risk due to poor management, fiscal distress, and the bankruptcy of one of the key vendors, Westinghouse.  Gee, if only somebody could have seen something like this coming.  In one of the finest moments of pretend finance in recent years, DOE flagged the risk of these massive loans (roughly sixteen Solyndra's) at zero. 

The bankruptcy affects nuclear projects in both SC and GA, though only the GA project (Plant Vogtle) is receiving federal subsidized loans.  The big question is how much of the DOE loans will end up in the lap of taxpayers.  As of now, Vogtle hobbles on, with Southern Company -- the largest investor in the project -- taking over the lead from Westinghouse.  Whether or not the Vogtle reactors are completed, there are billions in costs to be covered by some combination of customers, taxpayers, and utilities.  Here's the Atlanta Journal-Constitution's summary:

The Plant Vogtle project was backed by $8.3 billion in loan guarantees from the U.S. Department of Energy – during the Obama administration...[T]he Congressional Research Service noted that those loan guarantees came with this price: “If the Vogtle project is terminated, the borrowers must repay the entire outstanding loan amount in five years.”

But the CRS also said that the secretary of energy has the power “to modify the loan agreement terms and take other steps upon a default.”

This battle will not be resolved soon.  Good thing Southern Company CEO Thomas Fanning sold most of his shares in the company back on 2014.

Update, June 3rd:  a key deadline in the continued financing of Vogtle has been missed, and analysts predict litigation.

Hillary Clinton's use of her personal email account for official government business has been all over the news lately.  The concern is that the approach escapes the normal channels of accountability regarding official government business, and makes it much more difficult to protect government records for historical purposes.  

If an email is sent from a private address, does it make a noise?

Clinton is not alone.  Jonathan Silver, the former head of DOE's Loan Programs Office, did too.  He was clearly not as high up in the Obama administration as Secretary Clinton; and unlike Clinton, he seems also to have used his DOE email address.  Nonetheless, Silver did oversee the granting of some of the largest non-bailout loans to individual private corporations in US history.  And, like Secretary Clinton, he had a penchant for using his private email a lot. 

Great investigative work by Carol Leonnig and Joe Stephens in the Washington Post back in 2012 highlighted the issue.  They wrote that Silver frequently reminded staff not to include personal emails in DOE correspondance for fear of making the account subpoenable.  But it seems that if one just used private email, without having it appear alongside DOE addresses, that would be fine.  Indeed, he often relied on this less visible method for his own key correspondence.  Leonnig and Stephens: 

Silver repeatedly communicated about internal and sensitive loan decisions via his personal e-mail, the newly released records show, and more than a dozen other Energy Department staff members used their personal e-mail to discuss decisions involving taxpayer-funded loans as well. The Washington Post received the e-mails from Republican investigators on the committee.

"The frequent use of non-government e-mail accounts and the contents of e-mails leaves little doubt that DOE officials participated in an intentional effort to shield their communications from legal scrutiny and the public," committee Chairman Darrell Issa (R-Calif.) and subcommittee Chairmen Jim Jordan (R-Ohio) and Trey Gowdy (R-S.C.) wrote to Chu.

You can review examples of Silver's emails here.

And although the impetus for this Congressional review was concerns over loan guarantees to solar projects, most notably to ill-fated Solyndra, the problem is hardly isolated.  In terms of program risk to taxpayers, the  massive loan to the Vogtle nuclear plant in Georgia is the Mother of All Solyndra's.  With taxpayer exposure topping $8 billion, it is clearly a critical deal to review. 

And review it, I have.  As part of a project with the Southern Alliance for Clean Energy, I went through thousands of pages of documents and emails related to the Vogtle loan guarantee submission and evaluation.  These documents saw the light of day only due to roughly ten separate rounds of FOIA requests over multiple years -- submitted by SACE and the Emory University School of Law’s Turner Environmental Law Clinic . 

Yet the released information had very little linked to Silver's private email.  One can only speculate on why that correspondence was left out, and what important information related to the Vogtle deal we may be missing.  

Taxpayer exposure on Vogtle - some troubling trends

So how's the program doing?  Will taxpayers or others ultimately bear a heavy financial burden because of poor accountability on the review and pricing of massive federal credit support to Vogtle reactors 3 and 4?

