Today, the DOE is expected to announce a $6.5 billion loan guarantee for Southern Company's new nuclear facility in Georgia.

This guarantee is for the lender, not the borrower.

The borrower benefits in two important ways. First, the guarantee lowers the project's capital costs. Interest during construction is capitalized. Lowering the interest rate lowers construction costs.

More important, the federal involvement forces the state's hand. The state's utility commission cannot easily cancel the project without first considering the federal guarantee's impact on cost recovery.

Georgia has not deregulated or restructured its utilities. Their utilities operate under a cost-plus arrangement. Utilities' operations, maintenance, capital and fuel costs are passed onto the state's commission plus a fee. The state then passes all approved costs plus the utility's fee onto consumers through state-approved tariffs.

The state already approved $14 billion for Southern's new nuclear units. That deal is done. However, cost overruns are not approved.

The state believes cost and schedule overruns are coming. The total cost could be much more than $14 billion.

Prior to the loan guarantee, the state could have cancelled the project. I believe they were considering a delay or a substitution. They could use the same site to construct combined cycle gas turbines. Capital costs for an advanced gas turbine is approximately 15 percent of the estimated cost of a new nuclear unit. Of course, the operating profiles are much different.

Now with the federal loan guarantee in place, the state will find it more difficult to retreat. For a utility earning a guaranteed return on equity, this is good news for Southern.


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