SB 31: Georgia Power’s poison bill?

&#8220The Public Service Commission’s own staff has analyzed the bill and found that SB 31 not only takes all risk away from investors and shareholders, it “would force current customers to subsidize future customers.”&#8221

In case you haven’t heard, legislation has been introduced to allow Georgia Power to recover costs early, called “construction work in progress” or CWIP, for the construction of two new nuclear reactors at Plant Vogtle:

Georgia Power Co. could start billing customers for a planned nuclear plant expansion as soon as construction begins under legislation a Senate leader will introduce.

Current state law would only allow the utility to begin recovering its investment in the $14.4 billion Plant Vogtle project when the expanded facility goes into service.

Georgia Power officials say moving up recovery of the costs would save ratepayers $300 million because the company could begin paying off interest on the construction loans sooner.

Sen. Don Balfour, R-Snellville, compared the concept behind the bill he plans to introduce on Friday to a consumer loan.

“If you buy a car and put it on your credit card, you’re going to pay a lot of money,” said Balfour, chairman of the Senate Rules Committee. “If you save a little money and pay some of the cost up front, you pay a lot less.”

Not to pick on Sen. Balfour here, but the comparison to a car loan is not accurate. Would you send a check to a car manufacturer when they start building your car, essentially paying for it before you ever had the benefit of driving it?

Also, Balfour’s comment about “many other Southeastern states” with cost-recovery laws already on the books is true, but that’s only part of the story. He doesn’t mention the “buyer’s remorse” that legislators have. For example in Florida, Progress Energy has been pressed to suspend its cost-recovery plan due to the economic struggles of ratepayers. Progress Energy planned to add an extra $11.42 per 1,000 kilowatt hours.

In Alabama, a TVA project at the Bellefonte plant has had cost overruns that are more than double the estimate made the previous year. The original estimate at Bellefonte was $6.4 billion, which is coincidentally the same price tag Georgia Power has given for the two new reactors at Plant Vogtle.

Cost overruns, as noted above in the TVA project at Bellefonte, are significant when dealing in nuclear projects such as what is being undertaken at Plant Vogtle. A RAND Corporation study, cited by Tom Newsome during his testimony to the PSC, puts the average overrun for a nuclear power projects at 157%. Newsome also added that “[t]here is no direct evidence for [PSC] Staff to confirm the reasonableness of the Company’s in-service cost estimate of $6.4 billion.”

The Public Service Commission’s own staff has analyzed the bill and found that SB 31 not only takes all risk away from investors and shareholders, it “would force current customers to subsidize future customers.” PSC staff further added that “[w]hen ratepayers’ cost of money is taken into account, the pre-payments cost rate payers at least $218 million in net present value dollars over the life of the plants.” According to Jeff Pollock’s testimony to the PSC, ratepayers would pay $740 million more under SB 31.

Georgia Power and Sen. Balfour have both stated that early cost-recovery would save ratepayers some $300 million in interest, however, this figure can only be found by assuming that there is no cost of money, by ignoring the time value of money and it completely ignores the prepayment of state and federal income tax, which Lane Kollen testified and has quantified as at least $400 million during his testimony to the PSC. Additionally, PSC staff notes that it is “unreasonable to ignore” the pre-payment of taxes, adding that Georgia Power is “indifferent to the pre-paid taxes – they are a pass through for them.”

The PSC staff analysis also found that if this bill is passed that it ties the hands of the Public Service Commission “from changing the date that recovery would begin” as well as “[prohibiting] the Commission from changing the period of time over which the costs are recovered.” If things don’t turn out as advertised by Georgia Power, the PSC would be powerless. Since Sen. Balfour like using car analogies, this would be the equivalent to driving a car with no brakes. The legislature would have means to change the law, but that could take time and ratepayers would have to pray the lobbyists for Georgia Power call in sick during the session.

I’m not against nuclear energy, I’m against companies that give the appearance of rent-seeking by using the legislative power of government to take the burden off of investors and shareholders and put all the risk on ratepayers.

SB 31 will go before the Senate Regulated Industries and Utilities Committee sometime soon, as early as tomorrow afternoon.

13 comments

  1. Jason-
    That’s a great post. Well-researched and more detailed than I see in most newspapers. I’m not going to argue over the net present value vs. financing concerns you raise -that’s exactly what this debate should be about: the numbers.
    Sen. Balfour’s analogy is actually a pretty good one, though. I would gladly pay the folks at Porsche to start building me a $100,000 car now, and take five years to pay them, if I only paid $75,000 over those 5 years. At the end of 5 years, I’d have a brand-new, paid-off Porsche -with zero miles!
    Your criticism is completely valid -if Georgia Power is a private company in a competitive market. But it’s a regulated utility, and has to balance the risk of the investment with the benefit of future power AND their future obligation to provide electric power to you, me, and the rest of Georgia. Frankly, I’d like to see some oversight teeth given to the PSC (or Georgia Power) to control the cost overruns.
    Just out of curiosity: What do you think a reasonable number for pre-construction cost recovery would be?

  2. odinseye2k says:

    I was thinking a bit along the same lines, Mike, but I have one choking point.

    Yes, we are saving Georgia Power and the utility rate the cost of financing. However, at the same time, we are also forgoing the returns that we could get if we kept that same money.

    Somehow, I imagine that whoever is financing GP can request a higher rate than we can find in the limited investment vehicles we have access to, but it is a legitimate concern to address.

  3. odinseye2k says:

    The other problem with “the numbers” when dealing with a project of this size and duration, is that “the numbers” can be twisted to represent whatever you desire. “Figures never lie and liars always figure” and all that.