If you ask DOE, their loan program overall is going swimmingly well.  In their November 2014 progress report, the Office of Loan Programs' current director Peter Davidson noted that loss ratios are low, and interest and principal payments are running above losses.  Many of the principal payments are back-loaded, so we shall see.  And interest, even if repaid, is still provided at a significantly subsidized rate for many of the borrowers. 

What about the Vogtle loan itself?  The trends don't look very good, actually.

• DOE determined the credit risk on $6.5 billion in government loans to Southern Company, the largest investor in the new Vogtle reactors (through its Georgia Power subsidary), was zero.  It is hard to imagine Peter Davidson's former employer, Morgan Stanley, reaching a similar decision.  The advance credit subsidy fee was one of the key risk management tools available to the Department to reduce losses.  By setting the credit subsidy figure to zero, DOE greatly increased the likely magnitude of taxpayer loss on this deal and established a bad precedent for future solicitations.  The irony here is that they didn't need to give the loan at all and the plant would still have been built:  Southern had said multiple times that they could proceed without the federal credit support. 
  
  If DOE staff were confident in their decision, one would assume they would be proud to demonstrate its basis.  No such luck:  DOE has blocked repeated attempts to get detailed information on how they concluded that zero credit subsidy assessment was warranted. 
• Cost of the project has ballooned to as much as $18 billion and counting, and battles over who pays for the overruns are heating up.   The project's problems (likely in conjunction with a softening market for power) has led Southern Company to delay a second reactor project. 
• Southern Company CEO Tom Fanning sold the vast majority of his shares in the firm last fall, according to Barrons.  This was years prior to the expiration of the associated options.  He sold 275,600 shares in January 2014, and an additional 1,049,185 in September.  At that point, he had less than 40,000 left.  A spokesperson for InsiderInsights.com, a firm that tracks trading activity by corporate insiders, viewed the sales as "bearish" and suggested people avoid the stock.  The sales subsequent to DOE approval of a zero credit subsidy fee; in excess of historical sale patterns; and leaving only a tiny stake in the firm he is in charge of are all problematic.  Sometimes such a pattern precedes CEO replacement or retirement.  In this case, however, Fanning is still there. 
• While nukes were always sold as expensive to build but cheap to run, turns out they may not be very cheap to run either.  Exelon has taken the lead among current reactor owners in begging for alms in order to keep their plants on line.  And the alms, apparently, are quite substantial.  Tim Judson of NIRs has a good summary here.  Of course, these reactors have all been subsidized their entire lives, so perhaps begging for taxpayer handouts comes naturally.  They were subsidized when they were built; when they were deemed uncompetitive during power deregulation; for their accident risks, their waste management, and their accruals for plant decommissioning.  The list goes on.  But a key point is that if even the old reactors that have already paid off their capital can't operate competitively, what hope does a bloated Vogtle 3 & 4 have with cost recovery hurdles continuing to rise?

So how will this play out?  Southern Company rate payers are already feeling the pinch.  SACE notes that:

Georgia Power ratepayers are currently paying an additional over 9.4% on their bills for the Nuclear Construction Cost Recovery (“NCCR”) Rider due to anti-consumer state legislation passed in 2009 to incentivize building new reactors. Since 2011 customers have paid over $1 billion since the Company began collecting the NCCR tariff for financing costs and taxes that would normally be recovered over the normal life of the facility.

Oh, and if I were one of the town administrators in the Vogtle service area who had signed on to one of the take-or-pay, hell-or-highwater power purchase agreements for power from Vogtle 3 and 4, I would be starting to sweat.[fn]Here's some representative wording for MEAG: "The Conditional Commitment provides that the Project Entities will be the borrowers of the Guaranteed Loans. On or prior to entry into the Definitive Agreements, MEAG Power will enter into a take-or-pay, "hell or high water" power purchase agreement with each Project Entity for all of the power, energy and other services generated by such Project Entity's ownership interest in Vogtle Units 3&4. These power purchase agreements between MEAG Power and each Project Entity will be "back-to-back" arrangements requiring MEAG Power to make payments to the Project Entity to the extent that MEAG Power has received payment under its corresponding power purchase or sale arrangements." [/fn]

