CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

Federal Loan 

Guarantees for 

the Construction 

of Nuclear Power 

Plants

AUGUST 2011

© Shutterstock LLC
Pub. No. 4195
The Congress of the United States O Congressional Budget Office

A

STUDY

CBO

Federal Loan Guarantees for the 

Construction of Nuclear Power Plants

August 2011
CBO
Preface

CBO

Under the Energy Policy Act of 2005, the Secretary of Energy is authorized to guarantee loans used for the construction of advanced nuclear energy facilities. In exchange for 

providing a loan guarantee, the Department of Energy (DOE) is authorized to charge a fee 

that is meant to recover the guarantee’s estimated budgetary cost. Because budgetary cost 

estimates are not a comprehensive measure of the taxpayer resources committed through a 

loan guarantee, and because of concerns about the accuracy of the methods and assumptions 

that DOE uses to estimate budgetary cost, some commentators have suggested that federal 

loan guarantees for the construction of nuclear power plants are being systematically underpriced, whereas others believe they are being overpriced.

This Congressional Budget Office (CBO) study, which was prepared at the request of the 

Ranking Member of the House Subcommittee on Regulatory Affairs, Stimulus Oversight, 

and Government Spending, examines the main factors that influence the cost of federal loan 

guarantees for nuclear construction projects. It provides illustrative estimates of the costs of 

such guarantees, using both the methodology specified in the Federal Credit Reform Act 

of 1990 and a more comprehensive fair-value approach. In keeping with CBO’s mandate 

to provide objective, impartial analysis, the study contains no recommendations. 

The study was written by Wendy Kiska and Deborah Lucas of CBO’s Financial Analysis 

Division, with contributions from Mitchell Remy and Rebecca Rockey. The analysis benefited 

from comments provided by Kim Cawley, Wendy Edelberg, Justin Falk, Kathy Gramp, 

David Moore, and Marika Santoro. In addition, Jean Helwege of the University of South 

Carolina and Kevin O’Meara of the Public Power Council provided helpful comments. 

(The assistance of external reviewers implies no responsibility for the final product, which 

rests solely with CBO.)

Loretta Lettner edited the paper, and Kate Kelly proofread it. Jeanine Rees prepared the report 

for publication, and Maureen Costantino designed the cover. Monte Ruffin printed the initial 

copies, and Linda Schimmel coordinated the print distribution. This report is available on 

CBO’s Web site (www.cbo.gov).

Douglas W. Elmendorf

Director

August 2011

Contents

CBO

Summary and Introduction 1

Overview of DOE’s Loan Guarantee Program 4

Estimating Loan Guarantees’ Cash Flows and Riskiness 5

Key Drivers of Risk 6

Probability and Severity of Default 8

Comparing Budgetary and Fair-Value Costs 12

The Impact of Adverse Selection on Estimated Budgetary Cost 14

Selecting Discount Rates for Fair-Value Estimates 14

Illustrative Guarantee Costs and Sensitivity Analysis 15

Sensitivity to Credit Ratings, Recovery Rates, and the 

Inclusion of a Risk Charge 16

Sensitivity to the Timing of Defaults and Recoveries 16

Sensitivity to the Terms of the Loan Contract 18

Uncertainty in Default Rates Within a Single Credit Rating 18

Appendix A: The Federal Government’s Role in Nuclear Power and a 

Historical Overview of Industry Performance 21

Appendix B: Applications for the Department of Energy’s Loan Guarantee Program 27

Appendix C: Calculating the Value of a Loan Guarantee 29
VI FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

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Tables

1. Average Recovery Rates, by Type of Security 9

2. Credit Spreads and Estimated Risk Premiums 15

A-1. The Status of Nuclear Reactors in the United States, by 

Construction Start Date 23

Figures

1. Variations in the Estimated Cost of Loan Guarantees, by Credit Rating and 

Recovery Rate, as Measured Under the Federal Credit Reform Act and 

on a Fair-Value Basis 3

2. Rates of Default and Recovery on Corporate Bonds, 1985 to 2010 13

3. Sensitivity of Estimated Loan Guarantee Costs to Variations in 

Recovery Rates if Default Occurs During Construction 17

4. Sensitivity of Estimated Loan Guarantee Costs to the Probability of Default 19

C-1. A Typical Pattern of Contractual Payments on a Risky Loan for a

Nuclear Construction Project 31

C-2. An Example of the Cash Flows to a Lender on a Risky Loan for a 

Nuclear Construction Project, with Default in the 11th Year 31

C-3. Expected Cash Flows and Contractual Cash Flows to a Lender on a

Risky Loan for a Nuclear Construction Project 32

C-4. Expected Cash Flows from Guaranteeing a Risky Loan for a 

Nuclear Construction Project 32

C-5. Differences Between Expected Cash Flows and Contractual Cash Flows 

from a Risky Loan for a Nuclear Construction Project 33

Box

1. Credit Ratings as Predictors of Default 10
CBO

Federal Loan Guarantees for the 

Construction of Nuclear Power Plants

Summary and Introduction

Among the goals often posited for federal energy policy 

are to enhance energy security by diminishing the nation’s 

reliance on foreign oil, to meet a growing demand for 

electricity, and to reduce greenhouse gas emissions by 

encouraging investment in clean energy production and 

technologies. To help further such objectives, the Energy 

Policy Act of 2005 (Public Law 109-58) established 

incentives to encourage private investment in innovative 

technologies, including advanced nuclear energy facilities. Much of the support for such investment is provided 

under title XVII of that legislation, which offers federal 

loan guarantees for the construction of nuclear power 

plants and other types of “alternative” energy facilities. 

Administered by the Department of Energy (DOE), the 

loan guarantee program encourages private investment in 

nuclear energy by lowering the cost of borrowing and 

possibly increasing the availability of credit for project 

sponsors—usually an individual utility, a consortium of 

utilities, or a merchant power producer.1

 In exchange for 

providing a loan guarantee, DOE is authorized to charge 

sponsors a fee that is meant to recover the guarantee’s 

estimated budgetary cost. 

However, budgetary cost estimates—which are calculated 

as required under the Federal Credit Reform Act of 1990 

(FCRA)—are not a comprehensive measure of the cost to 

taxpayers of those guarantee commitments.2

 Specifically, 

FCRA estimates do not recognize that the government’s 

assumption of financial risk has costs for taxpayers that 

exceed the average amount of losses that would be 

expected from defaults; those additional costs arise 

because a borrower is most likely to default on a loan and 

fail to make the promised payments of principal and 

interest during times of economic stress, when the losses 

are especially painful for taxpayers. Consequently, the 

estimated budgetary cost of a guarantee is generally lower 

than its estimated “fair-value” cost, which approximates 

the market price that a private guarantor would charge 

for an obligation with similar risk and expected returns. 

Because budgetary cost estimates are not a comprehensive 

measure of the taxpayer resources committed, and 

because of concerns about the accuracy of the methods 

and assumptions that DOE uses to forecast default rates 

and recovery values, some commentators have suggested 

that federal loan guarantees for the construction of 

nuclear power plants are being systematically underpriced, whereas others believe they are being overpriced.3

For this study, the Congressional Budget Office (CBO) 

reviewed the many factors that can influence the cost 

to the government of guaranteeing loans for the construction of advanced nuclear facilities; developed a 

model to estimate guarantee costs for a representative 

1. Merchant producers are private companies that build independent 

generating capacity that is sold to utilities or to other customers 

that are not contractually obligated in advance to buy the power. 

2. Under FCRA, the budget records the lifetime cost of a loan guarantee, which is estimated by projecting the associated cash flows 

(amounts paid out to cover expected losses from defaults net of 

expected fees received) and discounting those cash flows to the 

present at Treasury interest rates. 

3. For example, see Nuclear Energy Institute, Credit Subsidy Costs 

for New Nuclear Power Projects Receiving Department of Energy 

(DOE) Loan Guarantees: An Analysis of DOE’s Methodology 

and Major Assumptions, NEI White Paper (Washington, D.C.: 

NEI, September 2010), available at www.nei.org/filefolder/

CreditSubsidyCostWhitePaper.pdf; and David Schlissel, 

Michael Mullett, and Robert Alvarez, Nuclear Loan Guarantees: 

Another Taxpayer Bailout Ahead? (Cambridge, Mass.: Union of 

Concerned Scientists Publications, March 2009).
2 FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

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loan using both FCRA-based and fair-value methodologies; performed a sensitivity analysis of those estimated 

costs to changes in assumptions about key drivers of cost; 

and explored the challenges inherent in attempting to 

charge borrowers the full cost of a loan guarantee. CBO’s 

findings are as follows:

 The expected cost to the federal government of guaranteeing a nuclear construction loan will vary greatly 

depending on a project’s characteristics and on the 

economic and regulatory environment in which the 

project will operate. Important considerations include 

capital structure (the mix of debt and equity used to 

finance the project); ownership structure (whether it is 

a stand-alone project or part of a diversified company); whether construction costs may be passed on to 

utility ratepayers or local taxpayers; the regulatory 

environment; the degree of uncertainty about construction costs; the cost of competing generation technologies; and the demand for electricity. Although a 

serious nuclear accident could entail extremely large 

costs to investors and society, that risk has a small 

effect on the direct cost to the government of providing a guarantee because liability under the guarantee is 

limited to the amount of the debt, and the probability 

that such an accident will occur is low. 

 Default rates and recovery rates are likely to vary 

considerably, both across projects and over the lifetime of a given project. CBO does not have enough 

information to independently estimate an average 

recovery rate for nuclear construction loans. However, 

assigning a similar expected recovery rate as a starting 

point for all projects—which is DOE’s current practice—does not appear to make full use of the information available to DOE through its detailed project 

assessment process. For example, when sponsors of 

stand-alone projects cannot pass on construction costs 

to ratepayers, very low recoveries may result if bankruptcy occurs during the construction phase. By contrast, recovery rates may be considerably higher once 

projects become operational.

Using a single recovery rate tends to increase the variability of estimated guarantee costs relative to their 

true values, which increases the government’s exposure 

to a phenomenon known as adverse selection. Adverse 

selection occurs when borrowers are better able than 

the government to assess the value of a guarantee offer 

and take advantage of their superior information at 

the government’s expense. For nuclear construction 

loans, borrowers will tend to turn down a guarantee 

if they believe the fee set by DOE is too high but go 

forward if they consider it fair or underpriced, which 

increases the likelihood that DOE’s portfolio will 

include more projects for which the subsidy fee has 

been underestimated than overestimated.

 When credit ratings are used to assess default probabilities, cost estimates will vary widely with the 

assigned ratings category, the assumed recovery rate, 

and whether Treasury interest rates or estimated 

market interest rates are used for discounting (see 

Figure 1). CBO relied on the information in historical 

credit ratings to impute default probabilities (as does 

DOE) and considered a range of recovery rates that 

might apply to different projects depending on their 

characteristics. As required under FCRA, budgetary 

estimates use Treasury interest rates for discounting 

future cash flows; fair-value estimates rely on estimates 

of the applicable market interest rates for discounting. 

 Budgetary estimates of guarantee costs are significantly lower than the corresponding fair-value 

estimates, which provide a more comprehensive measure of the cost to taxpayers. CBO used the credit rating associated with a project to derive the discount 

rate the market would most likely assign to the loan 

cash flows. For example, if the risks associated with a 

guaranteed loan are in the range of those posed by 

bonds rated A (less risky) and bonds rated BB (riskier), 

and if 55 percent of the amount owed is expected to 

be recovered in the event of a default, the budgetary 

cost, measured on a FCRA basis, ranges from 1 percent to 6 percent of the principal loaned. In contrast, 

the fair value of the guarantee ranges from 9 percent 

to 21 percent of the principal loaned. (Compare the 

first and second panels of Figure 1.)

 Because of the high degree of uncertainty involved, it 

may not be possible to charge borrowers the full cost 

of a loan guarantee. When adverse selection is severe, 

attempts to offset expected losses with an increase in 

fees can backfire because the higher fees drive away 

creditworthy borrowers, making it impossible to provide a loan guarantee that does not involve a subsidy.

CBO relied on a credit-ratings-based approach to evaluate the probability of default rather than on the historical 

experience of the nuclear industry, for which not enough 
FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS 3

CBO

Figure 1.

