Flat Out Lying About Loan Guarantee Costs

I remain offended and disappointed the the US House and Senate decided to remove the provisions in the American Recovery and Reinvestment Act of 2009 that would have enabled an additional $50 Billion in private capital to be made a bit more available to projects using innovative new nuclear power plants. It bugs me even more now that I have proven to myself that the organized opposition to keeping that provision in the bill FLAT OUT LIED in their communications effort by convincing people, including senators and representatives who have not taken the time to do the research themselves, that there was a high risk of default and taxpayer liability.

Here is my evidence. On numerous web sites, you can find examples of the suggested letters to congressmen and senators used during the successful action to get the provision removed. One example is on the site for an organization called 1Sky. Here is an excerpt from that site’s “About” page:

Right now, across the country, scores of organizations, leaders and everyday citizens are ready to tackle global warming. The movement is building at an astonishing pace—but to bring about the truly revolutionary change that’s needed, we have to come together.

1Sky was created in 2007 to focus the power of millions of concerned Americans on a single goal: bold federal action by 2010 that can reverse global warming. The 1Sky Solutions are grounded in scientific necessity—they are the bottom line of what’s needed to dramatically reduce carbon emissions while maximizing energy efficiency, renewable energy and breakthrough technologies. They also represent significant economic promise. By pivoting to a clean energy economy, we can relieve our dependence on foreign oil, unlock the potential of sustainable industry and usher in a new era of prosperity and green jobs.

As a guy who knows from first hand experience that fission power plants can be sealed up inside buildings and produce zero greenhouse gases at the point of power production – and extremely low levels of emission even with pessimistic assumptions about the fuel cycle and construction inputs – I know that nuclear fission power is a huge tool that should be supported by organizations like 1Sky. However, here is a quote from a letter that is part of a post titled INVEST IN RENEWABLES, NOT COAL AND NUKES:

Dear Senator:

The Senate Appropriations Committee has added an additional $50 billion in loan guarantees to the American Recovery and Investment Act of 2009 to support energy technologies authorized under Title XVII of the Energy Policy Act of 2005. The vast majority of this authorization would likely go to technologies such as nuclear power and liquid coal. The nuclear industry has demanded $122 billion in loan guarantees to construct 21 new nuclear reactors, according to the U.S. Department of Energy (DOE). There are numerous reasons why nuclear and liquid coal loan guarantees do not belong in an economic stimulus bill and we urge you to oppose this provision.

Here is the first lie, though it is a minor one that might be debated and passed off as simply choosing words to more forcefully make a point. The reality is that the nuclear industry has “applied for”, not “demanded” $122 billion in loan guarantees. The specific provision that covered the program also is not limited to nuclear or liquid coal, it simply does not prevent those technologies from competing for guarantees that are available to “… projects that avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases; and employ new or significantly improved technologies as compared to commercial technologies in service in the United States today. Incentive covers a broad range of technologies that include advanced nuclear energy facilities.” (Source: Energy Policy Act of 2005 – Title XVII – Incentives for Innovative Technologies)

If the vast majority of the loan guarantees under that program would go to nuclear and liquid coal projects, that might be because some very smart people with a lot of their own money at risk have determined that those technologies have the best chance for long term paybacks. Remember, a loan guarantee does not prevent the loss of all equity and this provision requires a 20% equity investment. Since a large nuclear project would probably start at a cost of $5 billion, the loan recipient would have $1 billion in real money tied up in the project and have plenty of incentive to avoid any defaults. The Title XVII provisions of the Energy Policy Act have also been clarified by Congress to require collection of fees from borrowers to pay all of the costs of the program.

The letter continues lying:

First, these industries will not provide significant stimulus. The nuclear industry is not ready to build new reactors in the near-term. Even under the best-case scenarios for the industry, no new reactors will even be licensed for at least three years and they will take another six or more years to build. Similarly, there are very few liquid coal facilities that can go forward today. This provision would essentially allow developers to pocket stimulus funding for later at the expense of more immediate opportunities.

Despite all propaganda to the contrary, employment for major projects does not start when the first shovel hits the dirt. Those 21 reactor projects mentioned in the first quote from the letter are already employing a growing force of people number in excess of 15,000 who are building the technical and regulatory foundations and long lead time components that will enable the projects to move forward. You do not spend millions of dollars for engineers, environmental scientists, project planners, factory designers, and many other specialties without providing employment. Producing a solid license application and following that process through the NRC is a labor intensive endeavor and so is spooling up a new manufacturing infrastructure.

The license applications started arriving at the NRC well over a year ago, and the published schedule indicates that the license review process should be completed for at least six AP1000 projects by early 2011, just two years from now. As I read the graphs, the first scheduled issuance is going to actually be in 2010 – for the Southern Company’s Vogtle units 3 & 4.

So that paragraph contains at least three lies – the currently expected scenario is that licenses will begin to be issued within two years not three, there is a job related stimulus immediately available simply by clarifying the financial picture, and NO ONE would be pocketing any money at the expense of “more immediate opportunities”. A loan guarantee program costs about as much in current dollars as a father promising a young child that she can go to any college that accepts her. That promise can help stimulate all kinds of immediate, sustained, positive efforts – again, first-hand experience here – but no checks have to be written for many years.

