“Georgia Power’s Plant Vogtle is seen as the first example in the country’s ‘Nuclear Renaissance’. The technology indeed employs new simpler, safer, and more efficient designs than the last round of nuclear plants. However, there is nothing new about the crony politics and financial shenanigans surrounding the project.”
Georgia Power, a subsidiary of the mighty Southern Company, is pressing ahead with development of a two-unit, 2,240 Megawatt (MW) nuclear plant, Plant Vogtle. With a pending $8.6 billion federal loan guarantee, a cap on liability, production tax credits and pre-collection of profits this makes Georgia Power the nation’s biggest welfare queen.
And the predictable bad news is already coming in. Recent news reports state that Vogtle may be nearly $1 billion above budget. Bad for electricity users and taxpayers; good for utility stockholders given that the extra rate base receives a guaranteed rate of return.
All these financial goodies didn’t come from performance in the marketplace but from well-planned lobbying at the state and federal levels. Tracing the actions and rationalizations that went into getting this project off the ground and into construction is illustrative, although disheartening.
The last phase of nuclear plant construction back in the 1980s demonstrated gross incompetence and mismanagement by the utility. Changing regulations got the blame. The unlearned lesson is that more risk must be born by the utility. But just the reverse has occurred with risk shifting to ratepayers and to taxpayers.
The Southern Company strategy is to go long on power and sell to other regions of the country. Southern uses its unregulated generating subsidiary, Southern Power, to build low-risk natural gas plants; but uses its regulated companies to build high-risk plants. The South, with its tradition of re-electing politicians long after they have become too rotten to be trusted, is an excellent place to invest large amounts of capital under regulation with virtually guaranteed returns.
Rationalizing the Uneconomic
Georgia Power went through the motions of evaluating alternative sources of generation and, by assuming high natural gas prices and high carbon emission penalties, found the high capital cost nuclear option best. The conclusion that high capital costs are a good tradeoff for low operating costs is always suspicious when under regulation returns are earned on capital but operating cost are passed through with no mark-up.
Georgia Power received regulatory approval to build the nuclear plant that included being allowed to collect financing cost on construction costs as the project progresses. In the regulatory world, financing costs include not just interest on loans but a return on equity for the portion of stockholder money used. Regulated utilities usually have a capital structure of about 50% debt and 50% equity. Financing cost is then a blend of these two “costs.” For example if debt is 4.5% and equity is 13%, then the financing cost is 8.75%.
After getting approval from state utility regulators, Georgia Power sought state legislation to make the financing scheme law. The proposal had widespread popular opposition and Georgia Power expended a lot of its accumulated political capital. The year 2009 was an off year for elections in the General Assembly so the Company and the politicians correctly assumed the public would forget the issues by the next election.
The pre-collection of construction financing was estimated to be $1.6, plus tax gross up. Of that, about $1 billion in profits will be collected before the nuclear units are active. Widely touted in lobbying before the regulatory and legislative bodies was the purported savings to ratepayers of $300 million in financing savings. This figure assumes no discount rate and ignores taxes. Consumers faced with paying credit card bills are supposed to be neutral about paying now or paying over the sixty-year life of the nuclear plant scheduled to begin operating in 2016.
Big Costs Institutionalized
The cost estimate used in seeking approval for the project was $14.5 billion. Not long after all the approvals were made, Stan Wise, a Georgia Public Service Commissioner, spoke before a meeting of southeastern regulators in Charleston, SC, declaring he did not expect the approved estimate to be the final number. This echoes the problems of the last round of nuclear plant construction thirty years ago.
During that period, Georgia Power continued to announce new higher cost estimates but always said that by only considering the incremental additional cost and ignoring the sunk costs, the project was worthwhile. While that line of reasoning is true. The notorious gaming of the regulatory system by Georgia Power and the Georgia Commission makes it plausible that the initial estimate was deliberately low-balled to get approval and the true additional cost is being slowly revealed after considerable cost has already been sunk.
Georgia Power has asserted, and has regulatory and legislative support for, the right to collect any sunk cost, with profit, if the project is ever canceled for any reason. The regulatory strategists in Georgia Power have learned the lessons of the last round of nuclear plant building very well indeed.
Cost overruns in projects out in the non-regulated sector of the economy are disasters for the management of the competitive companies. In the regulated world cost overruns lead to Champagne corks popping on Wall Street and utility executives being hailed within the industry as visionary leaders. The more a project under regulation costs the greater the profit for the utility.
Georgia Power’s Plant Vogtle is seen as the first example in the country’s “Nuclear Renaissance.” The technology indeed employs new simpler, safer, and more efficient designs than the last round of nuclear plants. However, there is nothing new about the crony politics and financial shenanigans surrounding the project.
While being a technical advance in a new energy era, Plant Vogtle is already becoming Exhibit A of why nuclear is a bad deal for everyone except the rent-seeking utility in search of rate base and rate-of-return guarantees. In a new era of abundant fossil fuels, the opportunity cost of this plant and nuclear has never been lower.
Note: For further documentation on Plant Vogtle, see Robert Peltier, Obama’s Southern Company Play: How Much Nuclear Plant for $14.5 Billion, 80% Federally Guaranteed? March 4, 2010.
Jim Clarkson, president of Resource Supply Management, an energy procurement and management firm based in Sumpter, South Carolina, is a director of the Institute for Energy Research and IER’s advocacy arm, the American Energy Alliance.