The Clean Energy Loan Guarantee Program’s Credit Subsidy Fee:
A Review of a Recent Paper by the Center for American Progress
The U.S. Department of Energy’s (DOE) Title XVII Loan Guarantee Program is designed to
protect taxpayers while accelerating deployment of the clean energy technologies necessary to
meet America’s energy and environmental goals. All clean energy technologies are subject to
the same rigorous due diligence to ensure that the program provides financing support only to
viable projects that have an extremely high probability of being successful.
The Center for American Progress (CAP) published a brief paper on March 8 on its website,
Protecting Taxpayers from a Financial Meltdown: Calculating the Credit Subsidy Fee on a
Loan Guarantee for a New Nuclear Reactor 1 by Richard Caperton.
The Center for American Progress is openly and determinedly anti-nuclear and CAP’s recent
paper reflects that anti-nuclear bias. Although it appears to be an objective discussion of credit
subsidy fees, careful examination shows that the paper is built on mistakes and misstatements;
unsubstantiated estimates of default probability and recovery rates; cost estimates of mysterious
origin, lack of understanding about recent nuclear construction experience, and inaccurate
descriptions of the DOE loan guarantee program requirements and project structures. An
impartial observer could easily conclude that the Center for American Progress hopes to
undermine the entire clean energy program, including support for wind, solar and other carbon-
CAP’s inaccurate and/or misleading statements are set forth below, accompanied by factual
Center for American Progress: “Building a nuclear reactor today will involve dealing with
tremendous financial uncertainty.”
Building a new nuclear power plant today does not involve tremendous financial
uncertainty. The process leading up to a decision to build is designed to eliminate
uncertainty. Project sponsors have significant shareholder equity at risk and have
every incentive to ensure project costs are well-understood and contained.
By the time construction starts; there is, in fact, a high degree of financial certainty –
because the design is complete, quantities of commodities and materials are well-
known and priced; EPC (engineering-procurement-construction) terms and conditions
have been set; liquidated damages agreed to, and contingencies defined, etc.
Building a new nuclear power reactor in the United States or other countries is an
expensive and complex endeavor. Governments and companies spend years
analyzing the need and feasibility, and do not decide lightly to proceed. The project
sponsor has evaluated risks, variables and costs, and put in place tools and
mechanisms to manage and contain those risks.
Center for American Progress: “ Cost projections for nuclear plants keep going up because of
variability in material costs, a new licensing process, limited suppliers for key parts, and
inevitable delays in construction projects …. [C]ost overruns are virtually certain in nuclear
construction, which greatly increases the risk the nuclear companies will default on their loans.”
All these statements are incorrect.
In the new nuclear power projects in the pre-construction phase in the United States, cost
estimates are either stable (e.g., SCANA’s V.C. Summer project), or going down
(Southern’s Vogtle project). These projects provide regular status reports to their
respective public utility commissions with updated detailed cost estimates.
Recent construction and operational experience demonstrates that an experienced project
management team – with effective quality assurance and corrective action programs, with
detailed design completed before the start of major construction, with an integrated
engineering and construction schedule – can complete projects on budget and on
schedule. The global nuclear industry, including the U.S. nuclear industry, has
performed projects ranging from major upgrades to plant restarts to refueling outages
efficiently, without delay.
There are several examples that provide confidence that new nuclear plant development
in the United States will proceed smoothly:
The Tennessee Valley Authority returned Unit 1 of its Browns Ferry nuclear plant to
commercial operation in May 2007. The five-year, $1.8-billion project was
completed on schedule and only five percent over the original budget estimate, a
significant achievement during a period of rapidly escalating commodity costs. The
Browns Ferry 1 restart project was comparable in complexity to the construction of a
new nuclear power plant. Most systems, components, and structures were replaced,
refurbished, or upgraded, and all had to be inspected and tested.
At the Fort Calhoun plant in Nebraska, Omaha Public Power District replaced the
major primary system components – steam generators, reactor vessel head and rapid
refueling package and pressurizer – as well as the low pressure turbines, the main
transformer and hydrogen coolers, among other equipment. The outage began in
September 2006 and ended in December of that year, lasting 85 days. The $417-
million project was completed approximately $40 million under budget and five days
ahead of schedule.
