Let the Vogtle DOE Loan Guarantee Vanish

This guest post was authored by Kennedy Maize and originally ran as a blog for PowerMag on January 21, 2014. It is being reposted with permission from the author. Find the original post here. Since his post, the Department of Energy extended the loan deadline to the end of this month for Southern Company (and presumably Oglethorpe Power), which would represent the seventh extension since it was originally offered in February 2010. Another partner in the Vogtle expansion, MEAG, reportedly received an extension until the end of July. Southern Alliance for Clean Energy remains extremely concerned with the risks these loans pose for U.S. taxpayers. Find our most recent press release here regarding our continuing efforts to find out more about the loan guarantees through our Freedom of Information Act (FOIA) requests. Additionally, find the group letter urging the agency to withdraw the offers. To voice your concerns, click here–Sara Barczak, SACE High Risk Energy Choices program director.

Sorry, I confess I just don’t get it. Why is the Department of Energy still negotiating with the Southern Company for a below-market loan to finish construction of two more units at Georgia Power’s Vogtle nuclear plant?

The utility says it will go it alone if the Obama administration doesn’t come through with a loan of $8.3 billion (for what is now a $15.5 billion project). Indeed, construction is going forward on the project, and it appears to be on schedule. So why should Uncle Sam subsidize the project?

Let ’em go. If the Southern Co, doesn’t need the money, that’s great. Go for it, Southern.

The only answer I’ve seen so far is that without the federal largess, local customers will pay more for electricity. So Southern Co., Municipal Energy Agency of Georgia, Oglethorpe Power Corp., and the city of Dalton want federal taxpayers to subsidize Georgia electric customers. Huh? Again, I don’t get it.

Call me Marie Antoinette, but my response is, “Let the Georgian’s eat cake.” I have no problem if free-market capital costs more than taxpayer-provided capital. Is this a capitalist economy? The federal government should not be propping up the local utility in order to lower the costs of electricity to local customers. That’s not capitalism as I understand it. Or maybe it’s crony capitalism?

With Vogtle, we’ve got an additional subsidy, hardly mentioned in the accounts I’ve seen. Three of the four partners (admittedly the lesser ones) are public power systems: Oglethorpe, MEAG, and Dalton. Their borrowings are already tax-exempt. Follow the money.

Then there is the mythology of these being “loan guarantees,” implying that Uncle Sam (you and I) are not on the hook for the money flowing to Southern. “Loan guarantee” is one of those slippery terms that politicians and bureaucrats devise to divert attention, the political equivalent of a basketball head fake. The term sounds like, “Well, heck, we won’t assume the risk. The private-sector lender will.”

Entirely, 180-degrees wrong. It doesn’t work that way at all, for good reasons once you follow the money and parse the path of the cash. With Solyndra, A123, Fisker, etc., the checks came from the U.S. Treasury, with no private lenders involved. The companies wrote their payments, including interest, to the Treasury, not to private lenders. That’s how it would work for Vogtle.

That’s a good thing, as the politicians and bureaucrats understand but don’t want to share with you.

It’s about risk and reward. If these were truly “loan guarantees,” the private lenders would write the checks to the borrowers. The borrowers would write their payments for principal and interest to the private lenders.

If the borrower pays off the loans, the lender gets paid in full with a profit. If the borrower defaults, the government, which guaranteed the loans, makes the lenders whole. The taxpayers assume the cost of the default but get nothing if the loan is repaid. Loan guarantees guarantee that Wall Street wins under any circumstance. Loan guarantees stink.

In the case of a direct loan, which is really what we are talking about here despite the cosmetic terms, the taxpayers assume both the risk and the reward. The borrower (Southern Co.) writes checks for principal and interest to the Treasury (you and me). If the company fulfills the loan, taxpayers win. If Southern defaults, we eat the loss. It’s a classic risk and reward proposition.

So the term “loan guarantee” is entirely cosmetic. This is a government loan. Private capital wouldn’t make this deal, because it is too risky.

There’s the rub. Why should Uncle Sam be in the business of making loans to projects that can’t attract private investors? There may be reasons why this is so, but nothing in the legislation that authorizes these loans makes that case, and neither does the Obama administration. Let me state up front that I don’t like governmental energy subsidies that are based on unproven assertions of “market failure,” particularly for proven technologies. If investors won’t invest, that’s not proof that a market has failed. Perhaps the technology has failed?

As for Vogtle, let the giant Southern Co. with easy access to Wall Street face a real market where private investors, not taxpayers, share both potential risks and rewards. Let’s call Southern’s bluff. If they can’t make it in a free market, too darn bad.

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4 Comments

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Just for the sake of accuracy…tax payers do see a return from interest charges.

If you believe in nuclear – this project will be a testing ground to see if nuclear projects will be solvent in the us in the 21st century. So the project does hold national significance. Nuclear companies and lending institutions are waiting in the wings to see how this project will pan out.


Comment by Rob riggle on February 3, 2014 5:13 pm


The author is correct: “he doesn’t get it”. This is not a loan, as he falsely reports. This is a loan guarantee. A loan, to afford the author a training moment, is like what you get from the bank to buy a car or a house. A loan guarantee is like what a veteran gets from the VA to buy his first home, – basically a letter asking a bank to loan the veteran the money. In this case, the loan guarantee only ends up in $s paid out from the Government if Southern goes under. Anyone care to bet on the odds of that happening? Actually, the only money being passed is from Southern to the Government, as the loan guarantee has a fee (and not a small one). False information flatters noone. The question is begged, though: what is the agenda behind the author’s false information?


Comment by Dale Shepherd on February 10, 2014 7:46 am


If you take a moment to read a bit, and gather some factual information, you’ll discover that these are indeed Loan Guarantees, and not loans; essentially loan insurance. These owners ARE using private funding. The loan guarantee, much like mortgage insurance, adds faith/credit to the loan, and enables the borrower to obtain a lower interest rate.

Pretending like this is a Federal Government loan is uninformed and irresponsible.


Comment by GaCitizen on February 10, 2014 10:02 am


I’ll answer Kennedy’s opening question at the end.

But first, let’s just clarify what this is. It’s a loan guarantee. Southern Co. is paying the government a significant fee to guarantee to the lenders that their money will be repaid even if Southern goes bankrupt.

The confusion arises because – as a condition of the loan guarantee – Southern is then limited by government diktat to exactly one lender: the Federal Financing Bank. This is a government corporation, but it still has to conform to normal commercial lending rules. So Southern gets lower interest rates because it has the guarantee, but there’s nothing unusual about that.

If it were just a loan, there would be no loan guarantee fee.

And that brings us back to the opening question. Why is the DoE still negotiating with Southern? And the answer is: because the government initial assessment of the guarantee fee was so ridiculously high that no-one would touch it – the lower interest rates simply didn’t make up the difference. And it’s Southern that has to pay that fee.

And (bonus question) why wasn’t this a problem for Solyndra, A123, Fisker, etc.? Answer: because, under an everything-but-nuclear discrimination in the legislation, their guarantee fees were paid by yet another pocket of the government, so they didn’t care what the fees were.


Comment by Joffan on February 25, 2014 4:06 pm


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