Federal regulators are expected to sign off in the next few weeks on the United States’ first new nuclear power reactors in three decades, a $14 billion project near Augusta.
But the move by Atlanta-based Southern Co. and its Georgia Power subsidiary to build two new reactors at Plant Vogtle, in Burke County, may not have happened without financial cushions provided by consumers and taxpayers.
One cushion comes from the federal government, which is promoting U.S. energy independence as well as cleaner options. Taxpayers are guaranteeing more than $8 billion in loans for the Vogtle project.
The other cushion comes from the 2.4 million Georgia Power customers. Unlike the nuclear construction boom in the 1970s when reactors were built and then consumers paid for them, Georgia Power customers are already footing the bill for the Vogtle project — even though it hasn’t received final approval yet.
Both developments transfer financial risk away from Southern Co. and its shareholders and toward consumers and taxpayers. If there are cost overruns — as there were when Vogtle was originally built — customers will largely be on the hook.
Southern Co. and proponents of the project agree that it’s a substantial investment by the public, but they say it’s a necessity. Modern plants are just too expensive.
“There’s no project like this that would be built without that kind of [regulatory and financial] support,” Southern Co. CEO Tom Fanning said in an interview last week.
That’s partly because of what happened during the previous nuclear construction boom.
The first two reactors that started producing electricity at Vogtle about 25 years ago ran over budget by more than $8 billion and took 16 years to build — not a model that would be accepted today, said industry players, regulators and consumer advocates.
Projections vs. reality
Construction at the original Vogtle was stopped twice: once in 1974 for financing reasons and again after a partial meltdown at Pennsylvania’s Three Mile Island in 1979 triggered more than 1,000 new regulations. Some of them caused parts of the Vogtle project to be torn down and rebuilt, and that drove up costs dramatically.
“Unless the industry tweaked the way they did things, I doubt another nuclear unit would ever be built again. It was such a disaster — not from a safety perspective, but from what we expected these things to cost and what they really cost,” said David Parker, a utilities analyst with Robert W. Baird & Co.
In the end, state utility regulators forced Georgia Power to eat $1 billion of the final price tag, but consumers still paid an extra $7 billion. That drove up a typical monthly household electric bill by more than 12 percent.
In 2009, a new financial template emerged. After heavy lobbying, a change in state law and regulatory policy paved the way for Georgia Power to start collecting money from consumers for the reactors before the project received the final OK.
About 20 states have adopted ways to help utilities finance the high cost of power plant projects while they’re being built. Analysts say less money has to be borrowed if a utility is receiving revenue while the project is getting built. Also, it may allow a utility to borrow money at a lower interest rate because it would have less outstanding debt on its books. This, proponents say, equates to a smaller rate hike for customers in the short term instead of a larger one later.
“Three percent a year versus 30 percent, that seems to be more plausible,” Parker said.
Neill Herring, a veteran environmental lobbyist and Georgia Power critic, said Vogtle’s expansion plans would not have happened if Georgia did not adopt this new procedure. But he is angered by what he sees as unfairness.
“Ratepayers aren’t supposed to pay for anything that isn’t in use and useful,” he said, referring to the fact that the reactors at Vogtle haven’t been completed. “You have a monopoly, and there’s no risk, particularly when the risk you do have is borne by others.”
To sell the plan to the 2009 Legislature, Georgia Power lobbyists and the bill’s sponsors touted a $1.30 per month initial increase, saying customer bills would increase by that amount each year for seven years.
But in 2011, the initial fee started at $3.88 a month. It will increase to $8.74 a month by 2015. The fee will end once reactors start producing power in 2016 and 2017. But it will be replaced by the amount of the construction and operating costs, currently estimated at $4.4 billion. Georgia Power officials said they do not yet know the impact that will have on monthly bills.
Rate of return
Georgia Power is building the reactors with a group of other utilities and is responsible for $6.1 billion of the estimated $14 billion in costs. Haunted by the massive cost overruns with the first two Vogtle reactors, utility regulators review the schedule and construction costs of the expansion project every six months. The Georgia Public Service Commission has hired an independent monitor to act as an early-warning system to any cost and scheduling problems so they can be addressed right away.
The PSC regulates Georgia Power’s rate of return on its investment. Currently, the rate of return is set at a relatively lucrative 11.15 percent. Georgia Power made $1.15 billion in 2011, a 20 percent increase from 2010, the company reported last week.
What’s more, the PSC has taken a step to ensure that rate of return isn’t threatened. It denied a proposal that would have cut into Georgia Power’s profit margin should the Vogtle project run more than $300 million over budget.
