the price of new nuclear power has "escalated dramatically,"

TO BE NOTED: From SA:

"Will the Nuclear Power "Renaissance" Ever Reach Critical Mass?
Despite an abundance of plans and applications, new nuclear reactors outside of Asia are few and far between, which puts nuclear's contribution to fighting greenhouse gas emissions at risk

NEW NUCLEAR: An MIT report cautions that nuclear power has not yet been effectively employed to cut back on greenhouse gas emissions--and time is running out.
© ISTOCKPHOTO.COM / HANS F. MEIER

This month, Finland's Olkiluoto 3 nuclear reactor was supposed to begin generating power, a tangible sign of the revival of the nuclear industry outside of Asia after nearly 30 years of no new construction because of accidents, cost-overruns and other issues. Instead, the reactor won't be completed for more than three more years, its price is nearly 60 percent more than anticipated, and it is mired in costly legal squabbles between the builder, Areva, and the Finnish utility, Pohjolan Voima.

In the U.S., since 2003, 17 applications for 26 new reactors have been filed with the U.S. Nuclear Regulatory Commission, but not one is yet under construction.

Despite dozens of new nuclear plants ordered or built in Asia in recent years, "increased deployment of nuclear power has been slow both in the United States and globally," wrote the authors of a new Massachusetts Institute of Technology review of the state of nuclear power.

Those figures, say the authors of the report, an update on a similar report in 2003, mean that "even if all the announced plans for new nuclear power plant construction are realized, the total will be well behind that needed for reaching a thousand gigawatts of new capacity worldwide by 2050."

One thousand gigawatts is the number the M.I.T. professors estimated would be needed to ensure that nuclear power provided 20 percent of global electricity needs as well as cut emissions of greenhouse gases from power plants. In the U.S., the number would be jumping from 100 to 300 gigawatts of nuclear-sourced electricity by 2050.

After all, once operating, nuclear power plants burn nothing and therefore emit no carbon dioxide as fossil fuel–burning power plants do. (There are, of course, significant greenhouse gas emissions associated with building and fueling nuclear facilities).

But the price of new nuclear power has "escalated dramatically," according to the report, jumping by 15 percent a year to reach as much as $4,000 per kilowatt compared with $2,300 for coal-fired generation and just $850 for natural gas. And the industry is asking for at least $100 billion in federal tax subsidies and loan guarantees for the 26 reactors currently planned.

The situation is no better in Europe, according to Steven Thomas, a professor of energy studies at the University of Greenwich in London: Finland cannot complete its new reactor; the U.K. has yet to get started on any projects; and a new nuclear reactor in France, after 18 months of construction, is 20 percent overbudget and requires complete subsidy by the French government.

"The nuclear power industry in Europe is in the midst of the same kind of regulatory and financial uncertainty that makes the future of the industry murky at best in this country," Thomas said during a conference call with reporters. "We've been waiting for the renaissance for 10 years."

Nor has there been a solution to the issue of nuclear waste. In the U.S., the plan to use Yucca Mountain in the Nevada desert as a repository for spent nuclear fuel rods is in limbo, opposed by the Obama administration. Reprocessing nuclear fuel, currently underway only in France, has proved prohibitively expensive, and it raises concerns about the proliferation of plutonium for nuclear weapons.

"We do not believe a convincing case can be made on the basis of waste management considerations that the benefits of partitioning and transmutation [conversion of fuel into less radioactive form] will outweigh the attendant safety, environmental [and] security considerations, and economic costs," wrote the researchers, who included President Obama's now science advisor John Holdren, in 2003.

The update? "There is no basis to change that conclusion today," the professors, not including Holdren, wrote in the new report.

Ultimately, the M.I.T. authors warned, "if more is not done, nuclear power will diminish as a practical and timely option for deployment at a scale that would constitute a material contribution to climate change risk mitigation."

Adds Thomas: "It seems to me highly unlikely that [investing in nuclear power] is the most cost-effective way to reduce greenhouse gas emissions. Put that money in other sources, such as energy efficiency and renewables, and get a much better return on your money."

Rather than taking over and running banks, the FDIC should split each bank into two parts.

TO BE NOTED: From the WSJ:

"Banks Need Fewer Carrots and More Sticks

Insolvent institutions should be taken over by the FDIC.

By R. GLENN HUBBARD , HAL SCOTT and LUIGI ZINGALES

The results of bank stress tests -- expected tomorrow -- will no doubt prompt calls for further government guarantees and capital injections. But continuing to prop up the banks with government cash is a mistake. There is a better approach.

