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by
John K. Welch
President and Chief Executive Officer
USEC Inc.
at the
Department of Energy’s Public Meeting On the
Notice of Proposed Rulemaking Implementing the Energy Loan Guarantee Program
June 15, 2007
Mr. Secretary, members of the panel, thank you for the opportunity to comment on the recent notice of proposed rules for DOE’s loan guarantee program. My name is John Welch. I am president and chief executive officer of USEC Inc., the sole domestic producer of enriched uranium that supplies fuel to both U.S. and foreign nuclear power plants.
USEC supports the implementation of the loan guarantee program as envisioned in the Energy Policy Act of 2005. With regard to nuclear power, in many areas we are a generation behind the rest of the world in investing in new nuclear technologies. But prompt implementation of the Act, and in particular the guarantee program, will help support critical investments that will enable us to recover lost ground and strengthen our nation’s energy security.
Deploying these first-of-a-kind projects envisioned by the Act will be difficult without government support. Although capital markets continue to evolve, investors typically look to benchmark potential investments against comparable technologies, projects and competitors. This is not always consistent with promoting investment in new technologies, especially for projects that may require significant amounts of capital with a long time horizon. The loan guarantee program needs to maintain its focus squarely on the notion of supporting commercialization of technologies not mature enough to access the capital markets due to their innovative nature.
Government support for the deployment of these critical technologies will strengthen our nation’s energy independence. I commend the U.S. government’s recognition that these innovations need support, and I applaud you for seeking input from the energy industry, financial institutions and other agencies implementing similar programs. But we can’t drag our feet – we must move forward.
The proposed rules received significant response from many stakeholders recommending ways that the program could better fulfill its intent. In particular, concerns have been expressed regarding constraints on the amount of guaranteed debt, seniority of debt traunches, and “stripping” of debt into components more suitable for the capital markets.
I won’t spend time rehashing these. USEC supports the statements made by the Nuclear Energy Institute, those put forth by the financial community on these matters, and those made in the testimony of Exelon’s Christopher Crane before the House Subcommittee on Energy and Air Quality in April regarding the loan guarantee program.
I would, though, like to make a few salient points.
The proposed rules restrict the program’s ability to meet its objectives. The principal objective of the program is, and I quote, “to encourage commercial use in the United States of new or significantly improved energy-related technologies” with the belief that “accelerated commercial use of energy-related technologies will help sustain economic growth, yield environmental benefits and produce a more stable and secure energy supply and economy for the United States.”
To accelerate commercial use of energy-related technology in a manner that promotes the government’s broader policy objectives, the government’s intent is to accept technology risk in an amount or at a pace that exceeds the appetite of the private sector. It should not accept that risk blindly. Rather the Department can protect the government’s interests through a program that provides a framework for rigorous project evaluation and the flexibility to structure a guarantee based on a project’s risk profile.
Project evaluation happens in the government and private sector every day. Many benchmarks are already being used in commercial financial institutions, rating agencies and other government loan programs. The Department of Energy should examine best practices and establish a process utilizing the best resources available, outside the Department if appropriate. The U.S. government already operates many successful guarantee programs. Don’t reinvent the wheel.
In addition to the project sponsor’s assessment of a project’s risks, the loan program currently contemplates due diligence or credit reviews from additional debt investors and rating agencies. These cannot replace the fact that the Department must complete its own due diligence review of each application, even if other external reviews occur. This may require hiring outsiders with financial or industrial expertise the Department does not already possess. One assumes that Congress intended this staff and resource buildup when it appropriated money in this year’s federal budget creating an office to manage the program. In some cases, DOE’s staff experts will provide the best assessment of a project’s technical risk. But since the Department must be responsible for completing the government’s official assessment of each applicant, the use of outside expertise may be needed.
Project sponsors will submit extensive information in their application that will provide an excellent foundation from which the Department can work with a project sponsor to structure a guarantee. By supplementing business plans and information from the project sponsor with reports from independent consultants, the Department can form a view of the project’s credit risk and work with a project sponsor to structure a guarantee that achieves the government’s and the sponsor’s objectives while protecting the public interest.
