The ongoing debate over how best to finance nuclear power plant construction in Georgia has generated more energy than utilities do. One side argues it will save customers $300 million; the other sees a $575 million cost. It takes a graduate degree in finance to help determine the answer.Too much time has been spent airing the “pay me now or pay me later” dispute, however, while the real risk of a downgrading of the credit rating for the utility involved has gotten short shrift. Yet that’s what would produce the worst possible outcome for consumers.
Georgia Power Co. plans to expand its Plant Vogtle nuclear plant outside Augusta by adding two reactors at an estimated cost of $6.4 billion. The construction would take seven years, with completion scheduled by 2017. Georgia Power seeks to recover the financing costs of the project during the construction phase and to codify into state law its ability to recover those financing costs. The utility will own 45 percent of these new reactors; the rest would be owned by a combination of Georgia electric membership cooperatives and municipally owned utilities that have the ability to start billing their customers for their portion of costs at any time, after an extensive process of approvals.
At issue is the timing of when Georgia Power recovers its financing costs. Nearby states such as Florida, South Carolina, Louisiana, Mississippi and Virginia currently allow utilities to recover financing costs during construction. Florida went as far as to allow direct construction costs also to be recovered during construction; a controversial step that is being reconsidered.
Georgia Power proposes that the financing costs be phased in 1.3 percent per year from 2011 to 2017. The alternative is to let it accrue, recovering the costs in years 2016 and 2017 with rates increasing about 12 percent. Under federal accounting rules, the costs cannot be phased in after construction is completed.
The question is similar to many financial questions: Is it better to pay a little each year over time or face a large payment at the end? One viewpoint is that customers would prefer a phase-in versus a “rate shock” in the final two years. Another is that customers would be better off investing their money during the first five years, instead of dedicating it to the utility interest payment.
Both are probably correct, but both miss the big picture: Georgia Power, despite one of the best credit ratings in its business, is indeed at risk of a credit downgrade. This may seem unlikely, but experts warn otherwise: Moody’s, one of the big three rating services, “expects this nuclear construction program to increase business and operating risks at the utility and could lead to a further weakening of credit metrics and a potential ratings downgrade over the next several years ….”
And a June 2008 Moody’s report noted, “The technology is very costly and complex, and the 10- to 15-year duration of these construction projects can expose a utility to material changes in the political, regulatory, economic and commodity price environment …”
A lower credit rating would cost Georgia Power customers more than $100 million a year, a cumulative impact that would be much greater than any amounts currently being tossed about regarding the timing of payments.
Given the credit risks and the need to remain competitive with other states, Georgia should consider codifying the recovery of financing costs for nuclear power plants with the following provisions:
- Only financing costs should be included. Georgia should not follow the model of Florida and allow direct costs to be recovered during construction.
- The Georgia Public Service Commission should retain the ability to review and approve all financing costs.
- The charges should be incorporated into the base rate of all customers.
- Annual rate increases should not exceed a reasonable, guaranteed rate, perhaps 1.5 percent, to protect Georgia consumers.
Investment in nuclear energy is a wise, environmentally sound approach that will produce long-term benefits to this growing state. With the nation watching Georgia, no doubt some hope that hindering its cost-effectiveness hampers this capital-intensive project; regulatory excesses and uncertainty for utilities certainly heighten the risk in investing in this energy source.
The sheer size of this investment, the long construction process and the tightening of credit markets make it conceivable that Georgia Power’s credit rating could be downgraded. Legislators should embrace all prudent, reasonable steps available to mitigate risk and uncertainty to Georgians.
Kelly McCutchen is executive vice president of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (February 20, 2009). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.