Nuclear construction experience in South Korea over the last 15 years demonstrates
the “learning curve” that can be achieved. The “first of a kind” nuclear power plants
– Yonggwang Units 3 and 4 – were built in the mid-1990s in 64 months. The next
two units – Ulchin 3 and 4 – were built in 60 months at 94 percent of the “first of a
kind” cost. The next plants – Yonggwang 5 and 6 – were built in 58 months for 82
percent of the “first of a kind” cost. By 2004, Ulchin 5 and 6 were built in 56 months
for 80 percent of the “first of a kind” cost. The next two plants – Shin-Kori 1 and 2 –
will be in service next year. Construction duration: 53 months and 63 percent of
what it cost to build Yonggwang 3 and 4. South Korea’s goal is a 39-month
Nuclear power plants in Japan achieve construction schedules similar to those in
South Korea. The first two Advanced Boiling Water Reactors built were constructed
in times that beat the previous world record and both were built on budget.
Kashiwazaki-Kariwa Unit 6 began commercial operation in 1996, and Unit 7 began
commercial operation in 1997. From first concrete to fuel load, it took 36.5 months
to construct Unit 6 and 38.3 months for Unit 7. Unit 6 was built 10 months quicker
than the best time achieved for any of the previous boiling water reactors constructed
in Japan. Experienced construction managers from Japan are already working on the
preparations for the South Texas Project’s construction of two ABWRs.
The new nuclear power plant designs that will be built in the United States between 2015
and 2020 will have been built overseas first and, as a result, U.S. projects will benefit
from lessons learned overseas.
With 56 reactors under construction world-wide, the supply chain is rapidly expanding in
the U.S. and globally to meet demand for new nuclear plants. Key components for the
reactors planned in the U.S. are already on order. Given the relatively modest
construction rate anticipated between now and 2020 (between four and eight new nuclear
plants between 2016 and 2020), parts supply will not be an issue for the first new
Center for American Progress: “The projected cost for two new reactors in Canada shot from
$7 billion to $26 billion in just two years.”
The cost estimates for the reactors in Canada were based on a bidding process that had
very strict requirements for Canadian content and turn-key pricing which drove up the
cost considerably. Many reactor vendors dropped out of the bidding process as a result
and the end bid was not competitive.
Center for American Progress: “[I]n the United States, costs for two new reactors at the South
Texas Project have ballooned from $5.4 billion to an estimated $18.2 billion since 2007.”
The cost estimates provided for the South Texas Project (STP) compare a cost
estimate for a portion of the project (no owner’s costs or financing) with a projected
full project cost (including financing and owner’s costs). An engineering-
procurement-construction (EPC) contract has not been signed for this project. In a
recent investor presentation 2 , NRG Energy indicated that project team (NRG,
Toshiba, and Fluor) are confident that the EPC cost estimate will be below $10 billion
for the two ABWRs proposed for the STP site. This translates to a competitive cost
of $3,400/kW or less when the final EPC contract is signed.
Although new nuclear power plants are capital-intensive, it is important to recognize
that capital costs are only the starting point for any analysis of new generating
capacity. The only accurate measure of economic competitiveness, and the one that
is more important to regulators and consumers, is the cost of electricity produced by a
particular project compared to alternative sources of electricity and to the market
price of electricity when the power plant starts commercial operation. This
generation cost takes into account not only capital and financing costs, but also the
operating costs and performance of a project.
Analysis by generating companies, the academic community, government agencies,
and others shows that even at capital costs in the $4,000/kWe to $6,000/kWe range,
the electricity generated from nuclear power can be competitive with other new
sources of baseload power. Examples include MIT’s 2009 “Update on the Cost of
Nuclear Power,” 3 estimates from the Energy Information Administration 4 , The
Brattle Group 5 , the Electric Power Research Institute 6 , the National Research
Council 7 , and the Congressional Budget Office, 8 among others. All of these reports
conclude that nuclear energy is a strategically important technology based on lifetime
cost, safe and reliable performance, and carbon-free generation.
Update on the Cost of Nuclear Power, Center for Energy and Environmental Policy Research, May 2009.