Variations in the Estimated Cost of Loan Guarantees, by Credit Rating and 

Recovery Rate, as Measured Under the Federal Credit Reform Act and on a 

Fair-Value Basis

(Guarantee costs as a percentage of loan principal)

Source: Congressional Budget Office.

Notes: Cost estimates under the Federal Credit Reform Act of 1990 use Treasury rates for discounting projected cash flows. Fair-value 

estimates approximate what a private guarantor would charge for the guarantee; they are based on the same projected cash flows,

but the discount rates are adjusted to include a market risk premium.

Recovery rates measure the fraction of the present value of outstanding principal and interest that the lender receives in the event 

of a default.

data exist to draw quantitative inferences. However, 

historical experience suggests that investing in nuclear 

generating capacity engenders considerable risk. One 

study found that of the 117 privately owned plants in the 

United States that were started in the 1960s and 1970s 

and for which data were available, 48 were canceled, and 

almost all of them experienced significant cost overruns.4

As a consequence, most of the utilities that undertook 

nuclear projects suffered ratings downgrades—sometimes 

several downgrades—during the construction phase.5

However, bondholders experienced losses from defaults 

in only a few instances. Losses for the most part were 

borne by the projects’ equity holders, the regions’ electricity ratepayers, and the government. Supporters of nuclear 

power argue that newer plant designs and changes in the 

regulatory environment make nuclear investments less 

risky now, but recent experience abroad suggests that 

cost overruns and delays are still common phenomena, 

and concerns remain about an uncertain regulatory 

Credit Rating

25 35 45 55 65 75

0

5

10

15

20

25

30

35

40

Federal Credit Reform Act Estimates

Recovery Rate (Percent)

25 35 45 55 65 75

0

5

10

15

20

25

30

35

40

A BBB BB B

Recovery Rate (Percent)

Fair-Value Estimates

4. Werner F. M. De Bondt and Anil K. Makhija, “Throwing Good 

Money After Bad? Nuclear Power Investment Decisions and the 

Relevance of Sunk Costs,” Journal of Economic Behavior and 

Organization, vol. 10-2 (September 1988), pp. 173–199.

5. Moody’s Global Infrastructure Finance, New Nuclear Generation: 

Ratings Pressure Increasing, Special Comment Report 117883 

(New York: Moody’s Investors Service, June 2009), available at 

www.scribd.com/doc/18057014/Moodys-New-NuclearGeneration-June-2009.
4 FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

CBO

environment and changes in demand for electricity. (See 

Appendix A for a more detailed historical review of the 

industry’s performance.)

Finally, although the federal budget is intended to account 

for the costs of federal activities, it does not account for 

the benefits of such activities. As is the case with other 

types of federal spending, loan guarantees for the construction of nuclear plants might increase well-being by 

supporting activities that are valuable to society but that 

are unlikely to be economically viable without governmental support. In assessing the value of the program, 

such benefits must be weighed against the costs of those 

activities. However, an analysis of the benefits of loan 

guarantees for nuclear construction is beyond the scope 

of this study. 

Overview of DOE’s Loan Guarantee 

Program 

Under title XVII of the Energy Policy Act of 2005, the 

Secretary of Energy, in conjunction with the Secretary of 

the Treasury, is authorized to provide loan guarantees 

for qualifying energy projects that use certain innovative 

technologies. To qualify, projects must “avoid, reduce, 

or sequester air pollutants or anthropogenic emissions 

of greenhouse gases” and “employ new or significantly 

improved technologies as compared to technologies in 

service in the United States at the time the guarantee 

is issued.”6

 Among the types of projects meeting those 

criteria are advanced, or third-generation, nuclear reactors. Third-generation reactors are designed to be safer 

to operate and less expensive to build and maintain than 

the first- and second-generation reactors used in existing 

nuclear power plants. 

Borrowers who qualify for a federal guarantee can 

obtain low-cost debt financing from private financial 

institutions or from an arm of the Treasury known as 

the Federal Financing Bank. Under the title XVII program, sponsors of a qualifying nuclear power project 

can finance up to 80 percent of the project’s total construction costs. For example, a project estimated to cost 

$3 billion to build could qualify for a guarantee on as 

much as $2.4 billion of debt. Guarantees may assure the 

lender of receiving full repayment of principal and any 

interest owed on the guaranteed amount (in which case 

the borrowers can obtain the loan from the Federal 

Financing Bank) or they may protect the lender against 

only a portion of potential losses. In exchange for a guarantee, DOE is authorized to charge sponsors a fee that 

covers the guarantee’s estimated budgetary cost. 

In 2008, the Congress authorized $18.5 billion to cover 

the cost of guaranteeing loans for the construction of 

advanced nuclear power facilities and $2 billion to cover 

the cost of guaranteeing loans for the construction of 

facilities for front-end fuel processing.7

 The President’s 

budget proposal for fiscal year 2012 includes a request for 

an additional $36 billion of guarantee authority for 

advanced nuclear facilities. As of April 2011, DOE had 

received a total of 19 applications for credit assistance 

from 17 different companies for the construction of 

14 nuclear power plants.8

 The requested loan guarantees 

amounted to $188 billion.9

 Of those applications, only 

one—an $8.33 billion guarantee for the addition of two 

new reactors at Southern Company’s Plant Vogtle in 

Georgia—has been reported to be close to completion.10

A guarantee offer was also extended to Constellation 

Energy last October to build a plant in Maryland, but the 

company declined to take it, citing the high cost of the 

guarantee fee.11 Observers pointed to lower projections of 

energy demand in the region as another possible factor. In 

general, the subsidy provided by a loan guarantee may be 

insufficient to make a project economically viable. (For 

additional information on the applications that have been 

made to DOE for loan guarantees, see Appendix B.)

6. P.L. 109-58, §1703(a); 119 Stat. 1120; 42 U.S.C. § 16513(a)

7. Front-end fuel processing comprises the various steps necessary 

to turn raw uranium ore into fuel that can be used in a nuclear 

reactor.

8. A plant (which can have one or more reactors) may have multiple 

sponsors, and a sponsor may participate in building more than 

one plant.

9. Standard & Poor’s Financial Services, “Special Report: U.S. 

Nuclear Power—The Challenges Ahead,” CreditWeek (New York: 

McGraw-Hill, August 25, 2010). The program has been closed to 

new applicants since September 2008.

10. The amount of the up-front guarantee fee has not been publicly 

disclosed, but press reports suggest it ranged from 0.5 percent to 

1.5 percent of the loan principal. That would translate to a fee 

ranging from $41.65 million to $125 million for the investors. 

See Regina Griffin, “Constellation Unmoved by New Offer on 

Loan Guarantee,” Electric Power Daily (October 12, 2010), 

available at www.plattsenergyweektv.com/story.aspx?storyid=

115313&catid=293.

11. Ibid.
FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS 5

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To apply for a guarantee, a project sponsor must pay a fee 

and complete a two-part application process that DOE 

uses to determine the project’s eligibility and pricing of 

the guarantee.12 The application asks for general information, a description of the project, technical information, a 

business plan, a financing plan, and regulatory and other 

certifications. 

The project evaluation process is intended to determine 

the likelihood that a project will generate revenues that 

are sufficient to cover the required payments on the 

guaranteed loan. The process involves extensive conversations with the applicant as well as input from independent consultants and outside legal counsel. In addition, 

DOE obtains an independent credit rating from a rating 

agency. DOE also conducts a financial and technical 

review that evaluates project and loan characteristics—

such as the creditworthiness of the borrower, construction factors, legal and regulatory issues, the technical 

relevance and merit of the project, the proposed technical 

approach and work plans, and environmental and energy 

security benefits. 

On the basis of the information obtained during the evaluation process, DOE assigns its own credit rating to a 

project, following the scale that Standard & Poor’s 

(S&P’s) Rating Services uses for industrial firms. It then 

relies on several rating agencies’ (including S&P’s) tabulations of the historical default experience for corporate 

bonds with a similar credit rating and on an assumed 

recovery rate to determine the guarantee fee and other 

terms offered to the borrower. 

Projects that pass DOE’s internal review process must 

then go through a credit approval process, starting with a 

review by the agency’s Loan Guarantee Program Office, 

continuing with an assessment by the Treasury and the 

Office of Management and Budget, and concluding with 

an evaluation by DOE’s Credit Review Board (CRB). 

The CRB, which is chaired by the Deputy Secretary of 

the Department of Energy, establishes the overall policies 

of the loan guarantee program and coordinates credit 

management and debt collection. If approval from the 

CRB is obtained, the applicant receives a “term sheet,” 

which lists the conditions required to enter into a loan 

guarantee agreement with the DOE. If after further 

negotiations an agreement is reached between the CRB 

and the applicant, the final term sheet becomes a conditional agreement with the DOE. Final approval of a loan 

guarantee agreement must then be obtained from the 

Secretary of Energy. 

Estimating Loan Guarantees’ 

Cash Flows and Riskiness

Many of the key drivers of the risk that a sponsor will 

default on a loan for the construction of a nuclear power 

plant are common to most capital investments. They 

include the project’s capital structure (the mix of debt and 

equity used to finance the project); whether it is a standalone project or backed by the sponsor’s other assets; and 

uncertainty about construction costs, costs of operation, 

and product demand. Certain risk factors, however, are 

more specific to the nuclear industry: the regulatory 

environment, the high proportion of fixed relative to 

variable costs (which causes any savings from temporarily 

suspending electricity production to be small), and 

the extent to which costs can be passed on to utility 

ratepayers or taxpayers.

To estimate expected cash flows for loan guarantees, analysts generally reduce the many drivers of cost and risk to 

two factors: the probability that a default will occur in 

each year and the expected severity of defaults. The loss 

severity rate is measured as the present value of lifetime 

principal and interest losses in the event of default as a 

percentage of the principal balance.13 Severity is inversely 

related to the recovery rate, which measures the fraction 

of the present value of outstanding principal and interest 

that the lender receives in the event of a default. The 

probability of a default and its expected severity can differ 

significantly depending on project-specific characteristics

12. The sponsor pays an application fee of $200,000 for the first stage 

of the evaluation and $600,000 for the second phase. DOE issues 

an initial project ranking on the basis of its initial review. Upon 

receiving that feedback, an applicant can decide whether or not to 

proceed so as to avoid the full cost of the application if the project 

gets a negative first-stage review. A more detailed description of 

the program requirements, process, and evaluation procedures for 

a Nuclear Power Facility Loan Guarantee Application is available 

online from the Department of Energy’s Loan Guarantee Program 

Office at http://lpo.energy.gov/wp-content/uploads/2010/09/

NuclPowerSol7-11-08Amend1.pdf.

13. “Present value” is a single number that expresses a flow of current 

and future income (or payments) in terms of an equivalent lump 

sum received (or paid) today. The present value depends on the 

rate of interest (known as the discount rate) that is used to translate future cash flows into current dollars.
6 FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

CBO

and over time. A potentially important source of variation is that defaults may be more likely, and losses more 

severe, during the construction phase of a project than 

after a project becomes operational. 

Evaluating the prospects for success of a nuclear investment project, and translating that evaluation into estimates of the probability and severity of default, requires 

significant technical expertise and necessarily involves 

judgment; even the best-informed estimate of the cost of 

a loan guarantee has considerable uncertainty associated 

with it. CBO did not attempt to assess DOE’s technical 

evaluation process or the means by which DOE translates 

those evaluations into credit ratings to assess default 

probabilities, nor did it consider the details of any specific 

application for a guarantee. However, to illustrate the 

sensitivity of projected guarantee costs to alternative 

assumptions about a project’s credit rating and recovery 

rate, CBO adopted the following methodology: It relied 

on historical default rates derived from credit ratings and 

considered a range of recovery rates that were intended to 

capture variations in recovery amounts caused by factors 

such as whether or not construction costs could be immediately passed on to ratepayers.14

Key Drivers of Risk

Nuclear power entails the risk that a serious accident or 

other incident could occur that would result in catastrophic losses—the costs of which would be borne by 

the plant’s owners, the government, and the public. 

