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The Congressional Budget Office (CBO) recently released a report on federal loan guarantees for nuclear power plants, which seriously calls into question the whether or not taxpayers are being adequately protected by the program. Established as part of the Energy Policy Act of 2005, the program was designed to give loan guarantees to “to encourage private investment in innovative technologies,” with $34 billion in loan authority devoted over the last few years to advanced fossil fuels, front-end nuclear, renewable and efficiency projects, and new nuclear plants. Nearly half of the program, $18.5 billion, is authorized to fund new nuclear reactors.

Similar to the many issues TCS has raised over the years with the Loan Guarantee Program, the report contains a litany of criticisms focused on how the costs of loan guarantees are determined. They include:

• Underestimated Costs. The estimated cost of a loan guarantee is “generally lower” compared the “fair-value” cost of the loan, which is what a loan of similar risk and expected returns would cost from a private guarantor.
• Loan Guarantees as Subsidies. There is an inherent conflict and risk of adverse selection (only the riskiest projects apply) in the set-up of loan guarantees where industry pays the risk premium or cost of the guarantee. The result is taxpayers are never fully protected nor is the risk borne by industry. If the true cost of a loan guarantee to taxpayers was charged to a borrower, it could easily be too high for industry to find attractive- in other words the subsidy versus the market rate would not be great enough. But if the subsidy is attractive to industry it is likely the subsidy is too great a risk for taxpayers—and we lose.
• Unaccounted for Market Risk. When a loan guarantee is offered to nuclear companies, the risk of the guarantee is borne by the taxpayers. This is because, in the event of a default, the government would lose any money they could not recover from the project, which would have to be offset by either a cut in taxpayer benefits or an increase in taxes at some point in the future. Because no funds are set aside when a loan guarantee is made to account for a possible default , “market risk is a cost to taxpayers that is not included in budget estimates.” Therefore, loan guarantees appear much cheaper than they really are.
• Standardized Recovery Rates. The DOE does not properly take into account the possible different rates of recovery that the government would experience for taxpayers dollars if the project defaulted at different stages of the project. For instance, if a nuclear project is not passing construction costs on to ratepayers and defaults during construction, the government loan will have “very low recoveries” because there would be little of real value that the government could use to get its money back. Properly considering this information with more project specific recovery rates would allow the credit subsidy cost, the portion of the loan that companies pay up front to receive the loan guarantee, to better reflect the real risked involved for the taxpayers.

Taxpayers for Common Sense has long been warning of the ills of this poorly designed program that risks taxpayer dollars often times for mature industries. As this CBO report demonstrates, loan guarantees for new nuclear reactors are particularly risky. Congress should end the program today or taxpayers stand to lose billions.

For more information, please contact Autumn Hanna (202) 546-8500 x112 or Autumn [at] taxpayer.net.