Annual Energy Outlook, Energy Information Administration, April 2009.
Integrated Resource Plan for Connecticut, The Brattle Group, January 2008.
Program on Technology Innovation: Integrated Generation Technology Options, Electric Power Research
Institute, November, 2008.
America’s Energy Future, Technology and Transformation, The National Research Council of the National
Academies draft report, 2009.
Nuclear Power’s Role in Generating Electricity, Congressional Budget Office, May 2008.
Center for American Progress: “[T]here’s no way to predict what the final cost will be.”
Public filings and state public service commission analyses and orders in SCANA’s
V.C. Summer 9 or Southern Company’s Vogtle projects 10 provide realistic examples
of reactor costs. These projects have signed engineering-procurement-construction
(EPC) contracts with significant fixed price portions to reduce risk. For the portions
of the project that are subject to escalation, contingencies are built into the estimates
to mitigate risk. In addition to the owner’s review, the respective state public service
commissions have reviewed the contracts and risk-sharing mechanisms to ensure
adequate protection for ratepayers.
The new nuclear power plants being reviewed by DOE’s Loan Guarantee Program
Office are all under construction or in operation overseas. By the time the U.S. plants
receive their combined licenses and close on loan guarantee financing, one design
will be in the final year of construction and the others will be operational. The final
costs will be informed by this additional data and will be reviewed as part of the
financial closing for the loan guarantee.
Center for American Progress: “Private lenders are well aware of the risk of building new
reactors, which is why they’re unwilling to finance the projects without government support.”
This is not correct. Private lenders are clearly willing to provide financing for new
nuclear power projects, and there are several recent examples of this.
During the week of March 1, 2010, MEAG (Municipal Electric Authority of Georgia)
Power brought a $2.7-billion bond offering to market. The bonds were rated “A,”
and the $2.7-billion bond offering was significantly oversubscribed: Underwriters
received interest totaling $7.6 billion. Proceeds from the bond offering would fund
approximately 73 percent of MEAG Power’s share of Vogtle Units 3 and 4 (MEAG
has a 23 percent share of the project). (The Department of Energy has offered MEAG
Power a conditional commitment for a loan guarantee for the rest of the financing.
The prospectus for the bond offering makes it clear that MEAG Power will evaluate
the terms of the loan guarantee when the project receives its license and is ready to
close on the balance of its financing, and will determine at that time whether it’s
preferable to use the DOE loan guarantee or finance through the commercial
SCANA’s combined application for a Certificate of Environmental Compatibility, Public Convenience and
Necessity and for a Base Load Review Order, submitted to the South Carolina Public Service Commission,
http://dms.psc.sc.gov/pdf/matters/3B3E3E6F-F48A-A3C5-50C13F96CFDBA604.pdf, subsequent PSC approval
Southern/Georgia Power’s application for Certification of Units 3 and 4 at Plant Vogtle and Updated Integrated
Resource Plan (including EPC contract) submitted to the Georgia Public Service Commission, Docket 27800,
http://www.psc.state.ga.us/facts/docftp.asp?txtdocname=113519; subsequent PSC approval
South Carolina Electric & Gas recently sold $150 million of first mortgage bonds,
with proceeds from the offering used to fund capital expenditures, including costs to
build two new nuclear units at the V.C. Summer nuclear station. The bonds were
rated “A” by Fitch Ratings and the rating outlook for the company is stable. The
company has applied for but not yet received a loan guarantee for this project.
The LES National Enrichment Facility in New Mexico is a privately financed nuclear
fuel cycle facility that will enter commercial operation in 2010. The facility has a
combined construction and operating license from the NRC for the construction of a
centrifuge uranium enrichment facility. The planned capacity will generate over 6
million separative work units (SWU) annually, which represents half of the
enrichment requirements of the U.S. market. The estimated final cost for the facility
is $3 billion, all of which will be privately financed through the parent company,
Center for American Progress: “The huge cost of nuclear power means that taxpayers will have
to provide nuclear loan guarantees to finance new projects if the president and Congress are
serious about building new reactors.”