Getty Images

A well-capitalized banking sector is a necessary ingredient for effective intermediation and economic recovery. But today's system is not well-capitalized. How can we move in the right direction?

In a market economy, the government can create the right incentives by using a combination of carrots and sticks. Thus far, the government has only used carrots with the banks. One major carrot is the Troubled Asset Relief Program (TARP). The initial infusions were very generous -- the Treasury got back securities worth $78 billion less than the $254 billion it invested -- as the Congressional Oversight Panel pointed out recently. In addition, the FDIC's guarantee of short-term debt was worth $100 billion just for the original nine TARP-participating banks. And the mortgage-related asset guarantees offered to Citibank and Bank of America were worth tens of billions of dollars more.

A new round of expensive TARP injections -- by converting the government's preferred stock into equity -- may follow the release of the stress-test results. In addition, the Treasury's Public-Private Investment Program (PPIP) plans to subsidize the purchase of banks' "toxic assets" by hedge funds and other investors. We estimate that the government will spend $2 for every $1 the private sector will put in. Yet even with this large subsidy, PPIP's chance for success is low because of the substantial gulf between the bid and ask prices on the toxic assets, and the reluctance of investors to partner with the government.

Not only is the carrot approach not jump-starting lending, it is also angering the American people. It's hard to justify to taxpayers that we need to reward the same group of people who, rightly or wrongly, are perceived as responsible for the current situation.

It's time for government to use the stick, beginning with creditors. The first step should be an announcement that the FDIC guarantees of short-term debt, set to expire at the end of October, will not be renewed. Insolvent banks -- defined not by stress tests, but as those that cannot fund themselves in the private market -- will be taken over by the FDIC. Of course, this takeover plan must be clear and credible. Otherwise creditors will play "chicken" with the government, knowing that at the last minute the government will flinch and fail to remove the guarantees.

Despite the clarity of such an approach, the market might be skeptical for several reasons. First of all, the FDIC lacks the staff to oversee, let alone run, several large and complex banks which may become insolvent. Second, the FDIC's main approach so far, as with Washington Mutual and IndyMac, has been to restructure the banks for acquisition. The trouble with this plan is that it is unclear who will buy the largest banks in the near future. Finally, it is politically unappealing to have a government institution run a significant fraction of our banking sector. Waiving the specter of nationalization, the creditors may try to force the government to bail them out.

We believe these problems can largely be avoided by adopting a simple approach. Rather than taking over and running banks, the FDIC should split each bank into two parts. One part ("the bad bank") will assume all the residential and commercial real-estate loans and securitized mortgages as assets, and all the long-term debt as liabilities. In addition, "the bad bank" will obtain a loan from the "good bank." This loan is necessary because the long-term debt of the old bank is not likely to be sufficient to fund the assets of the bad bank. The good bank will have all the remaining assets, including derivative contracts and its loan to the bad bank. It will have all the insured deposits and the FDIC-guaranteed short-term debt as liabilities. Once the split is accomplished, the good bank can be cut loose from FDIC receivership.

On the one hand, this split separates the toxic assets, whose value is very uncertain, in an institution that has no insured or guaranteed liabilities and poses no systemic risk. The bad bank will be like a closed-end mutual fund and can be run as such. The good bank will be well-capitalized, and the value of its assets will be clear.

The losers in this reshuffling are the long-term debtholders who get stuck in the bad bank. For this reason, we propose that they be compensated by receiving all the equity of the good bank. The old shareholders will get the equity in the bad bank. (In any restructuring, bondholders should do better than equity.) And the FDIC minimizes its risk because it guarantees the deposits in the good bank.

In fact, long-term debtholders who have debt claims against the bad bank and equity claims against the good bank will be better off under this plan than if the bank were liquidated or continued to operate as one bank. If the bank were liquidated, bondholders would stand to lose almost all their investment. If the bank continues to operate with government subsidies, the benefit of the subsidies are shared by both debt and equity. Under our plan, the debtholders will get all of the equity in the "good bank" and therefore all the upside of its future performance.

One of the major objections to letting banks fail is the argument that they are not really insolvent; they are just facing a temporary dislocation in the marketplace. But if this observation were true, the bad bank would surge in value, and the old shareholders of the banks, who received the shares in the bad bank, would gain. If it is false, the bad bank would default and the old shareholders would receive nothing (as they should).

