South Carolina’s Impending $19 Billion ‘Robbery’?
“Some will rob you with a six-gun, and some with a fountain pen.” Woody Guthrie
Full disclosure: I have nothing against the state’s utilities. Back in the 1980s and 90s when I was Director of the Palmetto Project, two of our board members were Virgil C. Summer, retired Chair of the Board of SCANNA (the parent company of SCE&G) and Al Ballard, head of the Electric Co-ops of South Carolina, the retail distributors of Santee Cooper’s power. Virgil was the founding Chairman on the Palmetto Project. Both of these men exemplified the highest values of corporate integrity, accountability and putting the people of our state first. A more recent full disclosure is that in the last few years I have solicited, without success, financial support from both SCE&G and Santee Cooper for non-profit projects.
In 2008, South Carolina Electric and Gas and Santee Cooper applied to the U.S. Nuclear Regulatory Commission for a permit to build and operate two nuclear power reactors in Jenkinsville, 20 miles northwest of Columbia. The facilities were to be built next to the existing Virgil C. Summer Nuclear Generating Station that has successfully been in operation since 1984.
The power companies also received permission from the S.C. Public Service Commission to raise their rates by $1.2 billion (2.5%) during the construction period to partially finance capital cost. The two facilities were to go on line in 2016 and 2019 and the original combined cost for both was $11 billion with SCE&G’s share at 55% and Santee Cooper at 45%.
Since then, things have gone from bad to worse to disastrous.
Today, both projects are still unfinished. They are not even close – 33 % competed. A Morgan Stanley analysis in March projected that the cost of completing the project could be $22.9 billion, if the project is competed at all. This $22.9 billion is double the original cost. By comparison, the entire budget for the state of South Carolina for this year is about $7.5 billion.
At the root of this tangle of financial issues is an insidious little legal provision called the “base load rate.” In 2007, the power companies got the legislature to pass a law that said the rate payers will have to pay in advance for the construction cost of new power plants – plus the power companies would be guaranteed a profit of 10.25%.
Think about this for a minute, the power companies are able to bill us in advance for their projects – and virtually no matter what the cost over runs or how bad the management screws up, they are guaranteed a 10.25% profit.
How did this happen? See Woody Guthrie’s fountain pen above – abetted by the power companies’ campaign contributions to state politicians, high paid lobbyist, ‘retainer fees’ to lawyer legislators, etc.
To make things even worse, the two companies responsible for the construction and financing are in deep, deep financial distress. Westinghouse, who is building the two reactors, has already gone bankrupt and their parent company, Toshiba, will probably declare bankruptcy soon. Plus, the federal tax credit that the utilities got from Congress that they say is vital to finishing the project, is due to expire soon – thus costing billions more.
No one knows what will happen next. Perhaps they will continue with building both units. Perhaps they will abandon one unit and built the other. Or, perhaps they will abandon both units and essentially walk away from the whole thing.
To add insult to injury, SCE&G officials have said that if they do walk away from these nuclear debacles, they will still get their 10.25% profit and they will have to build another power plant, most likely a natural gas plant, to meet the projected energy needs of the state that the nuclear plants were supposed to cover.
And, rate payers will have to again pay for this plant in advance through rate increases and SCE&G will still be paid their 10.25% guaranteed profit. (Again, see Woody’s fountain pen.)
One way or the other, someone is going to lose billions of dollars – the only question is who.
In trying to understand this huge mess, I turned to several experts who have been involved with this project since its inception. Their analysis is both shocking and blunt.
One expert said “… the big investment in nuclear is projected to account for 45% of SCE&G’s profit… We have a (state) regulatory system that incentivizes massive capital investment, even if other ‘soft path’ strategies are cheaper. Taking a huge risk with the ratepayer’s money is very financially rewarding and if the investment goes south (either big cost overruns or abandonment), the Base Load Review Act says the rate payers will pay anyway. Santee Cooper provides a further cushion/enticement for SCE&G to bet the farm because the state agency will shoulder 45% of the risk.”
In both 2016 and 2017, Santee Copper increased its rates by 3.7% and SCE&G has had nine rate increases of nearly 20% since 2009. Today the average residential bill is $147.53 per month with about 20% going to pay for the cost of the new nuclear facilities. (This is already one of the highest average utility bills in the country.)
But, this is just the beginning. As another energy expert said, “The power sales to pay off this (construction) debt are planned to be entirely on the backs of S.C. ratepayers… Somehow, some way, SCE&G and Santee Cooper plan for the people of South Carolina to pay $14+ billion and rising, or something like $2,333 for every man, woman and child. If you are a family of four, that is $9,000.”
Another South Carolina energy analyst explained: “This is the second monumental mistake Santee Cooper has made in the past five years. The first was wasting $200 million on construction parts for the ill-fated coal plant at Kingsburg, near Pamplico, before receiving permits, and then having their primary customer pull out. This was on top of the foolish arrogance of being the last utility in America to propose building a new coal fired power plant.”
“The board and management (of Santee Cooper) are clearly over their heads and in need of adult supervision. Yet their status as a public agency shields them from the financial and political consequences of these types of mistakes. In this respect, they exhibit all of the drawbacks of a government run entity, but offer none of the public benefits. The solution is to sell Santee Cooper to a private buyer.”
“SCANA may still be able to pull the wagon out of the ditch on the nuclear plant, but that should not be done at the expense of advancing energy efficiency and renewal power production, which constitute the energy future of the state and the nation.”
“All of this calls for more accountability as energy technologies and markets evolve with lightning speed. We can’t afford to be caught behind the curve again in this arena.”
In the months and years to come, this huge mess will grow bigger and bigger as the issues of who is going to pay for this mess will be fought out in the courts, the legislature, with the rate payers and the public.
The irony is that those most responsible for the mess will most certainly suffer the least – senior management and the boards of SCE&G and Santee Cooper. And, those that have absolutely no responsibility for the mess will certainly suffer the most – the utilities’ rate payers and the taxpayers.
For those whose primary concern is the first group and those of us whose primary concern is the second – this could well be all out war.
The question for the state’s politicians, business community, media and citizens is simple. As Woody Guthrie asked in another song, “Which side are you on?”