In exchange, the utility agreed to let the PSC examine any previously approved costs at Vogtle should the project exceed its budget. Customers would not have to pay for something deemed the utility’s fault.
Besides these state actions, the federal government has helped the project. It wants to decrease America’s reliance on foreign oil by increasing domestic energy production, and it sees nuclear power as part of the answer.
U.S. taxpayers are providing $8.3 billion in loan guarantees for the project. That will allow Southern to borrow money at a lower interest rate, saving the company — and eventually its customers — money over the long term.
Patrick Moore, a co-founder of Greenpeace who later left the organization to start his own environmental group, Greenspirit, said the Southern plan is equitable.
“The utility is taking some risk. The government in the form of taxpayers is taking some risk,” said Moore, an advocate of nuclear energy. “The loan guarantee is just like a co-sign on a loan.”
Southern was the first of the utilities to receive federal loan guarantees during this renewed push for nuclear energy. Decisions affecting plans by other utilities have been delayed, as the White House reviews the loan guarantee program after the controversy involving Solyndra. The solar-panel maker accepted $535 million in federal loan guarantees before declaring bankruptcy last year.
Georgia Power executives have said that the Plant Vogtle expansion project would have cost as much as $1 billion more than projected without the federal loan guarantees and the utility’s ability to collect financing costs from its customers early.
“The way we designed it is to be able to pass through every penny of the benefit to our customers,” said Fanning, the Southern CEO. “Was it an appropriate incentive? Absolutely. Would we take advantage of it? Absolutely.”
All eyes on regulators
The industry has been waiting 33 years to restart its nuclear engine after Three Mile Island led federal regulators to overhaul safety guidelines at nuclear plants across the country. Construction on about 30 reactors was finished in the 1980s. The industry stood essentially still until the 2000s, when market conditions sparked renewed interest in nuclear power. Natural gas prices began to spike, while environmentalists pushed for regulations on coal — which Southern Co. relies on heavily — that would increase its cost as an energy source.
Now, all eyes are on the federal regulators. The U.S. Nuclear Regulatory Commission is expected to meet soon to decide whether to approve the critical license Southern Co. and its subsidiary, Southern Nuclear, need to start major construction at Vogtle. Until now, the utility has prepared the site by backfilling two 90-feet holes with soil, laying pipes to transport water from the Savannah River to cooling towers, and building a retaining wall, among other things.
A blessing from the NRC would signal that Southern has followed all of the project’s procedures so far. The staff then can go ahead and issue what’s called a combined-operating license.
Most experts believe that will happen soon.
“No company is going to go out and spend a half-billion dollars getting the pre-construction work without the knowledge that regulators are supporting this plant and will help you build it,” said Mark Barnett, a utility analyst with the Morningstar investment research firm. “They are able to recover the cost of construction, and they go back every half-year or so to discuss those costs. Without that, I’m almost 100 percent certain Southern would not have gone ahead with this.”
By embracing nuclear power, the federal government is hoping to incrementally move the nation away from foreign oil. Nearly 30 reactors were slated to be built in this country over the next several years, although some utilities have been pulling back lately. A lack of financial backing, diminished demand for electricity, a fear of increasing safety regulations and cheaper natural gas have given some pause.
At the same time, the U.S. utilities that are considering more reactors are going in the opposite direction of some of their counterparts overseas. Some European countries and Japan are starting to pull away from nuclear, mostly because of safety and regulatory concerns after Japan’s disastrous Fukushima Daiichi accident last year.
Germany, for example, has decided to shut down its nuclear reactors by 2022. France is reviewing the safety of its older nuclear plants and pressure has grown to shut as many as half of them down. Japan will not build new plants.
Even Southern is hedging its bets, investing in natural gas in the short-term while it decreases its reliance on coal. Environmental regulations could require Southern’s utilities to add pricey pollution controls on several of its coal plants or face shuttering some units altogether. Recent environmental data showed that the nation’s top three greenhouse gas-producing coal plants belong to Southern’s utilities.
Vogtle’s new reactors won’t appreciably increase the nation’s energy independence, but analysts say it will be a start.
Currently, nuclear power makes up about 16 percent of Southern’s energy mix across its four-state territory. Adding two reactors at Vogtle will move the needle to about 20 percent. And that’s likely where it will stay for a while.
“It’s so expensive, and it takes 10 years to build,” Fanning said. “Vogtle will be the only new nuclear that we add by the end of the decade because it takes so long.”
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