However, only a small fraction of such costs would be 

absorbed by bondholders or guarantors. The reason for 

the small effect is twofold: The maximum loss to bondholders and the maximum liability arising from a loan 

guarantee are limited to the principal value of the debt 

(which represents a small fraction of the total potential 

cost to society); and most experts believe that the probability of a catastrophic event is very small, particularly for 

new reactor designs.15 Even so, recent events in Japan 

have heightened concern about the potential for similar 

incidents in the United States, and such concern could 

increase the risk of default by causing costly construction 

delays or the imposition of new safety measures.16

In comparison to conventional approaches to generating 

electricity, the risk of investing in nuclear power is heightened by the relatively high proportion of costs that are 

fixed rather than variable. Compared with facilities that 

use coal or natural gas to produce electricity, nuclear 

plants have high fixed costs (for construction and decommissioning) but low variable costs (for fuel). Total operating costs are similar to those for coal-fired plants, but 

operating costs for nuclear power plants have a larger fixed 

component because they require relatively large and 

fixed expenditures on safety systems. Fixed costs increase 

the risk of investing in nuclear power because if demand 

turns out to be low, cutting back on a plant’s output does 

not save much money. The relatively high cost of nuclear 

power also is a source of risk: Widespread use of nuclear 

power is unlikely to become economically viable in the 

absence of subsidies unless a sufficiently high price is 

levied on the emission of greenhouse gases or the price of 

fossil fuels escalates more rapidly than most forecasters 

predict. Hence, even with subsidies, the economic viability of nuclear power may be marginal in today’s economic 

and regulatory environment.17

14. CBO independently developed its model for translating default 

rates and recovery rates into expected cash flows, using standard 

formulas. Although both CBO and DOE employ a ratings-based 

methodology to estimate cash flows, CBO’s model differs in some 

respects from DOE’s model in implementation.

15. In its analyses, the Nuclear Regulatory Commission assumes a 

probability of one severe nuclear event in a million reactor years 

for reactors currently in operation. See Nuclear Regulatory 

Commission, State-of-the-Art Reactor Consequence Analysis 

(SOARCA) (November 2010). The International Nuclear Safety 

Advisory Group produces risk assessments for two types of nuclear 

events: core damage frequency (for which it assumes a chance of 

1 in 10,000 for existing plants and 1 in 1,000,000 for new 

plants); and a large release of radioactive material (for which it 

assumes a chance of 1 in 100,000 for existing plants and 1 in 

1,000,000 for new plants).

16. Standard & Poor’s Financial Services, The U.S. Nuclear Power 

Industry Looks at Japan and Awaits More Scrutiny (New York: 

McGraw-Hill, March 16, 2011), available at www.standard

andpoors.com/prot/ratings/articles/en/us/?assetID=

1245300367992.

17. Many studies indicate that a carbon tax could make nuclear power 

economical. For example, CBO found that a carbon tax of 

$45 per metric ton of CO2 emissions would make nuclear power 

competitive; see Congressional Budget Office, Nuclear Power’s 

Role in Generating Electricity (May 2008). Similar conclusions are 

reported in John Deutch and others, The Future of Nuclear Power: 

An Interdisciplinary MIT Study (Cambridge, Mass.: Massachusetts 

Institute of Technology, July 29, 2003), available at http://

web.mit.edu/nuclearpower/pdf/nuclearpower-full.pdf; and in 

International Energy Agency and Organisation for Economic 

Co-operation and Development/Nuclear Energy Agency, Projected 

Costs of Generating Electricity (Paris: OECD Publishing, 2010). 
FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS 7

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The risk associated with providing loan guarantees is 

increased by the phenomenon known as adverse selection—the likelihood that borrowers who have reason to 

think their project is riskier than the guarantor believes it 

to be will accept the guarantee fee offered, whereas borrowers who believe their project is relatively safe will be 

more likely to decline the offer of a guarantee they view 

as overpriced. DOE’s methodology may elevate the risk 

of adverse selection by categorizing nuclear construction 

projects into fairly broad credit-rating groupings and 

treating projects, regardless of how they are structured, 

as having similar recovery rates.

The cost to the government of guaranteeing a loan 

depends critically on the likelihood that the borrower 

will default and on the expected recovery rate, which in 

turn depend on a variety of factors. Those include the 

project’s capital structure, its ownership structure, the 

structure of debt payments, allowable charges to ratepayers, the potential need for additional financing, and 

other considerations. 

Capital Structure. Even a very risky project can support a 

small amount of safe debt because debt holders’ claim to 

any recoveries from the sale of assets takes priority over 

that of equity holders. Conversely, the debt of a relatively 

safe project can prove to be risky if the project is backed 

by only a small amount of equity. In general, equity 

financing makes a project’s debt safer because the equity 

serves as a cushion to absorb unanticipated losses. Title 

XVII limits federally guaranteed loans to 80 percent of 

construction costs, and the law requires that the guaranteed amount not be subordinate to other financing, so 

that the insured debt holders have the first claim on any 

recoveries in the event of a default. Nevertheless, the 

composition of the other 20 percent of the financing can 

affect expected losses; risk is lower if equity rather than 

other debt comprises the balance of funding because 

firms with higher total debt levels are more likely to 

default. DOE can reduce the government’s risk and lower 

the fee offered on a guarantee by requiring a higher proportion of equity financing.

Ownership Structure. Another aspect of capital structure 

that affects the government’s exposure to risk is whether a 

proposed nuclear power plant is legally organized as a 

stand-alone project—a financially independent, singlepurpose entity that relies on “project finance”—or 

whether it is part of a larger corporation.18 Project finance 

involves the creation of a legally and economically 

independent project company financed with equity from 

one or more sponsors and with nonrecourse debt that 

can be repaid only from project cash flows. By contrast, 

corporate debt is a general obligation of the issuing corporation; it does not rely on the success of any particular 

investment for repayment.

Which structure poses greater risk depends on several factors. All else being equal, a stand-alone project tends to 

be riskier because no other revenue streams are available 

to provide diversification. For example, defaults that 

occur during the construction phase of a stand-alone 

project that is 80 percent debt-financed and with no 

recourse to ratepayers or taxpayers could have negligible 

recoveries. However, historical data for nonnuclear projects shows that, on average, recovery rates on debt issued 

by entities using project finance have been higher than 

those on corporate issues, despite the latter having 

recourse to multiple revenue streams. Risk can be higher 

for a diversified firm if the possibility of adverse shocks to 

other parts of its business more than offset the benefit of 

diversification, and there can be organizational advantages to a project finance structure as well. 

For nuclear construction projects, sponsors that are merchant producers are more likely to depend on project 

finance than are utilities. However, utilities that invest in 

nuclear power may be able to limit the liability to their 

shareholders—and thereby increase the risk to the government—by structuring their nuclear facilities as legally 

separate entities. 

Structure of Debt Payments. How payments on guaranteed debt are structured can affect the likelihood of a 

default. Spreading payments out over a longer period, or 

delaying the start of the repayment period, may reduce 

risk by making it more likely that the sponsor will have 

sufficient earnings from operations to cover the debt payments. However, prolonging or delaying the repayment 

period also could increase the risk and severity of defaults. 

Accumulated interest payments increase total indebtedness and the size of required payments, and the longer 

18. Project finance is used for various types of projects, including construction and commercial real estate development, equipment 

finance, industrial and manufacturing projects, oil and gas facilities, petrochemical projects, power transmission and distribution 

projects, telecommunications projects, and transportation infrastructure.
8 FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

CBO

the debt is outstanding the more exposed it is to the 

possibility of an adverse event.

Allowable Charges to Ratepayers. For projects sponsored 

by public or investor-owned utilities, the risk to the 

government from a loan guarantee is affected by two 

important considerations: how quickly the utility is 

allowed by regulators to include construction costs in the 

rate base and the extent to which cost overruns can be 

passed on to ratepayers. (Merchant producers cannot pass 

on construction costs to ratepayers except perhaps indirectly through the price of the energy that they eventually 

sell.) In localities where utilities can include a charge for 

construction work in progress, much of the risk during 

the construction phase is absorbed by ratepayers rather 

than by bondholders. Even in such cases, however, bondholders face the risk that regulators or the courts will 

determine that certain costs cannot be passed on to ratepayers and hence accentuate the risk of a default on the 

bonds.

The Potential Need for Additional Financing. Although 

DOE guarantees may cover up to 80 percent of the estimated cost of construction, construction costs are difficult to predict accurately. Historically, construction costs 

for nuclear plants were often many times higher than 

the amounts initially predicted. Similar overruns in the 

future would pose the risk that project sponsors might 

require additional funding to complete construction and 

that the government might be the only available source of 

those funds. Thus, some may believe that the government 

is providing an implicit guarantee on a larger amount of 

debt than the amount formally contracted and paid for 

under the guarantee program.

Other Considerations. Many uncertainties about costs 

and revenues affect the ultimate profitability of a nuclear 

power plant, which in turn affects the risk of losses 

related to default: construction and operating costs 

(including the possibility of cost increases caused by 

delays); the costs of competing types of electricity generation over time that will affect the price path of electricity; 

and future demand for electricity.19 Those risks are exacerbated by regulatory uncertainty. Regulatory changes 

governing the design, construction, operational security, 

or decommissioning of nuclear plants could adversely 

affect (or, on the contrary, improve) profitability. Furthermore, the title XVII program is designed to support new 

technologies, which may be riskier than established 

designs. The prospect that policies will be adopted that 

require electric utilities to reduce their emissions of carbon dioxide is a potential, but also uncertain, mitigating 

factor. 

Probability and Severity of Default

Rating agencies define default as the first occurrence of a 

missed payment on any financial obligation, bankruptcy, 

or a distressed exchange (wherein the debt holders are 

forced to accept substitute instruments that may have less 

favorable financial terms, such as a lower coupon, lower 

seniority, or longer maturity).20

The probability of default varies with the risk factors just 

discussed, but it is difficult to directly translate those factors into default probabilities. Defaults on bonds are 

fairly rare, and there is not enough historical data to draw 

reliable statistical inferences, particularly for an individual 

industrial sector. However, extensive data are available 

from ratings agencies about the historical default experience of corporate bonds with a particular credit rating. 

Therefore, a common approach is to distill an analysis of 

a project into a ratings category and then use the historical default experience of firms with that rating to infer 

the probability of default for the project under consideration (see Box 1). DOE follows that approach and assigns 

ratings to loan guarantee applications that correspond to 

ratings for corporate bonds. 

The severity of defaults varies widely and is also difficult 

to predict. In some cases, missed payments are rescheduled and bondholders are able to fully recover their 

money. In other cases, bondholders may recover little of 

what they are owed, if anything. The severity of default is 

influenced by most of the same drivers as the probability 

of default. For instance, projects with a higher proportion 

of equity financing are less likely to experience large losses 

because the amount owed represents a smaller fraction of 

assets. For stand-alone nuclear projects, the severity of 

loss is likely to be greater before the plant becomes operational because cash on hand is likely to be low and any 

assets may have very limited salvage value. 19. To minimize its exposure to loan losses attributable to a project’s 

potential cost overruns, DOE has the authority to require that 

engineering, procurement, and construction contracts have builtin provisions for cost overruns.

20. Minor violations of covenants (legal restrictions on the firm 

contained in debt contracts) generally are not treated as defaults. 
FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS 9

CBO

Table 1.

Average Recovery Rates, by Type of Security

(Percent)

Sources: Kenneth Emery and Sharon Ou, Special Comment: Corporate Default and Recovery Rates, 1920-2009, Report 123042 (New York: 

Moody’s Investors Service, February 2010), Exhibit 7, available at http://v2.moodys.com/cust/content/Content.ashx?source=

StaticContent/Free%20Pages/Regulatory%20Affairs/Documents/corporate_default_and_recovery_rates_02_10.pdf; 

Standard & Poor’s Financial Services, Recovery: Figuring the Recovery Rates When Global Project Finance Transactions Default

(October 21, 2010), Table 1, available at www.standardandpoors.com/prot/ratings/articles/en/us/?assetID=1245277624007; 

and Edward I. Altman, Andrea Resti, and Andrea Sironi, Default Recovery Rates in Credit Risk Modeling: A Review of the Literature 

and Empirical Evidence, NYU Working Paper S-CDM-03-11 (New York: New York University, December 2003), Table 2, available 

through SSRN at http://ssrn.com/abstract=1295797.

Notes: The standard deviation of the recovery rate measures the variation from the average recovery rate. A low standard deviation indicates 

that most values are closely distributed around the average recovery rate, wheras a high standard deviation indicates that recovery 

rates are spread out among a wide range of values.