  4. Icarus says:

    I support nuclear power, and generally am inclined to support GA Power allocating some of the plant construction costs to customers during construction. There are at least two major areas of concern I have at the moment:

    1) There was some dispute as to whether the language of the bill exempted all large commercial customers, or just those who participate in peak load/power shaving programs. If this bill exempts most commercial customers, it becomes a political liability for anyone who votes to raise prices only on retail consumers.

    2) My understanding is that, during PSC discussions, the GA Power representatives were not open to suggestions, and pretty much said their design of the financing package was either going to be accepted by the PSC, or they wouldn’t build the new reactors. There are at least two PSC members who have a relationship with GA Power that makes you wonder if they work for them or for us. If GA Power is unwilling to listen and adapt to lawmakers and PSC concerns, then a “no” vote is required.

  5. Jason Pye says:

    Mike,

    The difference is that Georgia Power’s numbers aren’t as advertised, as presented above; therefore Sen. Balfour’s comparison to a car loan is inaccurate.

    The AJC points that Georgia Power has said they won’t do they project if they can’t have their proposal approved.

    The problem here, something I was trying to let readers figure out on their own, is that Georgia Power has no real incentive to worry about cost overruns, nor complete the project on time. This represents a huge risk to ratepayers, who are assuming a lot of risk under SB 31 and in many cases; they can’t just switch utility providers. They just have to take it.

  6. IndyInjun says:

    Georgia Power has no real incentive to worry about cost overruns, nor complete the project on time. This represents a huge risk to ratepayers, who are assuming a lot of risk under SB 31 and in many cases; they can’t just switch utility providers. They just have to take it.

    Jason. You are exactly right as was discovered the hard way with massive Georgia Power cost overruns with the first two units. The bigger the cost base, the greater the power rates “justified” There was rampant waste, even fraud, then.

    After Georgia Power was forced to ‘eat’ $billions in cost overruns, they rammed a limitation through with respect to future projects, so they they are protected from their own malfeasance by the cap, with the liability of the public unlimited.

    Now they want to be funded in advance.

    The citizenry is raped at both ends.

    With the $428 million property tax increase and this litle gem, peachpunditeers are getting the first glimpses of the Greenspan/Bush hyperinflation.

    Wages for the average earner will never keep pace and the middle class will be decimated.

  7. Bill Simon says:

    But it’s a regulated utility, and has to balance the risk of the investment with the benefit of future power AND their future obligation to provide electric power to you, me, and the rest of Georgia.

    It is a regulated, publicly-owned utlity that is allowed to generate an approximate return of 11.5% on its assets. “Allowed” as in the government stipulates that as both a minimum AND a maximum ROA/ROE.

    Publicly-owned in that it has dividend-receiving stockholders and interest-receiving bond holders.

    In ANY other corporate entity out there, public or private, not one of them is guaranteed anything in terms of the minimum ROA they are allowed to have.

    The “risk” for this company should be placed squarely on the backs of the shareholders/bondholders rather than the backs of residential ratepayers who are having enough of a challenge right now paying for their grits, much less contributing money to pay for Georgia Power’s shareholders’ future dividends.

    Funny how Don Balfour so magnanimously seeks to exclude commercial and industrial users of electricity from having to foot the bill. Funny…funny…funny…

  8. FinanceBuzz says:

    I certainly see the time value of money argument and that is certainly necessary to consider. I also agree with odinseye2k’s point regarding the different rates on bonds and loans that GP would have to get to fund the project and the average rates that would be returned on customer money. Now, I do not claim to full understand the operations of a regulated industry such as power. However, I am curious why, setting aside TMV impacts, whether customers pay as they go along or afterwards along with the accompanying costs to GP. If the utility has a higher cost structure during the construction time period due to making bond payment, won’t this simply add to the eventual rate hike customers would have to pay? This is where the different between the rate paid for financing and customer savings rate comes into play. If the financing rate is high enough – a definite possibility I would think in this economy – wouldn’t this very possibly offset or more than offset the lower NPV of customer payments made in the future? Also, if the stated ROA is mandated, wouldn’t increasing costs that eat into that return force the PSC to require rate increases to ensure that equity and debt holder returns are maintained? I would appreciate if someone could clarify these points for me or point to one of the links already (or yet to be) provided that could answer this.

  9. Icarus says:

    Note To GA Power:

    If you’re going to spend the coin on 37 different lobbyists, and I’m sure dedicate at least one or two of those to earned media, you may want to consider getting someone who actually can read a pulse of a blog before they continue to spam it with one new sockpuppet after another.

    Note to sockpuppet(s):

    Believe it or not, a lot of the folks on here actually do pay attention to what has been posted. It’s already been well established that not only can GA Power borrow money more cheaply and easily than any class of their rate payers, but that rating agencies have testified to the PSC that their rating will not change if this bill is not passed.

    To repeatedly come on this blog and others and try to claim that GA Power might have trouble borrowing this money, while taking money from Georgia families and businesses that actually are having trouble borrowing money and/or making payements on money they’ve already borrowed, demonstrates that you are 1) Out of touch with the political climate, 2) Way out of touch with the day to day realities of your rate payers, and 3) Not worthy of this rate increase based on the ignorance and callousness you have demonstrated throughout this end-run of the PSC.

    Note to members of the GA House:

    Govern yourselves accordingly

  10. Bill Simon says:

    FinanceBuzz,

    The value of a dollar will be worth more to those households during the time period of 2011-20?? of construction costs that nobody really believes will be fixed at the $6 billion GaPower is claiming it will cost them.

    Any senator who voted for this because they believed the Time Value of Money argument should go out and re-fi their house for the shortest time period possible. You know what? I’ll betcha none of them will. Why? Because they KNOW the value of their current dollars and would rather finance for as long a period as they can to allow for the least amount they have to pay in fixed costs every month.

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