Whether the cost is “huge” is a matter of debate. In the energy industry, nuclear reactor
projects are large but not uniquely large. The QatarGas II LNG project is a $12-billion
undertaking, for example. As discussed in detail earlier, although new nuclear power
plants are capital-intensive, it is important to recognize that capital costs are only the
starting point for any analysis of new generating capacity. All credible, mainstream
analyses have shown that new nuclear projects will be a competitive source of electricity
in a carbon-constrained world.
Center for American Progress: “Most borrowers under the nuclear loan guarantee program
will get a loan from the Federal Financing Bank, which will now charge a much lower interest
rate and provide more favorable terms.”
Most borrowers are seeking Federal Financing Bank (FFB) loans because DOE requires
the FFB to be the lender for 100%-guaranteed loans. The general terms and conditions
for FFB loans are comparable to commercial loans and not “more favorable.”
The Federal Financing Bank (FFB) charges the Treasury rate plus a spread to cover
its costs like a commercial bank. The terms and conditions of each loan guarantee
require approval from the Secretary of Energy, the Secretary of the Treasury and the
Office of Management and Budget. This system of checks and balances ensures that
the conditions are designed to protect the federal government without regard to the
presumed value or motivation of any individual company.
If 100% of the debt for the project is guaranteed, the rules governing the loan
guarantee program requires the loan to be funded through the FFB. The FFB was
created in Congress in 1973 to centralize and reduce the cost of federal borrowing, as
well as federally-assisted borrowing from the public. The FFB is under the general
supervision of the Secretary of the Treasury. The FFB is structured to offer terms
comparable to commercial financing.
Center for American Progress: “This remaining 20 percent can either come from 1) raising
equity, potentially through utility customers who pay higher rates before the reactor is actually
built, known as “construction work in progress” or 2) debt financing, potentially via French or
Japanese Export-Import Banks that will provide loan guarantees and/or loans for the portion not
covered by the U.S. government.”
CAP’s assertion that financing provided by export credit agencies (ECAs) can substitute
for equity is incorrect. ECA debt financing would reduce the amount of debt financing
guaranteed by DOE. CAP’s understanding of “construction work in progress” is
similarly mistaken: Rate recovery does not raise equity. It allows a return on equity to
be recovered more quickly.
The loan guarantee program is designed to require a significant equity investment
from project sponsors. The 20 percent minimum of project costs that the owner must
provide as equity is in a first-loss position. For investor-owned utilities, this money
will come from shareholder equity.
Export Credit Agency (ECA) financing may be used in certain projects in conjunction
with loan guarantees to reduce the size of the loan from, and the risk to, the U.S.
government. The ECA financing cannot be used to replace the shareholder equity
contribution since it is a source of debt financing and projects are not allowed to lever
above 80% debt in their capital structure.
Construction work in progress (CWIP) support from ratepayers covers the cost of
financing and return on equity during construction. It does not replace the
shareholder equity that will be invested in the project. Instead, CWIP lowers the
entire project’s cost by recovering financing costs during construction, rather than
accumulating those amounts and adding them to the project cost that must be
recovered when construction is complete. CWIP also lowers the company’s interest
costs by improving company cash flow and protecting corporate ratings. This will
lower the levelized cost of electricity for ratepayers for the life of the project.
Southern Company estimates ratepayers will save over $2 billion as a result of CWIP
policies in Georgia.
Center for American Progress: “Debt holders get paid first in bankruptcy proceedings, but
DOE has changed its loan guarantee rules and no longer requires the U.S. government to hold a
‘right of first lien,’ which means that the U.S. government doesn’t necessarily get paid before
other debt holders. The result is that in the event of a default, taxpayers would have to share
proceeds from a liquidation with other creditors, such as the French or Japanese Export-Import
CAP is incorrect in its implication that the change to the rule governing the loan
guarantee program in 2009 diminishes DOE’s first lien position. DOE simply shares a
first lien pro rata with other lenders. In addition, DOE controls the collateral.
The rule change to allow equal treatment of lenders and project partners not
participating in the loan guarantee program was necessary for, and encouraged by, all
clean energy technologies. 11
This rule change was necessary to attract partners and outside lenders such as ECAs
to bring additional capital to the projects and to diversify risk, which is beneficial to
all project participants, including the U.S. government. Equal treatment of other
lenders based on their share of the project is standard financing protocol and a
requirement for participants to reasonably protect their interests. Also known as “pari
passu” treatment, this is a standard financing condition in which each lender is in a
first lien position with respect to its share of the financing.