The type of bank loan indicates whether the borrower has pledged specific assets as collateral for the loan and the seniority of the 

debt over other types of obligations in bankruptcy proceedings. First and second lien loans are backed by collateral; senior unsecured 

loans are not collateralized. First lien loans will receive payment before second lien loans, and second lien loans will receive payment 

before senior unsecured loans.

The type of bond indicates whether the borrower has pledged specific assets as collateral for the loan and the seniority of the debt 

over other types of obligations in bankruptcy proceedings. Senior secured bonds are backed by specific collateral; senior unsecured 

bonds and all levels of subordinated bonds are not collateralized. In the event of bankruptcy, bondholders receive payment in the 

following order: senior secured, senior unsecured, senior subordinated, subordinated, junior subordinated.

Project finance debt is issued on the basis of the expected cash flows from a particular project, rather than those of the sponsor. In the 

event of bankruptcy, a lender can recover losses only from the project-specific assets and not from the general assets of the borrower.

n.a. = not available.

The data available to predict recovery rates are extremely 

limited, but some patterns have been documented on the 

basis of bond characteristics. (Recovered amounts are 

generally measured as the present value of payments 

received by bondholders as of the default date; that value 

is often measured by the price of defaulted bonds at the 

time of default.) Debt that is owed to banks or that has 

a higher priority for repayment tends to have higher 

recovery rates, as do project finance bonds (see Table 1). 

One natural point of reference for nuclear construction 

loans is senior unsecured bonds, which are medium- to 

long-term general obligations of corporations.21 Those 

bonds have an average historical recovery rate of about 

37 percent. However, some have suggested that federally 

 Investment-Grade Noninvestment-Grade

2008 2009 1982–2009 1992–2009 Securities Securities

Bank Loans

62 54 66 n.a. n.a. n.a.

40 16 33 n.a. n.a. n.a.

32 35 49 n.a. n.a. n.a.

Bonds

55 38 50 n.a. 24 26

34 38 37 n.a. 24 24

24 22 31 n.a. 24 24

24 47 31 n.a. 24 22

n.a. n.a. 25 n.a.

n.a. n.a. n.a. 72 n.a. n.a.

Senior secured

Senior unsecured

Senior subordinated

Lien Position

First lien 

Second lien 

Standard Deviation of Recovery Rate

Senior unsecured 

Average Recovery Rate

All Project Finance Debt

Subordinated

Junior subordinated

21. In the United States, senior unsecured corporate bonds generally 

are not explicitly backed by specific collateral but have a claim on 

all of a corporation’s assets that have not been otherwise pledged.
10 FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

CBO

Continued

Box 1.

Credit Ratings as Predictors of Default

Distribution of Credit Ratings Among U.S. Utilities, 2006 to 2010

Source: Congressional Budget Office based on data from Standard & Poor’s CreditPro®—Corporate Ratings, accessed 

April 6, 2011.

Notes: Standard & Poor’s classifies electric, gas, and water utilities, and companies that operate as independent producers or 

distributors of power, as “utilities.”

Standard & Poor’s uses letter designations to identify a company’s credit quality rating. For example, AAA and AA (high 

credit quality) and A and BBB (medium credit quality) are considered investment grade. Credit ratings for bonds below those 

designations (BB, B, CCC, etc.) are considered noninvestment grade.

Rating agencies such as Standard & Poor’s (S&P), 

Moody’s Investors Service, and Fitch Ratings assign 

credit ratings to issuers of corporate bonds (and to 

specific bond issues) to provide investors a metric 

for judging the relative creditworthiness of corporate 

obligations. The top credit ratings indicate that 

the obligations are believed to be of the highest quality and pose minimal risk of loss; lower ratings imply 

a higher expected likelihood of loss.1

 Ratings reflect 

analysts’ judgments about the future and thus may 

vary over time as economic conditions and a firm’s 

situation change. 

For nuclear construction projects sponsored by utilities that probably will be able to pass on most costs 

to ratepayers, a relevant reference point is the rating 

of the sponsoring utility. The distribution of credit 

ratings for electric power utilities is concentrated in 

a range from A- to BBB-, with BBB as the most frequent rating. In recent years, the average credit quality of utilities has declined (see figure above). The 

current rating of a utility, however, is not necessarily 

indicative of what the utility’s rating would be if it 

were to undertake a nuclear construction project. For 

example, Moody’s recently reported that it was considering taking a more negative view of bond issuers 

who were seeking to finance the construction of new 

nuclear power plants.2

 A primary concern cited by 

Moody’s was whether the proposed plants were economically viable, especially given uncertainties about 

the effects of energy-efficiency programs and national 

AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B0

10

20

30

40

50

60

70

80

90

100

2006

2007

2008

2009

2010

1. Although the probability of default is clearly linked to credit 

ratings, the extent to which ratings predict recovery rates is 

less certain. The major rating agencies differ in whether or 

not the likely severity of a default is a factor in determining 

the credit rating. However, evidence suggests that default and 

recovery rates are to some extent negatively correlated. For a 

discussion of that relation, see Edward I. Altman and others, 

“The Link Between Default and Recovery Rates: Theory, 

Empirical Evidence, and Implications,” Journal of Business, 

vol. 78, no. 6 (November 2005), pp. 2203–2228.

2. Moody’s Global Infrastructure Finance, New Nuclear 

Generation: Ratings Pressure Increasing, Special Comment 

Report 117883 (New York: Moody’s Investors Service, 

June 2009), available at www.scribd.com/doc/18057014/

Moodys-New-Nuclear-Generation-June-2009.
FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS 11

CBO

Box 1. Continued

Credit Ratings as Predictors of Default

Historical Frequency of Defaults on 

Corporate Bonds

Source: Standard & Poor’s Financial Services, Default, 

Transition, and Recovery: 2009 Annual Global 

Corporate Default Study and Rating Transitions 

(New York: McGraw-Hill, March 17, 2010), Table 26.

Note: The standard deviation of the default rate measures the 

variation from the average default rate. A low standard 

deviation indicates that most values are closely distributed around the average default rate, whereas a high 

standard deviation indicates that default rates are 

spread out among a wide range of values.

clean electricity standards on the demand for new 

nuclear generating capacity, the availability of capital 

for such projects, and the effect of such investment 

on the sponsoring utilities’ balance sheets. 

The same rating for different broad categories of debt 

obligations—for instance, corporate bonds, sovereign 

debt, asset-backed securities, municipal bonds, and 

project finance—may not mean the same thing. For 

instance, project-finance bonds with an A rating have 

historically experienced higher recovery rates than 

corporate bonds with the same rating. Some observers contend that bonds issued to finance nuclear 

projects that use project finance are therefore safer 

investments than might be assumed on the basis of 

data associated with corporate bonds. However, it is 

uncertain whether bonds backed by nuclear projects 

are as safe as the typical project-finance investment 

because of differences in the characteristics of the 

projects.3

 For nuclear projects, project financing may 

be more likely to be used for riskier merchant plants 

that cannot pass on cost overruns to ratepayers. 

(Merchant power producers are private companies 

that build independent generating capacity that is 

sold to utilities or to other customers that are not 

contractually obligated in advance to buy the power.)

The linking of credit ratings with expected default 

rates relies on historical data collected by rating agencies. The rating agencies conduct annual corporate 

default studies using “static” (or fixed) pools of bonds 

issued by corporate entities—including industrial 

firms, financial institutions, utilities, and insurance 

companies—grouped by initial ratings category. This 

method allows default rates to be calculated over long 

horizons while also accounting for changes in ratings 

over time. Average default rates vary significantly 

across ratings categories, and the default rate varies 

significantly over time within each category. (See the 

accompanying table for the cumulative default rates 

over 15 years by ratings category, as reported by S&P, 

and for a measure of the uncertainty associated with 

those rates.)4

Ratings

Category

AAA 1.1 1.0

AA+ 0.3 2.1

AA 0.9 0.5

AA- 1.4 2.1

A+ 2.8 1.4

A 3.0 0.8

A- 3.2 2.3

BBB+ 5.9 2.2

BBB 7.1 1.5

BBB- 13.2 3.5

BB+ 14.8 7.0

BB 19.7 3.7

BB- 27.1 8.1

B+ 33.6 5.3

B 36.6 5.0

B- 40.1 14.1

(Percent)

Default Rate

Default Rate

Deviation of 

Cumulative 

15-Year

Average 

Standard 

3. Project finance is used for a variety of types of projects that 

include construction and commercial real estate development, equipment finance, industrial and manufacturing 

projects, oil and gas facilities, petrochemical projects, power 

transmission and distribution projects, telecommunications 

projects, and transportation infrastructure.

4. The slightly higher rate of defaults experienced by AAA 

bonds relative to AA bonds is probably attributable to a combination of two factors: there are a very small number of AAA 

corporate bonds; and, because the likelihood of default is so 

low, one or two events can have a large effect on the sample 

average. The reversal does not affect CBO’s analysis because a 

nuclear construction project would not get a rating of AAA.
12 FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

CBO

guaranteed debt for nuclear construction would behave 

more similarly to project finance, which has an average 

recovery rate of 72 percent.22 Individual recovery rates 

vary considerably within each of those categories, and the 

recovery rate expected for a particular project could lie 

well outside of the range implied by those averages.23

DOE assumes a base recovery rate of 55 percent for both 

nuclear and nonnuclear projects (although it sometimes 

adjusts expected recoveries somewhat to take into 

account project-specific factors). That estimate falls 

between the historical average rates of recovery for senior 

unsecured corporate bonds and for project finance. CBO 

does not have enough information to independently evaluate whether the choice of 55 percent is the best estimate 

of the average recovery rate on nuclear construction 

loans.24 However, in CBO’s view, finding the best estimate of the recovery rate for a given project would 

require an assessment based on the specific risk factors 

discussed earlier. The practice of assigning a similar 

expected recovery rate as a starting point to all projects 

does not appear to make full use of the information 

available to DOE through its detailed project-assessment 

process. Moreover, using a single recovery rate rather than 

a project-specific one tends to increase the variability of 

estimated guarantee costs relative to their true worth. 

Because project sponsors have the option to accept the 

guarantee offer or decline it, that variability makes it 

more likely that the guarantees accepted will be those 

that were priced below their true budgetary cost, whereas 

those turned down may be those that were priced 

above it. 

Comparing Budgetary and 

Fair-Value Costs

Under current policy, DOE requires borrowers to pay 

the initial estimate of the cost of a loan guarantee. The 

estimation approach used to calculate that amount is also 

used to determine the initial budgetary cost of a loan 

guarantee. Hence, the Office of Management and Budget 

records a zero cost in the budget when nuclear construction loan guarantees are made.25

The Federal Credit Reform Act of 1990 specifies the procedures that are used to estimate the budgetary impact of 

most of the federal government’s loan and loan guarantee 

programs. Under FCRA, the budgetary cost of a loan 

guarantee (or a direct loan) is calculated as the net present 

value of expected cash flows over the life of the obligation. The net present value is calculated by discounting 

cash flows to the time of loan disbursement using rates on 

Treasury securities of comparable maturity. (For example, 

the cash flows a year after disbursement are discounted 

using a one-year rate, cash flows five years out are discounted using a five-year rate, and so on.) 

The budgetary cost of a loan guarantee is not intended to 

be a comprehensive measure of economic cost, and in 

practice it is generally less than its fair-value cost—the 

amount that a private financial institution would charge 

for the guarantee in a well-functioning market. The main 

difference between the cost that appears in the federal 

budget and the fair-value cost of a guarantee is that investors require compensation for bearing market risk, which 

is not treated as a budgetary cost.

Market risk is the component of risk that investors cannot protect themselves against by diversifying their portfolios. Investors require compensation for market risk 

because investments exposed to such risk are more likely 

to have low returns when the economy as a whole is weak 

and resources are more highly valued. In general, loan 

guarantees have significant exposure to market risk 

because private enterprises default on their debt obligations more frequently and with greater severity (meaning 

that recoveries from the borrowers are lower) when the 

market is weak (see Figure 2). In the case of nuclear 

construction guarantees provided to investor-owned 

utilities or merchant power providers, for example, plant 

construction may be more likely to be slowed or canceled 

22. For example, see Nuclear Energy Institute, Credit Subsidy Costs for 

New Nuclear Power Projects Receiving Department of Energy (DOE) 

Loan Guarantees.

23. For an analysis of the performance of project finance loans relative 

to corporate loans, see Chris Beale and others, “Credit Attributes 

of Project Finance,” Journal of Structured and Project Finance

(Fall 2002), pp. 5–9.