Going back to the lie-filled letter:

Second, the U.S. Department of Energy (DOE) is not ready to manage such an enormous loan guarantee program. In July 2008, the Government Accountability Office (GAO) released a scathing report on the status of the program, finding that “instead of working to ensure that controls are in place to help ensure the program’s effectiveness and to mitigate risks, DOE has focused its efforts on accelerating program operations.” GAO recommended that DOE and Congress “limit the loan guarantee commitments…until DOE has put into place adequate management
and internal controls.” Indeed, the DOE is not yet even prepared to disburse the $38.5 billion loan guarantee program already authorized by Congress in 2007. Adding additional funds to a program that has difficulty applying the funds it already has will provide little stimulative effect. And adding $50 billion more to a program that has not yet been proven to work would be fiscally irresponsible.

There is some truth to this section of the letter – most lie-based propaganda campaigns work best if there is some truth included. The July 2008 GAO report on the “New Loan Guarantee Program” does offer a snap shot of a program that is not yet fully developed. However, that report was issued more than 6 months ago. My guess, based on having been through a few GAO report processes during my time in DC, is that GAO auditors could not have used information any more up to date than May 2008 in order to issue a report dated July 2008.

Bureaucracies move rather slowly, but the DOE has corrected most of the issues noted by the GAO way back in the spring of 2008. During his confirmation hearing, Secretary Chu heard a clear emphasis from the assembled senators that they wanted him to remain focused on getting that loan guarantee program rolling. He has promised to do so on numerous occasions. Though there is good reason to be frustrated with the pace of progress in this program, as a taxpayer, I prefer for the professionals to take measured action and work hard to establish processes that can prevent excessive risk and cost.

Adding additional funding authority for a program that has been through a full vetting and review process that started in 2005 is exactly the right way to move forward more quickly. It is a hell of a lot faster than starting a new program with new criteria and new processes for review.

Now on to the really demonstrable lie that seemed to gain a lot of traction through repetition by people who may not have actually bothered to seek out the original material on which they were making their claims. If they had, they would have seen just how far away from the truth they had strayed.

Third, loan guarantees for these technologies would create a significant liability to U.S. taxpayers. The Congressional Budget Office (CBO) estimates the likelihood of default for loans made to nuclear reactor developers to be “well above 50 percent.” Worse still, the loan guarantees permit much more highly leveraged financing (a four-to-one debt-to-equity ratio) for nuclear plants than would occur in their absence. High leverage is a key characteristic of the mortgage-backed securities that precipitated our current economic crisis. This appears to be little more than a preemptive and unnecessary bailout of the nuclear power industry.

The CBO did NOT estimate that the likelihood of default for loans made to nuclear reactors vendors would be “well above 50 percent.” That statement is a bold faced lie. I have read the CBO report titled Nuclear Power’s Role in Generating Electricity dated May, 2008 and the associated web supplement. I have also used modern technology to search both documents. There is no basis in those documents for making that statement; there is no analysis that talks about the risk of default other than to say the following: “However, economic theory suggests that such incentives cause recipients to invest in excessively risky projects because they do not bear all the cost of a project’s failure.”

In the GAO report, there is a footnote on page 19 that may be the source of some confusion, especially among people who are trained that they can repeat almost anything as long as they can document a “source”. Here is the exact wording of the footnote:

Calculated from table 6 of the Federal Credit Supplement, Fiscal Year 2009. The assumptions (emphasis added) presented for the LGP were a default rate of 50.85 percent and a recovery rate of 50 percent, which result in a loss rate of 25.42 percent when multiplied together.

I went and found table 6 of the Federal Credit Supplement, Fiscal Year 2009. (The Government Printing Office (GPO) is so much more accessible now than it was when you had to find the dusty documents in a federal deposit library.) Here is the footnote quote on that document regarding the 50% default rate for the new loan guarantee program:

Assumptions reflect an illustrative example for informational purposes (Emphasis added) only. The assumptions will be determined at the time of execution, and will reflect the actual terms and conditions of the loan and guarantee contracts.

As the old saying goes, when you ASSUME, you make an “ass” out of “u” and “me”.

Some, perhaps even most, of the people who have repeated the assertion that the CBO has estimated that the risk of default is over 50 percent probably do not realize that they are not telling the truth. Perhaps some will get the word before the next time that the nuclear industry seeks to enable the creation of tens to hundreds of thousands of good jobs now and far into the future by helping to reduce the cost of building new nuclear power plants through the use of federal loan guarantees.

Final thoughts – though I have focused on a particular letter from a particular organization, it is possible to find numerous examples of very similar suggested letters at a variety of organizational web sites. The campaign to remove the loan guarantee provisions was a broad based effort that demonstrates that despite shifting public attitudes, atomic advocates have a lot of work to do and will have to fight repeated battles. Also, if anyone would like to dispute my analysis and show me to be wrong, have at it. If you can make a good case, I will come back and apologize in public for my accusation. That is the only responsible thing to do.