SACE’s High Risk Energy Choices program director, Sara Barczak, contributed to this blog post from Whitney Rappole, 2014 graduate of Emory Law School and former Turner Environmental Law Clinic student.
As a student attorney at the Turner Environmental Law Clinic at Emory University School of Law, I was given the opportunity to join the Clinic in representing the Southern Alliance for Clean Energy (SACE). Together the Clinic and SACE have been working to uncover the truth about the $8.33 billion worth of federal loan guarantees offered by the Department of Energy (DOE) to Southern Company and its partners. Since February of 2010, when the DOE conditionally offered these loan guarantees, we’ve questioned what may be going on behind the scenes.
The $8.33 billion was to support construction of two new nuclear reactors in Georgia at Plant Vogtle. Specifically, $3.46 billion for Georgia Power Company (subsidiary of the Southern Company), $3.06 billion for Oglethorpe Power Corporation, and $1.81 billion for the Municipal Electric Authority of Georgia (MEAG).
The battle to find out more information about these loan guarantees, especially the risks posed to taxpayers, was first pursued by SACE back in March of 2010, through a Freedom of Information Act (FOIA) request. Unfortunately that was only the first of ten FOIA requests submitted over several years to the DOE, the Office of Management and Budget (OMB) and the Department of Treasury, which would all be met with resistance or ignored.
While SACE, a member of the public, was kept in the dark, DOE continued to negotiate with the Southern Company behind the scenes, but struggled for years to reach an agreement on what the credit subsidy costs associated with the loan guarantees should be. The credit subsidy cost is a fee paid by the entity receiving a loan guarantee in order to cover the estimated cost to the Government of supplying the guarantee. It is based on an estimate of the amount of money that would be needed by the Government to cover any “defaults and delinquencies, interest subsidies, and other requirements,” as well as “origination and other fees, penalties, and recoveries.” If the credit subsidy fee paid by the entity isn’t enough to cover the costs of default, taxpayers shoulder the risk. Essentially, the Government will take from taxpayers the money it needs to make up what it lost as a result of the default.
SURPRISING (AND DISCOURAGING) SWEETHEART DEAL ANNOUNCED
One would think that the four years of negotiations over what the credit subsidy fee should be serves as strong evidence of potential concerns by the Government over the risks of default associated with the loan guarantees. However, in a surprise turn of events the DOE decided there was no risk and thus waived the fee entirely, approving over $6.5 billion for Georgia Power Company and Oglethorpe Power Corporation with no credit subsidy fee required. Despite years of negotiations and the fact that construction of the new reactors is already over budget and behind schedule, DOE simply dismissed this unbelievable change of heart as a calculation “based upon a standard methodology used across the federal government.” I’m not sure what is more concerning – that the DOE has dismissed this as standard operating procedure, or that if this were an honest statement, it would mean that it took over four years for the agencies responsible for our country’s energy policy and budget to add to zero.
WHAT ABOUT THE $1.8 BILLION FOR MEAG?
Sadly the fishy business surrounding this zero dollar credit subsidy fee is not the only thing troubling about the loan guarantees issued this past February. We were also surprised to learn that the guarantees were approved for Georgia Power Company and Oglethorpe but not for MEAG. MEAG received an extension until July 31, 2014, which has now been apparently extended again, to January 31, 2015. (See MEAG 2013 Annual Information Statement, published May 2, 2014.) We were under the impression that the loan guarantees were a packaged, all-or-nothing deal and began researching why MEAG wasn’t included.
The results left us even more concerned. As one of Southern Company’s utility partners, MEAG is a licensed co-owner of the proposed Vogtle reactors 3 and 4. However, unlike Georgia Power and Oglethorpe, MEAG has organized its interest in the proposed Vogtle reactors into three separate projects. What seemed like an arbitrary division at first glance became clearer upon discovery of an application to the U.S. Nuclear Regulatory Commission filed by Southern Nuclear on behalf of MEAG on December 2, 2013 (Supplement filed December 12, 2013).