24. Technically, DOE’s model begins with the assumption that 

pre- and postconstruction recovery rates are equal to 55 percent.

25. DOE’s authority to guarantee loans under the title XVII program 

is subject to annual appropriation action. The Office of Management and Budget periodically reestimates the cost of federal loan 

guarantees to capture changes in expected and realized losses. 

Under FCRA, the costs of those reestimates are covered by an 

unlimited appropriation (and not by the borrower). 
FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS 13

CBO

Figure 2.

Rates of Default and Recovery on Corporate Bonds, 1985 to 2010

Rate of Default (Percent) Rate of Recovery (Percent)

Source: Congressional Budget Office based on data from Standard & Poor’s Financial Services, Default, Transition, and Recovery: 2009 

Annual Global Corporate Default Study and Rating Transitions (New York: McGraw-Hill: March 17, 2010), Table 1; and on data from 

Standard & Poor’s CreditPro®—Corporate Ratings, accessed January 28, 2011.

Notes: Shaded bars indicate periods of recession, which extend from the peak of a business cycle to its trough.

The rate of default is the percentage of outstanding securities that are rated by Standard & Poor’s that default in a given year. The rate 

of recovery measures the percentage of the present value of outstanding principal and interest that the lender receives in the event of 

a default.

when the demand for electricity is depressed by a weak 

economy.

A common view is that the government has a lower cost 

of capital than private financial institutions because it 

can borrow at Treasury rates. Treasury rates are low, 

however, because holders of Treasury bonds are protected 

against losses by taxpayers, who absorb the risk of the 

government’s activities. Specifically, when the government provides a loan guarantee, taxpayers are at risk 

because if the borrower defaults and guarantee fees are 

not sufficient to cover the losses, the shortfall must be 

covered with higher future taxes, lower future government benefits, or cuts in other spending. Therefore, when 

the government provides such a guarantee, it is effectively 

shifting financial risk to taxpayers who, like investors in a 

financial institution, are averse to bearing that risk. From 

that perspective, market risk is a cost to taxpayers that is 

not included in budget estimates.

To provide a more comprehensive measure of the cost of 

the subsidy associated with nuclear construction loan 

guarantees, CBO evaluated guarantee costs on a fairvalue basis as well as on a budgetary basis.26 In recent 

years, CBO has provided supplementary information to 

the Congress on the fair-value cost of several major 

federal credit and insurance programs.27 For a liability 

such as a loan guarantee, the fair value is the price that 

would have to be paid to induce a market participant to 

assume the liability. Fair values are often based on market 

prices when those are available. However, the fair value 

of an obligation may diverge from its market value, for 

0

1.0

2.0

3.0

4.0

0

45

50

55

60

65

70

75

80

1985 1990 1995 2000 2005 2010

0.5

1.5

2.5

4.5

3.5

Recovery (Right axis)

Default (Left axis)

26. CBO’s analysis considered direct losses to the government from 

defaults but excluded certain indirect effects. For instance, no cost 

was included to account for the fact that the offer of a guarantee 

increases the likelihood that a plant will be constructed, which in 

turn increases the probability of future damages that could be 

costly to the government. 

27. See, for example, Congressional Budget Office, The Budgetary 

Impact and Subsidy Costs of the Federal Reserve’s Actions During the 

Financial Crisis (May 2010); letter to the Honorable Judd Gregg 

about the budgetary impact of the President’s proposal to alter 

federal student loan programs (March 15, 2010); Costs and Policy 

Options for Federal Student Loan Programs (March 2010); and 

Federal Financial Guarantees Under the Small Business Administration’s 7(a) Program (October 2007). 
14 FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

CBO

instance, during a financial crisis when the few transactions that occur are likely to be at distressed prices or 

when comparable obligations are not publicly traded. In 

such cases, fair value can be estimated using standard 

financial modeling and extrapolation. A private market 

for nuclear construction loan guarantees does not exist. 

However, the cost that investors would assign to the risk 

of such guarantees can be estimated from the prices of 

debt securities that have similar risk characteristics as 

evaluated through credit ratings, and CBO took that 

approach in this study. 

The federal budget is intended to account for program 

costs but not their benefits. Credit guarantees, like other 

federal spending, might increase public well-being by 

supporting activities that are valuable to society but that 

are unlikely to be economically viable without government support. In evaluating a program, those benefits 

must be weighed against the costs to taxpayers of those 

activities, but such an analysis for nuclear construction 

loan guarantees is beyond the scope of this study. 

The Impact of Adverse Selection on 

Estimated Budgetary Cost

In practice, it may not be possible to charge borrowers 

the full budgetary cost of a loan guarantee, either on a 

FCRA or fair-value basis. When projects involve a high 

degree of uncertainty and adverse selection is severe, 

increasing fees would only serve to drive away morecreditworthy borrowers. Under such circumstances, 

private lenders may refuse to offer credit at any price 

(a situation known as credit rationing). Indeed, fully private financing does not appear to be available for nuclear 

power plant construction. For investments that provide 

significant social benefits, avoiding credit rationing in the 

private marketplace is a rationale for offering federal 

credit assistance. However, such assistance is likely to 

involve a cost to taxpayers, regardless of the fees that the 

government charges. 

In CBO’s view, adverse selection is likely to be a significant factor for nuclear construction loan guarantees, 

and it is probably not possible for DOE to set fees that 

would entirely cover the estimated budgetary cost of 

the program. To account for that difficulty, and to avoid 

a downward bias in its official cost estimates, CBO 

adds 1 percentage point to its FCRA estimates for the 

cost of title XVII guarantees. 

Selecting Discount Rates for Fair-Value Estimates

When estimating the cost of nuclear construction loan 

guarantees, the difference between budgetary (or FCRA) 

estimating practices and a fair-value approach is in 

the choice of discount rates. Whereas FCRA calls for 

Treasury rates to be used to discount expected future cash 

flows, a fair-value methodology employs discount rates 

that reflect the market risk inherent in the specific credit 

obligation, which gives rise to investors’ requiring a risk 

premium. 

As noted above, the frequency and severity of defaults on 

credit obligations varies considerably over time and with 

the state of the economy. Still, expected recovery rates on 

such obligations depend more on “idiosyncratic,” or 

project-specific, risk than on market risk. For example, 

expected recovery rates during the construction of a 

nuclear plant may be low because the unfinished plant 

has little value when it comes to alternative uses, whether 

the aggregate economy is performing well or poorly. Conversely, an operating plant could default because revenues 

from electricity sales during a recession are too low to 

support the promised debt payments, but expected recovery rates in that case may be high because the operating 

plant remains a valuable asset.28

To determine the appropriate risk premium for estimating the fair value of loan guarantees for nuclear construction, CBO relied on information in yield spreads—the 

difference between what investors expected to earn on 

bonds of a particular credit rating and Treasury rates. The 

key advantages of that approach are that extensive historical data are available on credit spreads and that the discount rates are consistent with the translation of project 

risk into a ratings category.

The yield spread on a risky bond can be decomposed into 

four components: a market risk premium, an expected 

default loss rate, a liquidity premium (which is compensation to investors for the higher costs of buying and 

28. For a further discussion of the theory and evidence, see Edward I. 

Altman and others, “The Link Between Default and Recovery 

Rates: Theory, Empirical Evidence, and Implications,” Journal of 

Business, vol. 78, no. 6 (November 2005), pp. 2203–2228.
FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS 15

CBO

Table 2.

Credit Spreads and Estimated 

Risk Premiums

Source: John Hull, Mirela Prediscu, and Alan White, “Bond Prices, 

Default Probabilities, and Risk Premiums,” Journal of 

Credit Risk, vol. 1, no. 2 (Spring 2005), pp. 53–60, 

available at www.rotman.utoronto.ca/~hull/

DownloadablePublications/CreditSpreads.pdf.

Note: The risk premium is the additional rate of return that 

investors require to bear market risk—the risk that losses 

will be greatest during times of economic stress.

selling non-Treasury debt), and a tax adjustment (to 

account for differences in tax treatment). For the purposes of discounting expected loan guarantee cash flows, 

CBO used only the estimated market risk premium to 

adjust Treasury discount rates. The expected default loss 

rate was incorporated in the projections of cash flows; 

including it in the discount rate would cause expected 

losses to be counted twice. CBO chose not to include an 

estimated liquidity premium or tax adjustment in the discount rate for its fair-value calculations; although a 

broader interpretation of fair value would also include 

those effects, CBO chose to focus only on the risk that 

most directly affects taxpayers. Finally, CBO selected the 

size of the risk premium for each ratings category on 

the basis of the findings of academic studies.29 Those 

studies show, as expected, that the market risk premium 

increases with the riskiness of the debt as measured by its 

credit rating (see Table 2). 

CBO’s estimates of guarantee costs rely on the fact that 

the cash flows associated with a loan guarantee are 

identical to the combined cash flows from directly making a risky loan and, at the same time, borrowing the 

promised cash flows risk-free. (To value a partial guarantee, both the risky loan and the corresponding amount 

borrowed risk-free are reduced proportionally.) The value 

of the guarantee is then calculated as the difference 

between the value of the risk-free loan and the risky 

loan. Using that approach follows standard industry practice, and it produces the same results as using FCRA 

methodology when the risk premium is set to zero.30

(Appendix C explains CBO’s procedure for calculating 

the fair value of a guarantee in more detail.) 

Illustrative Guarantee Costs and 

Sensitivity Analysis 

The estimated cost of a nuclear construction loan guarantee varies widely with the assumptions made about a 

project’s credit rating, recovery rate, and whether the cost 

of market risk is taken into account. Therefore, CBO 

estimated the guarantee cost for a hypothetical nuclear 

construction loan under a variety of assumptions about 

those key parameters and the loan contract itself.

The ratings-based approach that CBO used reflects the 

assumption that it is appropriate to evaluate the cost of 

loan guarantees for nuclear construction by summarizing 

the proposed project’s risk characteristics with a credit 

rating and then using the typical default rates and risk 

premiums for those ratings categories to infer the cost of 

the guarantees. That approach is frequently used in the 

private sector for investments that are difficult to evaluate, such as those considered here. An alternative 

approach would be to model the cash flows and the 

uncertainty associated with them for each individual 

project. For example, a simulation model that incorporated assumptions about the capital structure and other 

features specific to a project could be used to predict the 

probability and severity of defaults. Such an approach 

might produce more-accurate estimates than the more 

generic ratings-based approach used here. However, it 

would require a significant investment in modeling for 

each project, and the results would still have a great deal 

of uncertainty associated with them.

29. For its estimates, CBO relied primarily on the analysis of John 

Hull, Mirela Predescu, and Alan White, “Bond Prices, Default 

Probabilities and Risk Premiums,” Journal of Credit Risk, vol. 1, 

no. 2 (Spring 2005), pp. 53–60. Other studies also conclude that 

a market risk premium is an important component of yield 

spreads. See Edwin J. Elton and others, “Explaining the Rate 

Spread on Corporate Bonds,” Journal of Finance, vol. 56, no. 1 

(February 2001), pp. 247–277.

Ratings 

Category

AAA 83 38

AA 90 43

A 120 69

BBB 186 115

BB 347 160

B 585 200

U.S. Treasuries

Bond Yield Over

Risk Premium

30. Alternatively, practitioners sometimes use an options-pricing 

approach to value loan guarantees. 
16 FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

CBO

The reference loan that CBO considered has features that 

are fairly typical for loans that might be guaranteed by 

DOE under the federal guarantee program. The loan has 

a maturity of 30 years. Principal is paid in equal increments semiannually, starting at the end of an assumed 

6-year construction period. Interest on the outstanding 

balance is paid semiannually over the life of the loan. The 

interest rate charged equals the 10-year Treasury rate plus 

a small spread; CBO assumed that the rate charged is 

3.4 percent. 

Sensitivity to Credit Ratings, Recovery Rates, and 

the Inclusion of a Risk Charge

Estimated guarantee costs vary widely with changes in the 

assumed credit rating, recovery rate, and discount rate on 

risky loans (see Figure 1 on page 3). The choice of credit 

rating is a key determinant of estimated costs for both 

FCRA-based and fair-value estimates. In particular, estimated costs increase significantly for ratings that are 

below BBB, which is the lower cutoff for bonds that are 

considered “investment grade.” That variation reflects the 

much higher default rates historically for bonds in lower 

ratings categories. Most utilities have ratings that fall 

within the range of A- to BBB-, and initiating a new 

nuclear construction project could cause a utility’s rating 

to be revised slightly downward by the rating agencies. 