The Secretary of Energy clearly has the right to ensure that the terms and conditions
of the loan reasonably protect the interests of the U.S. government as the specifics of
collateral-sharing and inter-creditor agreements are finalized for each loan.
Center for American Progress: “Not surprisingly, the nuclear industry wants the [credit
subsidy] fee to be 1 percent or less, while the Congressional Budget Office has estimated that it
should be 30 percent, which reflects the CBO’s 2003 determination of ‘risk of default on such a
loan guarantee to be very high—well above 50 percent.’ In a blog on March 5, CBO declined to
refine this estimate to reflect any specific projects, but reiterated that ‘it would be difficult to set
the fee so as to entirely cover the estimated cost to the government’.”
The nuclear industry has never said the credit subsidy fee should be 1%. The nuclear
industry has said that the fee should be calculated according to protocols and procedures
specified in the Federal Credit Reform Act of 1990 and implementing guidance from the
Office of Management and Budget. The DOE loan guarantee program is governed by
these procedures and protocols.
In simple terms, the subsidy cost is the value of expected cash flows to and from the
government over the life of the guaranteed loan. These cash flows reflect payments
to the borrower under the loan guarantee, adjusted for defaults and recoveries in the
event of default.
Letter from clean energy associations to President Obama, May 19, 2010,
The major inputs to the calculation – probability of default and recovery by the
government in the event of default – are derived from historical data and detailed
project-specific credit analysis.
Project-specific due diligence and underwriting evaluate the legal, technical and
financial attributes of each project. This process is conducted by DOE in concert
with outside legal and financial advisers, independent engineering consultants and
market experts. The analysis includes a rigorous assessment of the creditworthiness
of the project, which can be accurately measured using well-established project
finance ranking criteria (e.g., credit rating of the project sponsor, project capital
structure, project cash flow, strength of power purchase agreements, etc.).
Speculation about high default rates based on reports published by the Congressional
Budget Office has no factual basis and mischaracterizes the CBO reports.
The CBO estimate of a 50 percent default rate is an unsupported assertion from an
outdated 2003 CBO analysis of a different loan guarantee program that was never
approved. The 2003 proposal did not, for example, require project sponsors to pay
the credit subsidy cost and lacked the fiscal discipline of the technology-neutral loan
guarantee program authorized in the 2005 Energy Policy Act. The 2003 CBO report
assumed nuclear capacity would not be competitive but that companies would
proceed to build new nuclear plants anyway and then abandon their (then-proposed)
50 percent equity contribution to the project.
A more recent CBO report (in 2008) examined the economics of new nuclear
capacity. Unlike 2003 (when CBO asserted, without any analysis, that new nuclear
capacity would not be economic), the 2008 CBO report found that nuclear energy
would become a more attractive investment for new capacity than fossil-fueled power
plants in a carbon-constrained world.
The CBO Director, in his blog post 12 of March 4, explained that the 2003 CBO analysis
is not related to the current program. In describing the 2003 report, he explained that it
“reflected information about the technical, economic, and regulatory environment as it
existed in 2003, almost seven years ago. Such generalized estimates of credit risk may
not apply to a guarantee for any particular power plant because of variations in the
technical, economic, regulatory, and contractual characteristics of each project. Without
such information, much of which would be proprietary, CBO has no basis for estimating
the cost to the government of any specific loan guarantee of this type.”
Congressional Budget Office Director’s Blog, March 4, 2010, http://cboblog.cbo.gov/?p=478
Center for American Progress: “Standard and Poor’s thinks [the subsidy cost] should be at
least 4 percent to 6 percent, with the potential to be much higher, depending on the borrower’s
This is erroneous. Neither the press report cited in the CAP issue brief nor the actual
Standard and Poor’s report, both from October 2008, provide project-specific estimates
of credit subsidy costs. In fact, the Standard & Poor’s report repeats several times the
caution that “our calculations are only rough estimates.” The Standard & Poor’s report
was released before the Part II loan guarantee applications were due and much of the
project-specific data was not even available at that time.