Ultimately, the loan subsidy cost compensates the government for the risk it bears. The subsidy cost should be determined by using a transparent methodology that is commercially reasonable and consistent with other federal programs. It should also be included as part of the total project cost to allow companies to finance it over the term of the guarantee.
We also suggest adding a few criteria for selecting technologies.
I would like to spend a few minutes discussing a proposal for testing the program – a proposal I believe will benefit everyone involved.
It’s no secret that USEC supports the resurgence of nuclear power. We firmly believe the renewal of the U.S. nuclear industry must begin with the deployment of our American Centrifuge uranium enrichment plant. Every cart needs a horse to pull it. As the leading generator of emissions free electricity, U.S. nuclear plants need a reliable, domestic supply of enriched uranium now and in the future. And utility executives need that assurance to justify the large investment required for new reactors.
We believe American Centrifuge to be the perfect candidate for the loan guarantee program and I want to offer, right now, to be a pilot loan guarantee.
Deployment of this U.S. enrichment technology will meet multiple policy objectives of the Department and the U.S. government, in addition to those addressed in the program criteria.
The American Centrifuge Plant and its advanced centrifuge technology represent an opportunity to achieve several goals for the loan guarantee program in one project. Deployment of the American Centrifuge Plant will represent the commercial use of a significantly improved energy-related technology. Enriched uranium from the plant will help fuel at least 30 years of clean electricity generation by the nation’s nuclear power plants. At the same time, it eliminates electricity demand from our current gaseous diffusion operations equivalent to a 1000 MW power plant. That is one less new coal-fired plant needed to meet rising demand. With annual emission reductions of 9.9 million tons of CO2, thousands of tons of sulfur dioxide and nitrous oxide, and the retirement of a source of Freon emissions, you have a complete package – an innovative technology with benefits in multiple categories.
Earlier this year, DOE completed its own thorough risk-assessment of the technology and our deployment plan. Since DOE developed the original design from which we developed the American Centrifuge machine, the Department has an intimate familiarity with the technology.
The project is at a mature stage of development and will be deployed in phases. We have our construction and operating license from the NRC and have commenced construction. As I speak, we are installing machines to demonstrate machine performance in a cascade configuration. We are expecting the lead cascade to be operational in mid-2007. Due to the modular deployment, the American Centrifuge will begin operating and generating cash flow before we complete the construction of the entire plant.
We would like to see the loan guarantee program ready in 2008 to support the debt required to fund the remainder of plant construction. By the end of 2007, USEC will have contributed more than $700 million of equity toward the $2.3 billion project.
Looking ahead a few years, using USEC as a pilot guarantee now will assist utilities who approach DOE for guarantees for nuclear reactors to be built early in the next decade. They will benefit both from our experience piloting the guarantee program and from the assurance of a domestic source of fuel for their new reactors.
And there are further benefits –
The project will be built and operated in the United States and create hundreds of skilled, high-paying U.S. manufacturing and construction jobs.
With long-term domestic production capacity based on U.S. technology, the U.S. government can still have a seat at the international nonproliferation table. American Centrifuge could provide access to a source of enriched uranium to offer countries forgoing their own enrichment technologies. Given its modular design, the plant has further expansion potential. Assisting this first phase with a guarantee will seed any future expansion.
With a long-term and reliable U.S. fuel source, the nation’s nuclear utilities will not become solely dependent upon Russia and European governments for supplying their enriched uranium fuel. They will have a diversity of supply and competitive sources.
Finally, the American Centrifuge will yield a return on taxpayer investments in the original DOE centrifuge technology. The sale of product generated by its operations will potentially reap millions of dollars a year in royalties paid to the U.S. government, in addition to the revenue generated for USEC to repay the guaranteed debt.
I ask for DOE’s invitation to apply for a loan guarantee based on our pre-application submitted in December 2006, and I offer USEC’s project as a pilot guarantee in what should be a successful program to ensure U.S. energy security and independence.
We all need a program that works. Please consider the feedback being given. It reflects a broad consensus of members from the financial community and the commercial nuclear sector.
Thank you.