Homeowners are lucky if they get a 60 day rate lock on their mortgage application.  Nuclear reactor developers seem to have no such problem:  agreements for multi-billion dollar subsidized loans to build two new nuclear reactors at Plant Vogtle in Georgia have been repeatedly extended for four years.[fn]While the Vogtle credits are commonly referred to as loan guarantees, they are actually direct loans since the originator is the Federal Financing Bank, an affiliate of the US Treasury.[/fn]  A credit market meltdown didn't stop the extensions.  Nor did the rise of fracked gas and a recession, both undercutting nuclear plant economics.   Nor did the cancellation of one nuclear project after another, and large cost-overruns at those projects still being pursued.  Every six months or so, the required date of execution would simply be extended, offering a free option contract to project participants. 

Today a smiling Ernest Moniz, Secretary of the US Department of Energy, will be heading to Georgia for the signing ceremony as these loan agreements are finally executed.  He will likely talk about how this is the type of partnership that makes America strong; how the loans are the result of hard work by so many, and all should be proud; and how the US wants to buy and build every form of energy because, well, that's what we need to do.

What ultimately got this agreement to "yes" is not likely something any of the parties will discuss in their prepared remarks.  Perhaps it was because DOE finally got a backbone and refused to extend the original agreement any further.  Maybe the borrowers were getting pressure from shareholders to offload the risk, or because interest rates are creeping up and Southern Company (the parent co. of Georgia Power, the largest partner in the Vogtle consortium) won't be able to roll its short-term financing for next to nothing.  

We'll likely never know the truth.  But regardless of the drivers, the completion of the loan guarantee agreement is really quite a shame.  It puts a tremendous amount of risk on taxpayers and gives nothing in return.  Southern Company's CEO Tom Fanning said they didn't need the public funds, could finance the project privately, and would still build the reactors without the federal guarantee.  So when DOE's press release notes that "[t]he nuclear facility is eligible for loan guarantees since it is expected to avoid nearly 10 million metric tons of carbon dioxide emissions annually, which is the equivalent of removing more than two million vehicles from the roads," the statement of eligibility is technically correct.  But the connection between the loan and CO2 reductions is specious given that even the borrower says the project would have been built anyway; there are many ways to reduce carbon; and our public policy ought to be competing options against each other to buy the lowest-cost reductions first.  South Carolina Electric & Gas is privately financing its construction of two reactors, after all.  Surely the Vogtle team could have done the same. 

And Fanning had complained he didn't like changes DOE had made to loan terms:  "Those terms and conditions just aren't suitable for our application, so we'll just have to see." Did DOE cave and sweeten the terms (most likely by reducing the credit subsidy payment below it's already too-low level), putting taxpayers at even greater financial risk?  Or did the Vogtle investors realize the terms really weren't so bad after all as they saw Wall Street steering well clear of nuclear new build?  Though these are the details that drive taxpayer risk, subsidy magnitude, and competitive distortions across different energy options, it is safe to assume that this area, as well, won't get broached by the smiling faces at the signing.  Nor, absent yet more litigation to force disclosure, will DOE likely reveal them at all. 

Our review of the thousands of pages of internal documents related to DOE's loans to Vogtle that were forced out by litigation (see above link) clearly indicated a messy process with decisions driven by well more than just deal economics and proper financial risk management.   The resulting agreement is no case study in good oversight or democracy.  And yet the result is taxpayer funding equal to 15 Solyndras and 43 Fiskers (an electric car marker that also went bust owing DOE money).  If things go wrong on Vogtle, taxpayer losses on Solyndra and Fisker will be mere footnotes in comparison.

Looking in the crystal ball: what Fisker's bankruptcy can tell us about Vogtle

My colleague Ron Steenblik of OECD recently linked to an article on how Chinese autoparts giant Wianxing just won its bid for the bankrupt assets of DOE-funded electric carmaker Fisker Automotive.  This same firm also bought the distressed assets of DOE-funded battery maker A123 (cleverly renamed B456).  Reporter Katie Fehrenbacher notes that

As with Wanxiang’s deal with A123, controversy will follow the realization that a Chinese conglomerate will likely be taking over an electric car maker that got substantial funding from the U.S. government.