Center for American Progress: “The Government Accountability Office has estimated the loss
rate at 25.42 percent.”
The estimate of a 25.42% loss rate in the Government Accountability Office (GAO)
report is derived from theoretical assumptions in a budget document 13 that have no
connection to project-specific or even industry-specific data. A footnote in the document
explains: “Assumptions reflect an illustrative example for informational purposes 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.” The GAO report 14 is from
July 2008, well before the loan guarantee program had been fully staffed and all of the
procedures were in place.
As with the 2003 CBO report, this is another example of an anti-nuclear group
misrepresenting the purpose and findings of a government report.
Center for American Progress: “[T]he generic default rate is 50 percent.”
This assumption is not supported by any factual information or analysis, is unrealistic
and irresponsible, and deserves to be ignored.
All projects seeking loan guarantees will be subjected to detailed due diligence and
underwriting by a rating agency (such a credit assessment is required by the rules
governing the loan guarantee program) and by the Department of Energy. This due
diligence evaluates the legal, technical and financial attributes of each project, and
will produce a credible estimate of default probability that has a factual, analytical
basis. DOE’s due diligence is conducted in concert with outside legal and financial
advisers, independent engineering consultants and market experts. The analysis
includes a rigorous assessment of the creditworthiness of the project, which can be
accurately measured using well-established project finance ranking criteria (e.g.,
Budget of the United States Government: Federal Credit Supplement Fiscal Year 2009,
http://www.gpoaccess.gov/USbudget/fy09/cr_supp.html (see table 6, footnote 4).
Department of Energy: New Loan Guarantee Program Should Complete Activities Necessary for Effective and
Accountable Program Management, U.S. Government Accountability Office, July 2008, GAO-08-750,
credit rating of the project sponsor, project capital structure, project cash flow,
strength of power purchase agreements).
The assumption of 50% default probability is not credible because no company would
pursue a project if credit assessment and due diligence showed a potential default rate
of 50%. The companies building new nuclear power plants will have significant
shareholder equity ($1 billion or more per project) at risk. The companies would
forfeit this equity investment in the unlikely event of default on a guaranteed loan.
No electric company could afford a loss of that size.
The assumption of 50% default probability is not credible because the Department of
Energy would not offer a loan guarantee to a project if credit assessment and due
diligence showed a potential default rate of 50%.
Historical data compiled by all three rating agencies (Fitch Ratings, Standard &
Poor’s, Moody’s Investors Service) demonstrate that the historical default rate for
senior secured debt is well below 50%. In fact, the 20-year cumulative default
probability for regulated utility debt at all rating levels is significantly below general
corporate debt. For debt rated “BB” (one notch below investment grade), for
example, regulated utility debt has a 20-year cumulative default probability of 6.4%,
well below the 22.4% default probability for general corporate debt. 15
In a separate analysis, Fitch Ratings found that “[t]he average annual default rate for
investment-grade issuers was 0.14% and 2.99% for speculative-grade for the 1990-
2008 period.” 16
Some nuclear projects will be built in an unregulated, merchant environment rather
than a regulated environment. The merchant projects will be financed using “project
finance” structures. (In a project finance structure, the debt is secured solely by the
project with no recourse to the project sponsor’s balance sheet.) Project finance debt
generally has somewhat higher default probabilities than regulated utility debt. As
with regulated utility debt, however, default probabilities for project finance debt are
significantly lower than the 50% default rate assumed by CAP – because project
finance transactions have structural features designed to provide lenders a very high
level of protection. 17
According to Moody’s Investors Service: “In the Baa rating category, where the
majority of projects are rated, Project Finance debts have had higher default rates than
their corporate counterparts across virtually all time horizons. However, the average
recovery rate for senior secured bonds was also higher for Project Finance – making
Default, Recovery and Credit Loss Rates for Regulated Utilities, 1983-2008, Moody’s Investors Service, May
Global Corporate Finance 2008 Transition and Default Study, Fitch Ratings, March 5, 2009.