For stand-alone projects or weaker utilities, lower ratings 

for potential nuclear projects are a possibility. However, 

such projects may not be economically viable even with 

the subsidies provided by a loan guarantee, and DOE 

might be reluctant to approve those applications.

The assumed recovery rate also has a significant effect 

on the estimated cost of a loan guarantee, particularly 

for projects with a rating below investment grade.31

Therefore, for projects with low ratings, assigning a 

project-specific recovery rate could significantly change 

the estimated cost. The relative insensitivity to the recovery rate for investment-grade projects is explained by the 

low probability of default on highly rated bonds, which 

reduces the importance of recovery. 

The fair-value estimates, which include a risk premium, 

are significantly higher than budgetary estimates for guarantees with the same credit ratings and recovery rates. 

The pattern of higher costs for projects with lower ratings 

and lower recovery rates remains the same; however, 

including a risk charge has a larger effect on lower-rated 

bonds because riskier bonds have greater exposure to 

market risk and therefore have a higher associated risk 

premium. For example, for a project that has an A rating 

and the 55 percent recovery rate often assumed by DOE, 

market risk increases the guarantee cost rate from 1 percent to 9 percent of the loan principal; but for a project 

with a B rating and the same recovery rate, market risk 

increases the cost from 11 percent to 27 percent. As is the 

case with the FCRA-based estimates, the effect on fairvalue estimates of changing the recovery rate on highly 

rated bonds is muted because the underlying default 

probability is low, so expected losses are small regardless 

of the recovery rate. However, investors still require a risk 

premium because when the rare default occurs, it is most 

likely to be during a severe economic downturn. 

Sensitivity to the Timing of Defaults and Recoveries

Assuming a fixed recovery rate at all stages of a project’s 

life may neglect significant variation over time in 

expected recoveries.32 For example, it may be that 

expected recoveries for a project that is limited in its 

ability to pass on costs to ratepayers are lower during the 

construction phase than when that project is producing 

revenue from power sales. Lowering the recovery rate in 

the early years tends to increase the estimated cost of a 

loan guarantee because more principal is outstanding and 

because the recovered payments are discounted less.

To illustrate the potential size of the effect of recovery 

rates that vary over time and in particular the possibility 

that recovery rates are much lower during the construction phase, CBO compared the estimated guarantee costs 

across an assumed recovery rate during construction that 

varied from 0 percent to 40 percent, while assuming a 

31. An investment-grade rating indicates that a bond or other credit 

obligation has a relatively low risk of default. Bond-rating firms, 

such as Standard & Poor’s, often use letter designations to identify 

a bond’s credit quality rating. For example, AAA and AA (high 

credit quality) and A and BBB (medium credit quality) are considered investment grade. Credit ratings for bonds below those designations (BB, B, CCC, etc.) are considered low credit quality.

32. For example, see Nuclear Energy Institute, Credit Subsidy Costs for 

New Nuclear Power Projects Receiving Department of Energy (DOE) 

Loan Guarantees; and Statement of Richard W. Caperton, Energy 

Policy Analyst, Center for American Progress Action Fund, before 

the Domestic Policy Subcommittee of the House Committee on 

Oversight and Government Reform, “Taxpayer Protection and the 

Nuclear Loan Guarantee Program,” April 20, 2010, available at 

www.americanprogressaction.org/issues/2010/04/pdf/

caperton_testimony.pdf. 
FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS 17

CBO

Figure 3.

Sensitivity of Estimated Loan Guarantee Costs to Variations in 

Recovery Rates if Default Occurs During Construction

(Percentage point change in guarantee cost)

Source: Congressional Budget Office.

Notes: The change in the guarantee cost is calculated relative to the base case and is expressed as a percentage of the loan amount.

Cost estimates under the Federal Credit Reform Act of 1990 use Treasury rates for discounting projected cash flows. Fair-value 

estimates approximate what a private guarantor would charge for the guarantee; they are based on the same projected cash flows,

but the discount rates are adjusted to include a market risk premium.

In determining the percentage point change in the cost of a loan guarantee, CBO assumed that recovery rates on defaults that 

occurred during construction would vary from 0 percent to 40 percent of the outstanding principal and interest owed to the lender. 

For the postconstruction period, CBO assumed a fixed recovery rate of 55 percent. Recovery rates, which are estimated at the time a 

default occurs, measure the fraction of the present value of outstanding principal and interest that the lender receives in the event 

of a default.

fixed recovery rate of 55 percent after the construction 

period (see Figure 3). CBO estimated that the effect on 

the estimated cost of a loan guarantee for nuclear construction is less than 2 percentage points for ratings of 

BBB and higher, but much larger for lower-rated projects. For a project rated BB, for example, the effect of 

recovering only 20 percent early on increases the lifetime 

cost by 3.6 percentage points relative to the assumption 

of a flat 55 percent recovery rate.

Similarly, default rates may be higher during the construction phase, which would shift the pattern of defaults 

forward relative to a typical bond with the same rating. 

Shifting defaults forward in time increases the estimated 

cost of a loan guarantee because more principal is outstanding and losses are discounted less. CBO examined 

the effect of increasing the baseline default rate for a given 

credit rating during the construction phase by either 

10 percent or 20 percent and then decreasing the probability afterward so that the lifetime default rate remained 

Recovery Rate (Percent)

Federal Credit Reform Act Estimates

Credit Rating Credit Rating

Fair-Value Estimates

AA A BBB BB B

0

2

4

6

8

10

12

14

AA A BBB BB B

0

2

4

6

8

10

12

14

0 20 40
18 FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

CBO

unchanged. The recovery rate was again assumed to be 

55 percent over the project’s lifetime. Shifting forward the 

timing of defaults has the expected effect of increasing 

the estimated guarantee cost, but the size of that effect is 

less than half a percentage point for projects rated BB and 

higher. The combined effect of assuming higher default 

rates and lower recovery rates during construction would 

be to increase the estimated cost of low-rated projects 

significantly.

Sensitivity to the Terms of the Loan Contract

The terms of the loan contract can have a significant 

impact on the guarantee cost. For example, in the case of 

a direct loan, the guarantee cost is affected by the interest 

rate charged to the borrower; higher interest paid to the 

government reduces the subsidy cost required to be paid 

up front by the borrower.

In some cases, the guaranteed loan may be structured 

so that payments are deferred for some number of years 

to better match the pattern of project revenues. For 

instance, DOE may allow stand-alone merchant projects 

that do not have the resources of a utility available to 

them to defer the payment of principal and interest 

during the construction phase, whereas only principal 

repayment may be deferred for rate-based projects. Such 

deferrals can affect guarantee cost. For instance, if interest 

payments are deferred until after the construction phase 

(and the deferred amounts are added to the principal balance owed), then the estimated cost of a loan guarantee 

for a project receiving a BBB rating and with a flat 

55 percent recovery rate is 2.4 percent on a budgetary 

basis (16.5 percent on a fair-value basis). In contrast, 

without any interest deferral, the estimated cost is 

2.1 percent on a budgetary basis (14.6 percent on a 

fair-value basis). All else being equal, the cost of the guarantee increases with the length of deferral because, on 

average, a smaller portion of the loan is repaid before a 

default occurs. 

The 30-year maturity of nuclear construction loan 

guarantees amplifies the effect of including a charge 

for market risk compared with the effect on the cost of 

shorter-term guarantees. Over a 30-year period, the 

present-value cost of even a small amount of market 

risk each year becomes significant.

Uncertainty in Default Rates Within a Single 

Credit Rating 

A further source of uncertainty in estimating the cost of 

loan guarantees is that, within a given ratings category, 

there is considerable variation in the expected default 

rate. Standard & Poor’s reports those uncertainties in 

terms of standard deviations. The standard deviation of 

the recovery rate measures the variation from the average 

recovery rate; realized values should fall within a range of 

one standard deviation below the average to one standard 

deviation above the average about 68 percent of the time. 

(See Figure 4 for an illustration of how uncertainty about 

default rates translates into uncertainty about guarantee 

costs for different ratings.) For instance, a one-standarddeviation increase in the assumed default probability for 

bonds rated BB would increase the estimated guarantee 

cost on a budgetary basis by about 1.5 percentage points. 

That variation underscores the significant uncertainty 

associated with estimates of subsidy costs that are based 

on credit ratings. Estimating such costs using alternative 

methodologies, however, would also involve considerable 

uncertainty. 
FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS 19

CBO

Figure 4.

Sensitivity of Estimated Loan Guarantee Costs to the Probability of Default

(Percentage point change in guarantee cost)

Source: Congressional Budget Office.

Notes: The change in the guarantee cost is calculated relative to the base case and is expressed as a percentage of the loan amount.

Cost estimates under the Federal Credit Reform Act of 1990 use Treasury rates for discounting projected cash flows. Fair-value 

estimates approximate what a private guarantor would charge for the guarantee; they are based on the same projected cash flows,

but the discount rates are adjusted to include a market risk premium.

In determining the percentage point change in the cost of a loan guarantee, CBO assumed that the probability of default would vary 

plus or minus one standard deviation. The standard deviation of the default rate measures the variation from the average default rate. 

A low standard deviation indicates that most values are closely distributed around the average default rate, while a high standard 

deviation indicates that default rates are spread out among a wide range of values.

Federal Credit Reform Act Estimates

Credit Rating Credit Rating

Fair-Value Estimates

AA A BBB BB B

-2.5

-2.0

-1.5

-1.0

-0.5

0

0.5

1.0

1.5

2.0

2.5

AA A BBB BB B

-2.5

-2.0

-1.5

-1.0

-0.5

0

0.5

1.0

1.5

2.0

2.5

1 Standard Deviation Increase

1 Standard Deviation Decrease

Probability of Default

CBO

Appendix A:

The Federal Government’s Role in 

Nuclear Power and a 

Historical Overview of Industry Performance

A review of the historical financial performance 

of the nuclear industry provides a useful reference point 

for assessing the risk the government assumes when it 

provides loan guarantees for the construction of nuclear 

power plants. However, because not enough data exist to 

draw statistical inferences, it is difficult to use this information to form quantitative conclusions about expected 

future costs, and the Congressional Budget Office (CBO) 

did not attempt to do so. Historically, the U.S. nuclear 

industry has received considerable federal support and 

has been subject to extensive federal regulation. After an 

initial period of growth in the industry, many nuclear 

projects ran into problems with delays, cost overruns, and 

cancellations. In a few cases, those circumstances led to 

the bankruptcy of the project sponsor and to losses by 

some debt holders, although much more often losses were 

absorbed by ratepayers or the government rather than by 

bondholders. More recent experience from abroad suggests that the risk of cost overruns and delays remains a 

concern even with modern reactor designs.

Federal Regulations 

In 1946, the Congress created the Atomic Energy 

Commission (AEC), which led the effort to develop the 

first breeder reactor for generating electricity; that reactor 

became operational in 1951. Under the Atomic Energy 

Act Amendments enacted in 1954, private companies 

were allowed to apply for operating licenses for nuclear 

power plants. 

To encourage private investment in nuclear power, the 

Congress passed the Price-Anderson Act in 1957. That 

legislation, which was extended through 2025 by the 

Energy Policy Act of 2005 (EPAct 2005), limits the liability of private owners in the event of a nuclear incident. 

Damages that exceed the Price-Anderson liability limits 

are expected to be covered by the federal government. 

This catastrophic insurance, which is provided free of 

charge by the federal government, represents a subsidy to 

the nuclear industry, though its size is subject to debate.1

The Private Ownership of Special Nuclear Materials Act, 

which was passed in 1964, allowed private operators of 

nuclear power plants to own the fuel for their units. A 

decade later, the Energy Reorganization Act of 1974 

created two new entities to assume responsibility for 

activities formerly shared by the AEC: The role of promoting research and development became the purview of 

the Energy Research and Development Administration 

(ERDA); and the role of regulating new and existing 

nuclear power plants became the responsibility of the 

Nuclear Regulatory Commission (NRC). A few years 

later, in 1977, the Department of Energy (DOE) was 

established by the Department of Energy Organization 

Act. DOE took over the functions for which ERDA had 

been established.