And yet, should this be the point of controversy?  If DOE is going to play the Big League Venture Capitalist game (Secretary Moniz has restated they will), this type of occurrence is part of the drill.  Early money gets diluted in new investment rounds when things aren't going well (as they often don't). Original equity holders get wiped out, and debt holders may as well when the firm goes bankrupt. Getting something back is still better than losing everything. 

DOE's only leverage point here was at the beginning ("to lend, or not to lend, that is the question"). People ought not be surprised that the corporate carcass is sold on the cheap post-default or during a pre-packaged bankruptcy.

In private markets, venture capitalists line up to play this game because enough of their portfolio companies break even or nearly so to stem losses; and, far more importantly, every once in awhile they get back 100x or more with a blockbuster new company such as Google or Facebook. Even a handful of home runs can offset the losers with enough left over for them to buy a summer place in the Hamptons.

Alas, when governments are the investor, this upside disappears.  The government deals, including for Vogtle, are structured to extend huge chunks of debt to borrowers -- often far more than a private lender would extend given the project risks.  And yet, taxpayers get no equity at all:  even if a project receiving $500m or $8.3 billion in taxpayer support is wildly successful, generating Google-like returns, taxpayers still get squat. In a private firm, the partners who decide which firms to fund do well when the firms they've funded do well; if their investments tank, so does their pay.  In public progams such as the Vogtle mega-loan, public dealmakers have no financial tie to how their decisions play out over time; indeed, they have often moved on by then.  Socialized risks, privatized profits is the model that the Vogtle deal seems to have followed to the letter.

The Chinese buyouts of US government-funded firms on the cheap have stirred anger.  But second movers often get the benefit of buying up the residuals of first-mover firms that have failed.  Perhaps we ought not get too teary-eyed about the misplaced $192 million loan to Fisker given that the Vogtle loan puts more than 40x as much taxpayer capital at risk.  The nukes industry has repeatedly said there is nothing to worry about. These are good projects (though not so good, of course, that they just build them with private money), and won't go bust, they repeat again and again.  So we can rest easy -- just like ratepayers facing a $1.5 billion loss from Duke Energy's recent cancellation of the Levy nuclear project in Florida. They weren't supposed to lose money either.

Three years of freedom of information act (FOIA) requests by the Southern Alliance for Clean Energy (SACE), along with a fair bit of litigation when FOIA docs came back mostly black with redactions, have met with some success.  SACE's efforts have unearthed a sizeable cache of documents related to the construction of two new nuclear reactors at Plant Vogtle in Georgia and the $8.33 billion conditional loan guarantee by the US Department of Energy that would finance a big chunk of the deal.  While the funding on offer is commonly referred to as a loan guarantee, it is actually a direct government loan:  the Federal Financing Bank, part of the US Treasury, is the source of the funds. 

Earth Track and Synapse Energy Economics teamed up to take a first look at the release documents.  Despite widespread redactions (many pages were still mostly black; critical data on key inputs underlying DOE's credit risk estimates were systematically blocked as well), there was nonetheless quite a bit there.  You can read the full study here, and other study-related documents such as the press release and conference, and links to key documents, can be accessed here.  Some key findings are below.

• Indications of involvement in the loan guarantee process and terms by political appointees. Top political appointees in the Departments of Energy, Labor, and Treasury were directly involved to make the deal a go.  The White House was also involved.  DOE staff were under pressure to expedite the deal as well.  An e-mail from December 2010 points to unspecified communication between the White House and the Nuclear Energy Institute over issues of concern. (In this and other cases, extensive redactions in the FOIA documents make the precise focus of the meetings and discussion unclear.)  An email from February 2010 notes that DOE did not “deal” with Shaw [the firm slated to do much of the reactor construction]; rather, “the [W]hite [H]ouse did.” Efforts for DOE to close out consultation, most likely on loan terms, was handled “at the political level” of the Department of the Treasury, according to another email. Emails from DOE staff indicate that Secretary Chu was involved in discussions with key Vogtle Project players over loans details as well. “MEAG’s CEO, Bob Johnston got a call on Friday from Secretary Chu and they discussed the progress that had been made with Southern and where we stood on our [the MEAG] term sheet negotiation,” read one email. These contacts and interventions were a potentially troubling blurring of financial risk review, political discussion, and potential modification of loan terms.
  
