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Nancy Anderson, Ph.D.Torchlight

Moral Hazard

By: Nancy Anderson, Ph.D.

January 25, 2011

It might be a new morning for nuclear power in America. A decades-long moratorium on construction of new facilities is ending, although the number of new plants likely to be built is anyone's guess, as is their location. True, the furious debate over questions of the safety and sanity of domestic nuclear power is not over, but concerns over climate change, opposition to new coal-fired power plants, and a nuclear power industry able to finance projects with the backing of multi-level loan guarantees may have shifted the ground out from under the moratorium for now.

A panel held at the New York Academy of Sciences, Is Nuclear Power A Plausible Long-Term Option For New York State was a sign of these times. It was also a revealing eye-opener because it offered a glimpse into emerging deal structures to finance new plants, which these days cost north of $7 billion each. Consider this: the bonds to pay for a two-plant plan in Burke County, Georgia, priced at $14.5 billion, look like a good deal for local utility ratepayers.

It is well known that the US government is authorized to provide loan guarantees to nuclear plant developers, with a total of $18.5 billion in guarantees now available. Of this sum, $8.3 billion will go to the Burke County project. The NYAS panel examined how $2 billion in construction financing not guaranteed by the federal government was raised through the sale of bonds. In this deal, the bond interest rate of 4.5%, half that of similar investment vehicles, will help maintain the low cost of electricity in that region; that's good for utility ratepayers. What makes this a great deal for bond buyers? Georgia's municipal taxpayers have agreed to guarantee these bonds.

Sounds spectacular, but it is important to remember that local governments, unlike the federal government, can go bankrupt and in January 2011, Standard & Poor's issued a warning about looming downgrades facing part of the municipal bond market. Now consider this: should there be construction cost overruns and delays in completion of the Burke County facilities (a problem that besets even the most experienced nuclear power developers like the French company Areva) or problems with selling power at projected levels, private bondholders are guaranteed repayment, even if local governments in Georgia have to impose new taxes to cover them.

During the panel presentation, the dizzying details for financing these new power plants — whose design still awaits approval by the Nuclear Regulatory Commission although China is building four plants of a similar design right now — ricocheted in my mind and the words "moral hazard" hovered into view. Financial columnists for the New York Times introduced me to this concept when reporting in 2008 on our great financial system collapse and the ensuing federal bailout. Consider this Wikipedia definition:

Moral hazard occurs when a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk.

Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions. For example, a person with insurance against automobile theft may be less cautious about locking his or her car, because the negative consequences of vehicle theft are (partially) the responsibility of the insurance company.

It is worth asking if Georgia taxpayers, municipalities and their financiers are creating a moral hazard for nuclear utilities whose risks (whether financial or safety-related) cannot be reliably predicted.

UPDATE MARCH 14: Owners of the Georgia reactors do not expect any delays or added costs for this project in light of the disaster in Japan.

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