1. A study from the Massachusetts Institute of Technology suggests 

that the estimated expected fair value of this subsidy would be no 

higher than about $3 million per year per plant; see John Deutch 

and others, The Future of Nuclear Power: An Interdisciplinary MIT 

Study (Cambridge, Mass.: Massachusetts Institute of Technology, 

July 29, 2003), available at http://web.mit.edu/nuclearpower/pdf/

nuclearpower-full.pdf. CBO estimated the subsidy at $600,000 

per year per plant; see Congressional Budget Office, Nuclear 

Power’s Role in Generating Electricity (May 2008).
22 FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

CBO

In late 1979, after the nuclear accident at Three Mile 

Island, the NRC started to impose stricter safety and 

inspection regulations. The following year, DOE initiated a program to develop technology for disassembling 

and defueling damaged reactors. The Nuclear Waste 

Policy Act of 1982 (NWPA) determined locations and 

procedures for disposing of high-level radioactive waste. 

In 1987, the Congress amended NWPA to allow research 

on using Yucca Mountain as a disposal site for high-level 

radioactive waste.2

The Energy Policy Act of 1992 provided additional 

support to the nuclear industry. It introduced competition into the electric utility industry’s wholesale sector, 

allowing new practices, such as retail wheeling (using 

one supplier’s transmission system to carry power for 

other suppliers). It also took steps to reduce regulatory 

uncertainties for nuclear power plants by proposing new 

waste-removal and storage processes, streamlining licensing procedures, clarifying regulations of the uranium 

enrichment and mining sectors, and creating a fund for 

the decommissioning of reactors.

In 2002, DOE introduced the Nuclear Power 2010 

Program, which created a government-industry costsharing partnership for the construction of advanced 

energy (third-generation) nuclear power plants. Some 

project sponsors who applied for loan guarantees used the 

Nuclear Power 2010 Program to identify potential sites 

for reactor construction and to improve reactor design.

As well as establishing a nuclear construction loan guarantee program, the Energy Policy Act of 2005 extended 

the Price-Anderson Act to cover reactors that are built 

through 2025. It also required the government to pay for 

cost overruns of up to $500 million for the first two reactors under construction and of up to $250 million for the 

following four in the event of certain regulatory delays. 

Finally, EPAct 2005 included a tax credit of up to 

$125 million per nuclear plant for carbon-free energy 

production.3

Private Nuclear Investment in the 

United States

Throughout the 1950s and 1960s, private investment in 

the construction of nuclear power plants expanded. 

However, investment activity slowed in the 1970s, and 

no new plants have been started in the United States since 

1978. From 1964 to 1973, the average generating capacity per plant under construction more than doubled from 

537 megawatts (MW) to over 1100 MW. During the 

1980s, nuclear reactors continued to be connected to the 

electrical grid and enter into commercial operation. 

Today there are 104 nuclear reactors in operation in the 

United States, of which 98 are not federally owned. 

Those plants generate more than 1020 MW of power, 

supplying about 20 percent of electricity used in the 

country. 

The decline in nuclear power investment in the United 

States, which started in the mid-1970s, can be attributed 

to a variety of factors: decreases in the forecast demand 

for electricity, growing concerns over waste disposal, 

changing regulatory policies that increased construction 

compliance costs, and concerns about nuclear proliferation. In addition, following the accident at Three Mile 

Island in 1979, construction times lengthened because of 

additional quality controls, increased regulatory uncertainties, and reactor designs that became larger and more 

complex. 

Those factors reduced the payoff of investing in nuclear 

power plants. Cost overruns averaged more than 200 percent for plants on which construction started between 

1966 and 1977. Additionally, many projects were 

canceled after construction had started but before completion, and a number of reactors were shut down (see 

Table A-1). The first reactor cancellations occurred in 

1977; and in 1980 alone, 21 projects were canceled. In 

total, 40 projects were canceled after construction had 

started. Moreover, several reactors in operation were shut 

down before the end of their normal operating lives 

because of safety or operational problems or political 

opposition. Into the 1990s, reactors that were either 

under construction or that had been completed but not 

yet connected to the grid saw little progress. 

Federal Investment in Nuclear Power

The federal government is directly invested in the nuclear 

power sector through various programs and agencies. For 

example, the Rural Utilities Service (RUS), which is 

2. See Nuclear Waste Policy Amendments Act of 1987, Public Law 

100-203, 101 Stat. 1330-227.

3. For a summary of the act’s provisions and the incentives it 

provides, see Congressional Budget Office, Nuclear Power’s Role in 

Generating Electricity, Table 1-1. 
APPENDIX A FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS 23

CBO

Table A-1. 

The Status of Nuclear Reactors in the United States, by Construction Start Date

Source: Congressional Budget Office based on data from the International Atomic Energy Agency’s Power Reactor Information System

(PRIS) database.

administered by the Department of Agriculture, guarantees loans for electricity-generation projects owned by 

rural cooperative utilities, including nuclear reactor 

investments. The Tennessee Valley Authority (TVA) is a 

federally owned corporation that provides electrical generation, flood control, economic development, and other 

services to states in the Tennessee Valley region. As part of 

TVA’s effort to guarantee the provision of affordable electricity, it is heavily invested in nuclear projects. In 1966, 

TVA announced plans to build 17 nuclear reactors. By 

the early 1980s, after reassessing the changes in electricity 

demand and safety regulations, TVA canceled 8 of those 

planned reactors. TVA had invested about $5 billion in 

those units. In 2001, TVA wrote off more than $3.4 billion on existing assets with estimated future cash flows 

that were likely to be less than the recorded book values. 

Of that amount, $2.22 billion was attributable to 

deferred nuclear power units. 

The first three nuclear power plants sponsored by Washington Public Power Supply System (WPPSS, now 

Energy Northwest) received considerable, if indirect, 

financial support from the federal government through 

the Bonneville Power Administration (BPA), a federal 

agency. Although BPA was prohibited by statute from 

owning generation resources, a technique known as net 

billing allowed utilities participating in plant construction to assign their shares to BPA; the participants’ costs 

for servicing the bonds that WPPSS issued to finance 

plant construction were deducted from the power bills 

that the utilities paid BPA.4

 Although only one of those 

three plants was ever completed, no WPPSS bonds were 

defaulted on—BPA recovered the money needed to make 

the bond payments for the three plants by passing on the 

costs to BPA’s power customers through rate increases. 

The maturity dates of those bonds have been pushed 

back through refinancings, but final payments on the 

bonds outstanding for the two uncompleted plants are 

scheduled for 2018.5

 BPA has received all the electrical 

output from the one completed WPPSS nuclear plant 

(WNP-2, now Columbia Generating Station) since the 

plant began operation. Initially, the costs of operating 

the plant were also recovered through net billing, but 

in 2006 a new “direct-pay” agreement was negotiated 

wherein BPA simply pays for all of the costs of the 

Columbia Generating Station and receives all the output. 

(The payments on outstanding Energy Northwest bonds 

are now paid directly by BPA as well.)

Construction 

Start Date

1951–1955 1 0 0 1

1956–1960 14 0 12 2

1961–1965 6 0 2 2

1966–1970 67 7 4 4

1971–1975 70 33 1 0

1976–1980 14 0 0 0 ____ ___ ___ __

Total 172 40 19 9

Number of Reactors Shut Down 

Number of In operation 

Reactors Started at least 20 years

In operation 

fewer than 20 years

Number of 

Reactors Canceled

4. Net billing arrangements with BPA may have provided implicit 

financing subsidies in several other cases: WPPSS used such 

arrangements to pay for an electricity-generating facility at the 

Hanford Nuclear Reservation in 1966; and the Eugene Water and 

Electric Board used net billing to support payments for a share of 

the Trojan Nuclear Plant constructed by Portland General Electric. See Daniel Pope, Nuclear Implosions: The Rise and Fall of the 

Washington Public Power Supply System (New York: Cambridge 

University Press, 2008).

5. Northwest investor-owned utilities had a 30 percent share in one 

of the three plants, WNP-3. The utilities financed their share of 

the plant without federal support through BPA. In 1985, BPA 

bought out that 30 percent share through an agreement that gave 

the utilities BPA power to replace the power that would have been 

generated by the uncompleted plant.
24 FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

CBO

Default and Loss Experience

Although nuclear investments frequently encounter 

financial problems, episodes in which bondholders lose 

money have been fairly rare because shareholders, ratepayers, or the government have usually absorbed the 

losses. A study conducted in 1983 by DOE found that 

for cancellations, most jurisdictions allowed utilities to 

partially recover their costs through rate increases, and a 

substantial portion of the unrecovered costs are borne by 

the government, primarily because of tax write-offs. 

Nevertheless, in several notable cases, bondholders have 

taken sizable losses. Although the federal government had 

not provided guarantees in those cases, it has experienced 

losses from federal nuclear guarantees in a number of 

instances.

The largest and most famous default triggered by losses 

on nuclear power plants occurred in 1983 when WPPSS 

defaulted on $2.25 billion in municipal bond obligations.6

 Seventeen utilities founded WPPSS in 1957, 

and by 1971 some members of the organization were 

planning to invest in five nuclear units. The initial cost 

estimate for the five plants was $4 billion. A decade after 

construction started, cost overruns were $19 billion, causing four of the five units to be canceled. However, it was 

the delays associated with the construction of units 4 and 

5, combined with a legal ruling that blocked WPPSS 

from passing on losses to ratepayers, that forced the consortium to default on $2.25 billion in municipal bonds. 

Bondholders eventually received between 10 cents and 

40 cents on the dollar.7

 Ratepayers also were affected by 

losses resulting from the Bonneville Power Administration’s take-or-pay contracts on portions of the output 

from units 1, 2, and 3. Under those contracts, Bonneville 

was required to either purchase the output at an agreedupon price or pay a penalty for output not purchased. 

Thus, Bonneville ratepayers were obligated to pay $7 billion over 30 years for electricity that was never delivered.

Bondholders also experienced losses in the bankruptcy 

of the Public Service Company of New Hampshire 

(PSNH). That utility was the main investor in 10 utilities 

that sought to build the Seabrook nuclear power plant. 

By 1979, investors planned to have two units in commercial operation for a cost of about $970 million. Unit 1 

was finally put into commercial operation in 1990 at a 

cost of $6.6 billion; unit 2 was canceled in 1988 because 

of cost overruns, which had reached $5 billion. PSNH, 

which had funded about $2.9 billion of the project, was 

forced to declare bankruptcy after defaulting on a 

$37.5 million debt payment in 1987. At the time, that 

was the fourth largest bankruptcy on record. Holders of 

unsecured bonds lost about two-thirds of the interest 

owed to them but recovered all principal. A similar story 

of cost overruns, delays, and cancellations at the Palo 

Verde Nuclear Generating Station in Arizona forced 

El Paso Electric into bankruptcy in 1992.

In several instances, nuclear projects caused financial 

distress that did not end in default. An example is the 

experience of the Shoreham Nuclear Power Plant, a reactor completed in 1984 after being in various stages of 

construction for more than 11 years. Its owner, the Long 

Island Lighting Company, had incurred construction cost 

overruns of more than $2 billion by the end of 1979. 

Although Shoreham generated electricity from 1985 to 

1989, the reactor never produced power on a commercial 

scale. By 1994, the reactor had been fully decommissioned at a cost of $184 million. Over its lifetime, losses 

totaled about $6 billion. That cost was largely borne by 

Long Island electricity consumers through a 3 percent 

surcharge on electricity bills for a 30-year period starting 

in 1989. (Cost recovery by the utility on $1.35 billion 

of the losses was disallowed on the grounds that the 

costs were imprudently incurred.) Equity holders also 

experienced a large decline in the value of their shares. 

Bondholders, however, did not lose any money. Other 

examples include the cancellation of construction in 

1982 of the Cherokee Nuclear Power Plant by the utilities that had invested in the project. With a $633 million 

investment, Duke Power lost 30 percent of its precancellation net worth. The owners of the William H. 

Zimmer Power Station in Ohio incurred unrecoverable 

costs of about $1.8 billion after construction of the 

nuclear plant was canceled. Cincinnati Gas & Electric, 

which had invested $716 million in the project, lost 

90 percent of its net worth.

6. Moody’s Investors Service, U.S. Municipal Bond Defaults and 

Recoveries, 1970–2009, Special Comment Report 122579 (New 

York: Moody’s Invenstors Service, February 2010), available at 

http://v2.moodys.com/cust/content/Content.ashx?source=

StaticContent/Free%20Pages/Regulatory%20Affairs/Documents/

us_municipal_bond_defaults_and_recoveries_02_10.pdf.

