Let the Vogtle DOE Loan Vanish

Washington, D.C., January 21, 2014 – 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.