Constellation nuclear plans in fiscal peril

The Baltimore Sun

Constellation Energy Group's bid to be a leader in the nuclear industry's revival might be derailed if Bush administration officials don't back off of a proposal to cut the scope of loan guarantees approved by Congress, company and industry officials say.

Michael J. Wallace, who heads Constellation's nuclear business, said bankers won't finance the company's half-dozen proposed nuclear reactors unless the Energy Department agrees to back 100 percent of the debt rather than the 90 percent the agency has offered.

The outcome of the Energy Department's deliberations could have far-reaching effects on Maryland utility customers. Constellation wants to build a $5 billion reactor next to its Calvert Cliffs nuclear station in Lusby, which proponents say could alleviate the state's growing electricity shortfall and help lower utility bills. Nearly 30 percent of Maryland's electricity comes from outside the region and is subject to "congestion" charges on transmission lines -- significant factors in the recent 70 percent rate increase that hit Baltimore Gas & Electric customers.

It also could determine the future of Constellation's plans to develop similar reactors for utility buyers nationwide through a partnership announced Friday with Electricite de France SA of Paris.

Constellation's concerns are supported by five major investment banks, which say dozens of nuclear plants proposed industrywide are unlikely to be built without major changes in the loan program.

"We remain firm that without a full loan guarantee as provided in the 2005 Energy Policy Act, it is going to be very difficult -- if not impossible -- to finance these units," said Caren Byrd, an executive director with investment bank Morgan Stanley.

Lenders say investors will be reluctant to buy unsecured debt in nuclear projects after several high-profile financial disasters in the late 1970s. Many still recall what happened to the Shoreham nuclear power plant in Long Island, N.Y., which was completed in 1984 but never operated because of public opposition and regulatory obstacles.

Cost overruns, regulatory hang-ups and widespread opposition from environmentalists dogged the industry throughout the 1970s, contributing to the cancellation of dozens of proposed reactors and resulting in more than $17 billion in after-tax write-offs industrywide.

A spokeswoman for the Energy Department said it is taking the industry's concerns into consideration and will make a final decision on the scope of loan guarantees this year. Until then, the utility industry's plans to build the first new nuclear reactors in a generation are on hold.

Nuclear power has been promoted by energy companies as a way to generate large amounts of electricity without adding greenhouse gases to the atmosphere, though many environmentalists still are opposed. More than 30 plants have been proposed industrywide since the 2005 energy bill was signed into law. The projects must win regulatory approval, which no energy provider has attempted in decades.

Constellation has been laying the groundwork for its proposed Calvert Cliffs addition for more than two years. It has begun the license application process, placed orders for key components and secured $300 million worth of tax breaks from Calvert County if the reactor is built.

Constellation shareholders will pay out of pocket for 20 percent of the project's cost, or about $1 billion by some estimates. But the rest will have to come from lenders, who are reluctant to gamble billions of dollars on an industry that has atrophied since the Three Mile Island accident near Middletown, Pa., in 1979 increased public opposition to new reactors.

"We haven't done this for 25 years, so there's reluctance on the part of lenders as to how all of the risks are going to be organized," Wallace said.

General construction costs have climbed 30 percent over the past few years, and finding skilled engineers and manufacturers who can make the required components will prove difficult, said Paul Joskow, a Massachusetts Institute of Technology economist and director of its Center for Energy and Environmental Policy Research. Many of the companies that produced parts used in existing nuclear reactors have gone out of business or been acquired over the years.

The energy bill was designed to kick-start the industry by requiring the government to provide loan guarantees for the full 80 percent of project costs that Constellation and other energy companies will have to borrow. But they say the Energy Department's initial proposal would cover just 72 percent. The remaining 8 percent -- or about $400 million on a $5 billion project -- would be unsecured debt, which comes with a higher interest rate.

Bankers Morgan Stanley, Goldman, Sachs & Co., Citigroup Global Markets, Credit Suisse Securities LLC and Lehman Brothers have said the inclusion of unsecured debt would make it nearly impossible for lenders to sell the loans in the secondary market, which is essential in such deals. Government-backed debt is typically bought by pension funds and other cautious investors, who would balk at taking a risk on the unsecured portion of the financing.

"We are concerned that the proposed rule is not workable," the five bankers wrote in comments submitted to the Energy Department.

Peter Bradford, a former member of the Nuclear Regulatory Commission, counters that Wall Street routinely finances businesses that are considered just as risky.

"Their claims that the [Energy Department's] proposed package is not finance-able are just not correct," said Bradford, who is now vice chairman of the Union of Concerned Scientists, which opposes the loan provisions for nuclear power. "They want taxpayers to take 100 percent of the debt risk."

Environmental groups agree, saying nuclear energy should have to compete with other forms of energy for investment dollars. Many complain that the disproportionate focus on nuclear energy comes at the expense of financing for other renewable energy options that could be just as effective at reducing greenhouse gas emissions.

"These subsidies go to some of the best-performing companies on Wall Street," said Tom Cochran, director of the nuclear program at the Natural Resources Defense Council. "The most economically efficient way to address the global-warming problem is to cap carbon emissions and let the alternatives compete on a level playing field."

The Nuclear Energy Institute, a trade group, counters that the industry will have to build dozens of new reactors in the next 20 to 30 years in order to meet rising energy demand without adding to greenhouse gases.

"Without this [loan program], we think it's going to be hard, if not close to impossible, to build substantial numbers of new nuclear plants," said Richard Myers, vice president of policy development for the group.

Congressional leaders have criticized the Energy Department and Office of Management and Budget for offering a loan program that appears less generous than what was called for in legislation. Both houses of Congress have held hearings on the matter, and a bipartisan group of lawmakers have called on the White House to intervene.

"There is a lot of frustration among members of Congress about the way the Department of Energy and Office of Management and Budget have implemented the loan program," said Matt Letourneau, Republican communications director for the Senate Energy and Natural Resources Committee. "Specifically, the amount that the federal government will guarantee is not consistent with what Congress intended."

Some legal and industry experts say that many plants will be built even without a more generous loan program. Regulators and politicians in Florida, South Carolina, Georgia and Louisiana have told utilities that they will be allowed to recover nuclear development costs through rate increases for customers, which makes financing easier to obtain. Power generators in those states operate under traditional regulation rules, which assure them a guaranteed rate of return on investments.

"I know that there are plants that are based on an economic analysis that does not incorporate ... the loan guarantees, and those plants will probably go forward without regard to what happens at" the Department of Energy, said Charles Whitney, an Atlanta attorney specializing in energy issues.

But power generators in deregulated states, such as Maryland, cannot recoup their costs from electricity ratepayers and are not guaranteed a profit on their investments. It's unlikely any plants will be built in those states without loan guarantees, industry experts said.

"In states in the Northeast and Midwest that have competitive market models, I think the loan guarantees are essential," said Joskow, the MIT economist. "The markets are just so volatile and keep changing, and it's very hard to get debt financing for these projects."

paul.adams@baltsun.com

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