7. Because the recoveries involved years of delay, the present value of 

recoveries, and hence the recovery rate, was lower than the dollar 

percentage recovered.
APPENDIX A FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS 25

CBO

The federal government experienced losses from nuclearrelated investment guarantees through the RUS program. 

In 1979, Cajun Electric Power Cooperative invested in 

the construction of two units at the River Bend Nuclear 

Generating Station, which included the use of government guaranteed debt through RUS.8

 River Bend’s unit 

1, completed in six years, cost $7.2 billion to construct 

and is currently in operation; it was 400 percent over 

budget at the end of construction. Unit 2 was canceled 

10 years after construction started in 1982. As cost estimates increased during construction, Cajun was forced to 

take out deficiency loans to supplement its RUS debt. In 

1988, the Louisiana Public Service Commission ordered 

Cajun to lower its electricity rates because of statewide 

economic circumstances. Unable to meet its debt obligations or to restructure its $4.2 billion in total outstanding 

debt, Cajun filed for bankruptcy. Government losses were 

about $3.0 billion.

Foreign Experience 

Foreign experience is a source of more recent information 

about the cost of nuclear power plant construction. 

Although regulatory and other differences from one 

country to another may limit the relevance of international comparisons, other nations continue to have 

problems with construction cost overruns for a variety 

of reasons. 

Reliance on nuclear power varies considerably around 

the world. With 75 percent of its electricity generated 

using nuclear power and with generating capacity of 

63 gigawatts, France leads the world in the proportion of 

electricity generated from nuclear power by a large country. Some smaller nations also generate a relatively large 

proportion of domestic electricity from nuclear power 

plants. According to the Nuclear Energy Institute, 

16 nations generated over one-quarter of their electricity 

from nuclear power in 2009. Although the United States 

obtains only about 20 percent of its power from nuclear 

energy, it continues to have the largest number of reactors 

in the world.

Plans for the rate of future nuclear expansion also vary 

internationally. Currently, 60 reactors are under construction worldwide, one of which is in the United States. 

China, South Korea, and Russia have the largest number 

of new nuclear reactors under way with 27, 6, and 7 reactors, respectively. 

Comprehensive statistics on the financial performance 

of foreign investments in nuclear power are not available, 

but it appears that delays and construction cost overruns 

continue to be a problem in many instances. Recent studies show that French projects and collaborations with 

other European governments are experiencing cost overruns because of input price increases (for example, for 

concrete and steel) and other factors, such as quality control. Construction costs for reactors in Canada, Japan, 

India, and the United Kingdom are all exceeding original 

estimates. The Darlington reactor in Canada, originally 

estimated to cost about $3.9 billion, ended up costing 

$14 billion. General Electric and its Japanese partners, 

Toshiba and Hitachi, are about five years behind schedule 

on two reactors being built in Taiwan, costing an extra 

$4 billion to $5.5 billion. Information about the Chinese 

nuclear power sector is scarce, though external estimates 

of capital costs indicate that construction costs are 

probably lower in China.

8. Cajun Electric entered into an agreement with Gulf State Utilities 

in 1979 to purchase 30 percent of the River Bend plant. The 

other main investor, Gulf State Utilities, was nearly driven into 

bankruptcy as well. 

CBO

Appendix B:

Applications for the Department of Energy’s 

Loan Guarantee Program

As of July 2011, 19 applications had been submitted to the Department of Energy (DOE) for loan 

guarantees for the construction of advanced nuclear 

power facilities. All of those applications were received 

before the program was closed to new applicants in 

September 2008, and they are in various stages of the 

application and approval process. The projects vary as to 

whether they are sponsored by public utilities or merchant power providers (independent private producers) 

and in other characteristics that would affect the cost and 

risk to the government of providing a loan guarantee. 

According to press accounts, the $18.5 billion in budget 

authority that was made available for such purposes in 

2008 would probably cover at most four of the proposed 

projects. The three projects described below—as well as 

Southern Company’s Plant Vogtle in Georgia, which is 

discussed in the main text—have pending applications 

and appear from press accounts to have advanced the farthest, although it is not clear that any of them will reach a 

final agreement.

In October 2010, DOE offered a loan guarantee for the 

joint venture Unistar, owned by Baltimore-based Constellation Energy and France’s Électricité de France, to 

build a new reactor at Calvert Cliffs in Maryland that was 

projected to cost $10 billion. Constellation rejected the 

$880 million guarantee fee offer, which translated into an 

11.6 percent credit subsidy rate. DOE proposed 

a modification to the terms of the contract that would 

have reduced risk to the government and lowered the 

required fee, but Constellation declined to reconsider. 

Constellation’s decision may have been influenced by the 

combination of relatively low expected regional electricity 

prices and the significant guarantee fee that may have 

made it unprofitable for the sponsors to invest in new 

nuclear power capacity (even though the federal credit 

guarantee might have been offered at a below-market 

price). 

South Carolina Electric & Gas Company (SCE&G) and 

its state-owned partner Santee Cooper proposed a plan 

for the construction of two new units at the Virgil C. 

Summer Nuclear Station in South Carolina and have a 

pending application for a loan guarantee. Santee Cooper 

is currently searching for partners to share its 45 percent 

stake in the project and may raise rates in April 2012 and 

November 2013 in part to fund its share of construction 

costs. SCE&G was authorized to raise rates by 1.1 percent in September 2009 to begin recovering financing 

costs associated with its stake in the project. 

The final pending application that has advanced is for the 

South Texas Project, although its future has become more 

uncertain following the recent events in Japan. The plan 

calls for the construction of two new units by Nuclear 

Innovation, a joint venture in Texas owned by New 

Jersey–based NRG Energy, Inc., and Toshiba’s Tokyo 

Electric Power Company.1

 Together they applied for a 

$7 billion loan guarantee from the United States and for 

$3.5 billion in financing from Japan. The rest of the 

costs, an estimated $2.5 billion, are to be funded with 

equity investments.

1. NRG energy has withdrawn from the project and recorded a 

$481 million charge-off to reflect associated losses incurred by one 

of its subsidiaries.

CBO

Appendix C:

Calculating the Value of a Loan Guarantee

A standard approach to calculating the fair value of 

a loan guarantee relies on determining the difference 

between the fair value of the underlying risky loan in the 

absence of a guarantee and the value of a safe loan with the 

same promised cash flows but no possibility of defaulting.1

The value under the Federal Credit Reform Act of 1990 

(FCRA) can be found using the same method, replacing 

the fair value of the underlying risky loan with its budgetary value. This appendix explains the methodology the 

Congressional Budget Office (CBO) uses to value loan 

guarantees for the construction of nuclear power plants 

and the logic behind that methodology. 

When the federal government makes a risky loan directly 

to a borrower, it provides a cash outflow at the beginning 

of the agreement that represents the payment of loan 

principal to the borrower. The borrower promises to 

repay that principal to the government, along with interest, over the term of the loan. For an initial principal 

outlay of $100 million, a typical pattern of contractual 

payments on a federally guaranteed loan for nuclear construction would involve payments of interest in the first 

6 years followed by payments of interest and principal 

over the remaining 24 years of the loan (see Figure C-1 

on page 31). The risk to the federal government is that 

the borrower will cease making periodic payments of 

principal and interest, which constitutes default. In that 

case, the government may not receive the full amount of 

the principal and interest due from the borrower, even if 

the loan is collateralized by assets that can be sold to 

recover a portion of this loss. (For an example of cash 

flows from a loan with default in the 11th year and 

recovery of 60 percent, see Figure C-2 on page 31.)

Different borrowers would exhibit different default patterns—some would default early in the life of the loan, 

some would default later, and some would not default at 

all. Those possibilities are reflected in the expected cash 

flows, which depend on an estimate of the probability of 

a default in a particular period and the expected recovery 

amount if a default occurs (see expected loan cash flows 

in Figure C-3 on page 32). 

For a loan guarantee, in the event of a borrower’s default, 

the government must pay the lender the outstanding 

principal balance of the loan and the interest that has 

accrued on the loan since the borrower last made a payment, and the government can probably recover at least 

part of those costs. The expected payouts by the government vary over the lifetime of a loan, reflecting changes 

in the probability of default, the outstanding principal 

balance, and the expected recovery rate (see Figure C-4 

on page 32). In exchange for providing the loan guarantee, the government may collect fees from the borrower, 

which for this example are assumed to be paid in the 

form of an up-front premium.

When the government makes a loan itself, the expected 

cash flows are quite different from those associated with 

its guaranteeing a loan that has the same terms but is 

funded by a private lender (compare Figure C-3 with 

Figure C-4). However, the cash flows from the loan guarantee are exactly the same as if the government had made 

the risky loan directly and financed it by borrowing the 

contractual cash flows on that loan at a risk-free rate. 

(See Figure C-5 on page 33, which is constructed by 

subtracting the contractual cash flows on the risk-free 

1. Fair-value approximates what a private guarantor would charge 

for an obligation with similar risk and expected returns. An alternative method for valuing loan guarantees is to use an optionspricing approach. See Congressional Budget Office, Estimating the 

Value of Subsidies for Federal Loans and Loan Guarantees (August 

2004).
30 FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

CBO

loan from the expected cash flows on the risky loan in 

Figure C-3, and compare Figure C-5 with Figure C-4.) 

Because the federal guarantee produces net cash flows that 

are identical to those produced when the government 

makes a loan directly and borrows the promised cash flows 

at a risk-free rate, the guarantee can be valued by finding 

the difference between the value of the risk-free borrowing 

and the risky loan. On either a fair-value or FCRA basis, 

the value of the risk-free loan is the same; both values are 

found by discounting the promised cash flows at the corresponding Treasury rate. The value of the risky loan is 

generally lower on a fair-value basis than on a FCRA basis 

because the expected cash flows are discounted at the Treasury rate plus a risk premium instead of just the Treasury 

rate. Therefore, the fair-value estimate of the loan guarantee is greater than the FCRA estimate of that guarantee. 
APPENDIX C FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS 31

CBO

Figure C-1.

A Typical Pattern of Contractual Payments on a Risky Loan for a

Nuclear Construction Project

(Millions of dollars)

Source: Congressional Budget Office.

Note: * = Initial principal outlay of $100 million.

Figure C-2.

An Example of the Cash Flows to a Lender on a Risky Loan for a 

Nuclear Construction Project, with Default in the 11th Year

(Millions of dollars)

Source: Congressional Budget Office.

Notes: This figure assumes a recovery rate of 60 percent.

* = Initial principal outlay of $100 million.

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

0

1

2

3

4

5

6

7

8

Loan Year

*

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

0

10

20

30

40

50

60

Loan Year

*
32 FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS

CBO

Figure C-3.

Expected Cash Flows and Contractual Cash Flows to a Lender on a

Risky Loan for a Nuclear Construction Project

(Millions of dollars)

Source: Congressional Budget Office.

Notes: The expected cash flows to a lender equal the contractual cash flows to the lender minus the average defaulted amount (net of 

recoveries) in each year.

* = Initial principal outlay of $100 million.

Figure C-4.

Expected Cash Flows from Guaranteeing a Risky Loan for a 

Nuclear Construction Project 

(Dollars)

Source: Congressional Budget Office.

Note: The expected cash flows on a loan guarantee equal the average defaulted amount (net of recoveries) in each year.

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

0

1

2

3

4

5

6

7

8

Expected Cash Flows

Contractual Cash Flows

Loan Year

*

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

-400,000

-300,000

-200,000

-100,000

0

100,000

Loan Year
APPENDIX C FEDERAL LOAN GUARANTEES FOR THE CONSTRUCTION OF NUCLEAR POWER PLANTS 33

CBO

Figure C-5.

Differences Between Expected Cash Flows and Contractual Cash Flows from a 

Risky Loan for a Nuclear Construction Project

(Dollars)

Source: Congressional Budget Office.

Notes: The expected cash flows to a lender equal the contractual cash flows to the lender minus the average defaulted amount (net of 

recoveries) in each year.

The difference between the expected and contractual cash flows is identical to the expected cash flows on a loan guarantee

(compare this figure with Figure C-4).

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

-400,000

-300,000

-200,000

-100,000

0

100,000

Loan Year