“[P]roject finance loans include a number of credit enhancements that mitigate risk, such as first-priority liens,
cashflow sweeps, covenant triggers, limitations on indebtedness, etc.” (“Credit Attributes of Project Finance,” The
Journal of Structured and Project Finance, Fall 2002).
overall credit loss rates for Baa Project Finance credits similar to Baa corporate
According to Standard & Poor’s: “The default rates in the Project Finance asset class
declined for five consecutive years from 2002 to 2007. In the period 2004-2007,
default rates measured well below 1%. The long-term annual default rate falls
between 2% and 3%.” 19
Center for American Progress: “The recovery rate in liquidation is 50 percent.”
Like CAP’s assumption about default rates, this assumption about recovery rates is not
supported by any factual information or analysis, is completely unrealistic, and deserves
to be ignored.
CAP is mistaken in assuming liquidation. In the unlikely event of a default, the project
would be restructured with new project sponsors, completed and operated. There is no
likely or credible scenario in which a new nuclear project would be broken up for scrap
Recovery rates for both corporate and project finance debt are significantly higher than
50%. In fact, they generally fall in the 80-100% range.
According to Standard & Poor’s: “General Project Finance recovery levels are relatively
high (compared with some other asset classes) with discounted recovery observations
indicating that a very significant percentage of instruments recover between 90% and
100% … We compared project finance recoveries to those for senior unsecured corporate
instruments. The results indicate a more favorable recovery rate for project finance
instruments. Project finance loans on average experienced a higher recovery rate than
senior unsecured corporate debt … again confirming the sounder credit risk profile of
project finance loans.” 20
According to Moody’s Investors Service: “In the U.S. over the past 25 years, only six
investor-owned regulated electric utilities have experienced bond defaults. These
defaults resulted in recovery for secured debt that was well above the average for
defaulting corporate debt, with holders of secured debt eventually recovering 100% of
principal and interest on a nominal basis in all six cases.” 21
Default and Recovery Rates for Project Finance Debts, 1992-2008, Moody’s Investors Service, November 2009.
Project Finance Consortium Study Reveals Credit Performance Trends from the Early 1990s through 2007,
Standard & Poor’s, December 5, 2009.
Project Finance Consortium Study Reveals Credit Performance Trends from the Early 1990s through 2007,
Standard & Poor’s, December 5, 2009.
Proposed Wider Notching Between Certain Senior Secured Debt Ratings and Senior Unsecured Debt Ratings for
Investment-Grade Regulated Utilities, Special Comment, Moody’s Investors Service, May 2009.
Center for American Progress: “These assumptions indicate that the credit subsidy fee on a
nuclear loan guarantee should be at least 10 percent.”
Two items – probability of default and recovery rate in the event of default – drive the
financial model used to calculate credit subsidy costs for federal loan guarantees. Since
the Center for American Progress’ assumptions about default probability and recovery
rate have no factual or analytical basis, and are not supported by historical data, it follows
logically that CAP’s finding about subsidy cost is equally without merit or value. There
is no credible basis for this number and it can be safely ignored.
NEI is not a party to the discussions between the Department of Energy and the
companies seeking loan guarantees and cannot comment on the credit subsidy fees under
discussion. For reference, however, the average fee for all government loan guarantee
programs in the 2010 fiscal year is 0.2 percent of the loan amount. The federal
government manages a loan guarantee portfolio of about $1.2 trillion. The government-
wide average subsidy fee is low because many loan guarantee programs generate more
fee revenue for the federal Treasury than they cost, as the DOE loan guarantee program
for nuclear energy is expected to do.
As noted earlier, all projects seeking loan guarantees will be subjected to detailed due
diligence and underwriting by a rating agency (such a credit assessment is required by the
rules governing the loan guarantee program) and by the Department of Energy. This
detailed project-specific credit assessment will produce credible estimates of default
probability and recovery rate, which should serve as the basis for calculations of credit
Realistic estimates of default probability and recovery rate (i.e., in the 80-100% range)
will produce credit subsidy costs approximating the range suggested by Energy Secretary
Steven Chu on March 4, 2010, following his appearance before the Senate Energy and
Water Development Appropriations Subcommittee. Asked about subsidy costs,
Secretary Chu said: “It’s quite a small subsidy – 1 percent, plus or minus a half percent.”