In order for this plan to work, legislation would need to take effect before the withdrawal of the FDIC guarantee in October, so that FDIC procedures for handling failed banks can be applied to bank-holding companies. FDIC Chairman Sheila Bair has called for such legislation. Most importantly, this plan won't impose any new cost on the taxpayer.

Bold stress tests and government intervention reflect President Obama's use of Franklin Delano Roosevelt as a model in dealing with the current crisis. But he got the wrong Roosevelt. He should instead follow the motto of Theodore Roosevelt: Speak softly and carry a big stick.

Mr. Hubbard, dean and professor of finance and economics at Columbia Business School, was chairman of the Council of Economic Advisers under President George W. Bush. Mr. Scott is a professor of international financial systems at Harvard Law School. Mr. Zingales is professor of entrepreneurship and finance at the Chicago Booth School of Business."

Healthier banks have complained since Congress attached what the banks consider onerous restrictions to the bailout funds.

TO BE NOTED: From the NY Times:

"U.S. May Set a Debt Test for Banks

By ERIC DASH

The Treasury Department is planning to require banks seeking to free themselves from the government’s grip to show that they can survive without the taxpayer aid that has helped them through the financial crisis, senior government officials said Tuesday.

Banks have been enjoying an indirect subsidy adopted by the government last fall that allows them to issue debt cheaply with the backing of the Federal Deposit Insurance Corporation. The Treasury is expected to announce as early as Wednesday that healthier banks must show that they can issue debt without the guarantees before they are allowed to repay the money they accepted from the Troubled Asset Relief Program, or TARP.

The banks also must demonstrate that they will be able to sell stock to private investors and pass a government stress test to show that they are healthy enough to survive without the taxpayer aid.

The Obama administration plans to publicize the results of stress tests for the nation’s 19 largest banks on Thursday. The results are expected to reveal that a number of them need additional capital.

They are also expected to show that several banks — including Bank of New York Mellon, Goldman Sachs and JPMorgan Chase — are healthy enough to repay TARP funds.

Even before the conditions were formally announced, several banks were trying to raise money in the financial markets without relying on the F.D.I.C. backing.

Banks have grown eager to repay TARP money as quickly as possible, to rid themselves of compensation caps and other restrictions that they complain has hurt their competitiveness.

On Tuesday, Bank of New York Mellon announced it had raised $1.5 billion by selling debt not guaranteed by the F.D.I.C., in a move that positions it to repay the government.

The deal was oversubscribed by investors at a lower cost than previous sales, a sign that analysts said showed how credit was thawing for stronger banks.

JPMorgan Chase raised $3 billion of nonguaranteed debt in April, after a similar offering the month before.

Goldman Sachs sold $2 billion in nonguaranteed debt in late January, and took the additional step of raising $5 billion from private investors after it reported earnings last month.

Healthier banks have complained since Congress attached what the banks consider onerous restrictions to the bailout funds.

At a White House meeting with President Obama in late March, several banks asked the administration to lay out a plan for them to repay the money.

Mr. Obama said he understood their concerns, but did not want to undermine his effort to bolster lending.

The large banks were later told that they would have to wait for the results of the stress tests before they could repay TARP.

So far, only 11 small banks that did not undergo the stress tests have been permitted to repay the bailout money.

But they also must buy back warrants they issued to the Treasury to completely extricate themselves from the government. The warrants are a mechanism that ensure taxpayers will share in any upside for providing aid to the banks.

But banks have been tussling with Treasury over how much they should pay to repurchase the warrants from the government.

It is so difficult to find common ground that just one bank, Centra Financial of West Virginia, has bought back the securities.

That could pose an additional hurdle for bigger institutions like JPMorgan Chase or Goldman Sachs to fully untangle themselves from the government.

On Tuesday, Federal Reserve officials privately delivered the final stress test results to the banks after more than a week of intense negotiations.

Citigroup, Bank of America, Wells Fargo, PNC Financial and several other large regional lenders argued that they were much stronger than the regulators thought, hoping to avoid raising additional capital.

Citigroup, the largest and most deeply troubled of the banks, is expected to need $5 billion to $10 billion of additional capital, according to people briefed on the final results.

Citigroup executives say the bank can easily cover any shortfall, and is considering several options to close that gap.

Among them are efforts to accelerate the sales of several businesses within Citi Holdings, a holding tank for assets it plans to shed, or to expand its common stock conversion plans to a broader base of private investors who hold Citigroup preferred stock.

Both measures would avoid an increase in the government’s expected 36 percent ownership stake."