  We don't know how these contacts affected the terms of the deal.  However, the bigger the pile of money on the table, the more transparent the decision process should be, and the more completely financial analysis must be separated from political and policy goals in driving funding decisions.  These divisions were not properly respected, even though taxpayer support to Vogtle 3&4 is a big pile of money indeed:  by far the largest of DOE's Title XVII loan guarantee program, and much larger than funding through other venues such as venture capital investment in energy and export credit support via the Export Import Bank. 
• Credit subsidy payments appear too low to offer adequate protection to taxpayers in the event of a default. A key taxpayer protection under Title XVII is an up-front payment borrowers make to DOE to cover the expected risk of default.  Yet, it is clear that the most current estimates for these payments are unlikely to provide adequate protection for taxpayers.  Even the high estimate for Georgia Power ($52 million), for example, would add only about 1/8% to borrowing costs over the life of the loan. This increment, which is supposed to protect taxpayers from the risk of default on the first nuclear reactors built in the U.S. in 30 years, is likely less than the Federal Financing Bank (FFB) markup on the loan relative to the Department of the Treasury’s base cost of borrowing.  While the other investment partners were offered a conditional loan guarantee with substantially higher credit subsidy fees than Georgia Power, they were still not protective of taxpayers. Oglethorpe Power’s fee was 2.5-4.3% for a range of $70-132 million and MEAG’s fee was 5-11.1% for a range of $108-186 million.  The top end of this range is still lower than the average credit subsidy rate assumed on other Title XVII commitments, according to data from the US Government Accountability Office last year.
• Favorable repayment terms.  Taxpayer risk was also increased by loan repayment terms that allow Georgia Power to repay no principal at all on its multi-billion dollar loan until years 29 and 30 of the loan term.  Oglethorpe and MEAG do repay principal over the course of the loan, but assuming 40-year amortization period even though the loan term is only 30 years.  As a result, both will still owe substantial principal to DOE at the end of the loan term, requiring refinancing.  This structure increases the time over which the borrowers benefit from taxpayer subsidies on borrowing, and increases nonpayment risk to taxpayers should something on the project go wrong.
• Stale credit subsidy values. Over the past two years, there have been continuing changes to the loan terms, a deteriorating power market, and widespread changes in the prospects and operating procedures for nuclear power following the Fukushima accident.  All of these shifts would be expected to change the projected default risks of the Vogtle project.  Yet the DOE and OMB have both stated that there have been no subsequent adjustments to credit subsidy estimates to incorporate these market and deal shifts. 
• Over-reliance on external contractors for key risk evaluations. DOE appears not to have built sufficient analytic tools and staff expertise internally to properly assess credit risks and deal structure. 
• Inadequate control of credit subsidy assessment process. Credit subsidy values were issued to borrowers before the credit subsidy model was finalized, and there is some indication that Vogtle Project borrowers may have been given access to the analytic models DOE used to assess credit risks and subsidy rates.  

All told, the documents released do not generate confidence that decisions have been made in a systematic, objective, and independent way; or that the more than $8 billion that taxpayers are putting at risk is being adequately protected.  Press coverage of our study has been fairly broad, and in a number of the stories Southern Company officials have noted that the project is not dependent on federal loan guarantees to continue. 

DOE ought to take Southern up on this statement.  Having Vogtle 3 and 4 move forward without Title XVII loan guarantees would certainly be a good outcome for taxpayers, as we bear much of the risk of default but share none of the upside if the project is successful.  However, I think that self-financing the deal would actually be better for the long-term viability of the nuclear industry as well.  True:  eliminating subsidized Title XVII loans will still leave many other props to the project in place:  advance nuclear surcharges on Georgia Power customers -- Georgia's form of CWIP; long-term take-or-pay power purchase agreements that remain in force even if the plant is never completed; more than $2 billion in tax-advantaged Build America Bonds; and access to existing nuclear subsidies in the form of production tax credits, socialized nuclear waste management, tax favored nuclear decommissioning trusts, and liability caps on accidents.  But demonstrating they can tap into private capital markets for the rest would help establish a more replicable financing model going forward.