That application sought the transfer of control of each of the three projects to three separate “wholly-owned special purpose entities” referred to by MEAG as the “Project Companies.” After this transfer each of the Project Companies would assume the obligations of MEAG by becoming a co-owner of the Vogtle reactors 3 and 4 under the co-owners’ ownership and operating agreements. MEAG stated in the application that the purpose of the transfer was “to facilitate proposed additional, independent financing for one or more of these projects.” After exploring further what all of this means, it is evident that these three special purpose entities and corresponding license transfers are concerning for at least three reasons.
CONCERNS WITH MEAG’S LICENSE FINAGLING
First, these special purpose entities, which are limited liability companies (“LLCs”), were created for the sole purpose of obtaining taxpayer-backed, federal loan guarantees from the DOE. Unlike the bond resolutions that MEAG has already obtained to fund the three projects, the DOE and the U.S. Federal Finance Bank require a lien on the assets of each project that is financed with a DOE-guaranteed loan. MEAG’s application states that, “[b]ecause of concerns over cross-default risk, it is not possible for MEAG power to execute a lien on its 22.7% undivided ownership interest.”
Cross-default occurs when “one debt obligation triggers default on another obligation.” Either MEAG or the DOE has recognized the risk of this occurring with the Plant Vogtle reactors 3 and 4, and as a result MEAG is unable to provide the required lien on its 22.7% undivided interest. Instead, MEAG had to divide that interest into the three projects and then transfer each of the three projects to an LLC that will be able to execute a smaller lien on its individual assets. If we break this all down, it is apparent that without this division and the subsequent license transfers MEAG would not be able to acquire the $1.81 billion dollar loan guarantee.
The second reason for concern is that these LLCs can be used to shield parent corporations and their shareholders from liabilities and financial risks incurred by the LLCs. Once these LLCs have taken over the licenses for each of the three projects, if one of the projects fails MEAG can only be held responsible for the assets held by that particular LLC. When the interests are divided up and the licenses are transferred to these LLCs, if one of the LLCs happens to default the interests held by the other two LLCs become out of reach, and the burden is left on taxpayers to cover the costs of that default.
Finally, the third reason for concern is that the reorganization of a nuclear power plant’s ownership, as outlined in a report by Synapse Energy Economics, shifts the risks of accidents and decommissioning “from the plant owners to the general public because the relatively secure financial backing of substantial utility companies has in many cases been replaced by a limited liability subsidiary whose only asset is an individual nuclear power plant.” Furthermore, as stated in the report, the “NRC regulations do not specifically address the potential liability of other parties in the event that the licensed owner is unable to provide the funds required for decommissioning.” Again leaving these costs to be covered by the taxpayers should any of MEAG’s three LLCs default.
Beyond these more concrete concerns, MEAG’s application also sparks questions that need to be investigated and answered. For instance, both Georgia Power Company and Oglethorpe Power Corporation requested that MEAG agree to seek NRC consent to a retransfer of ownership back to MEAG after repayment of the DOE-guaranteed loans by the Project Companies. In other words they have requested that the three LLCs be dissolved after repayment of the DOE-guaranteed loans. Is this evidence of concern with this organizational structure on the part of Georgia Power Company and Oglethorpe Power Corporation?
Also, the application states that MEAG and the newly created Project Companies would both be exempt from any financial qualification review for the operating license pursuant to 10 C.F.R. 50.33(f). Is this true? If so, does this prevent meaningful review of these types of reorganizations for nuclear power plant ownership?
THE TAKE AWAY
Already $6.5 billion in loan guarantees has been finalized. Maybe it’s time to stop and really consider whether or not there is a more productive, less risky way to allocate the remaining $1.8 billion. We can only dig so far as we face an uphill battle to obtain the information the public is entitled to through the Freedom of Information Act. It seems that it is long past time for Congress to formally and robustly investigate. A hearing on DOE’s oversight and the status of the loan guarantee program was held in late May but far more questions need to asked and answered about the Vogtle debacle. Given my involvement and work on this issue I know that something should be done, because the public has been left in the dark while our already-in-debt government gives away billions of dollars for a high-risk project, to a company that says they don’t even need it, without charging a credit subsidy fee to cover any defaults – and it’s all backed by you and me, without our knowledge or consent.
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