The $4 billion question

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When South Carolina’s two big, homegrown electric utilities abruptly abandoned work on their over-budget, overdue nuclear construction project in the summer of 2017, the prospects looked particularly grim for the 2 million South Carolinians who get their power from state-owned Santee Cooper.

South Carolina Electric & Gas (SCE&G) parent SCANA Corp. had shareholders who could be forced to cover that utility’s $4.9 billion debt for the most spectacular business failure in S.C. history. Or, as it turned out, an out-of-state company could buy the utility, leaving SCE&G customers responsible for another $2.3 billion, but not the many, many billions more SCANA had hoped to charge them.

But Santee Cooper doesn’t have stockholders. And at the time, the idea of selling it to a private company that could improve efficiency enough to absorb all that debt seemed too far-fetched to even take seriously.

So it looked as though Santee Cooper’s $4 billion nuclear debt would be borne entirely by ratepayers. Throw in interest and an administrative add-on that Santee Cooper charges, spread the debt over 40 years, and the total for the 800,000 electric co-op accounts—that’s 1.5 million people—comes to $6.5 billion, or $4,200 per residential ratepayer. (SCE&G residential ratepayers, by comparison, face about $1,600 more in nuclear debt.)

Things still could turn out that way. But 17 months later, co-op leaders have worked to turn what at first seemed like a certainty into a long shot. In fact, it’s quite possible that their members will end up better off than SCE&G ratepayers. Here’s why:

  • The General Assembly spent much of 2018 working to slash SCE&G ratepayers’ costs. Now it’s time to get at least as good a deal for co-op members and the half-million others who get their power from Santee Cooper. The sale of some or all of Santee Cooper, which a special committee is exploring, is the only real option on the table.
  • A judge is ready to hear the co-ops’ claim that they don’t owe Santee Cooper another penny—and that they instead are owed $600 million that Santee Cooper collected from the Toshiba Corp. for failing to deliver on construction promises. In November, the judge rejected Santee Cooper’s request to have the case thrown out of court.
  • Central Electric Power Cooperative, which purchases energy for the state’s 20 distribution co-ops, has a contract with Santee Cooper that gives it negotiating power to limit how much a new owner of Santee Cooper could recoup from ratepayers.

Of course, nothing is certain. Central’s contract won’t provide any additional relief if Santee Cooper isn’t sold, and there’s no guarantee it will be. Depending on what’s for sale, its debt might exceed its value. The courts could rule in favor of Santee Cooper. The Legislature could decide to do nothing. Or the Legislature could make a decision that leaves co-op members better off than they would be without legislative action—but not as well off as might have been possible—and still paying a lot of money for reactors that will never produce any energy.

‘The work will teach you how to do it’

Michael N. Couick, president and chief executive officer of the state association of electric cooperatives, likes to quote an Estonian proverb to describe the co-ops’ approach: “The work will teach you how to do it.”

This obvious yet insightful guide for solving complex problems—gather all the relevant information and use that information to make your decisions—explains why the co-ops don’t have a specific, detailed blueprint for how this should end.

What they have instead is a set of guiding principles. Chief among them: The status quo at Santee Cooper is unacceptable, and co-op members deserve the best price that can be obtained for power, whether that’s through a transformed Santee Cooper or another party purchasing part or all of it.

It would seem that the best-case scenario for co-op members would be for the courts to rule that Santee Cooper has no right to charge customers for any of its nuclear debt. But even Central Electric’s general counsel John Tiencken (himself a retired president of Santee Cooper) acknowledges that this is an extreme outcome because it would plunge Santee Cooper into bankruptcy and force it to default on its bonds.

That wouldn’t be the end of the world: No one’s power supply would be interrupted, utility workers probably wouldn’t lose their jobs, and large investment companies and other bondholders would absorb a lot of the cost that otherwise would be paid by co-op members. But it would be messy and could make some companies antsy about moving to South Carolina. And it runs the risk of angering legislators, who have the power to determine the future not only of Santee Cooper but also of the co-ops themselves.

What would be better, Couick says, is for the Legislature, the co-ops, Santee Cooper, the bondholders and plaintiffs’ attorneys to work out an agreement on how to allocate the nuclear debt, and then for the Legislature to decide what to do with Santee Cooper. This still might involve a voluntary bankruptcy, but it would allow a more orderly, planned transition from the indebted Santee Cooper to its public, private or public-private successor.

This idea of all the parties cooperating to create a win-win-win solution is in keeping with the nature of cooperatives: organizations formed to work together, to cooperate. It’s also a pragmatic approach given the Legislature’s power to change all the rules under which co-ops operate.

How we got here

Before we talk about what that planned transition might look like, we need to understand how we got to the point where the co-op’s residential members face bills of $4,200 each for a project that will never benefit them.

Santee Cooper and the electric cooperatives were created in the 1930s and 1940s to provide electricity for rural areas that commercial utilities didn’t want to serve. In 1950, the cooperatives decided to purchase their electricity from Santee Cooper, and this partnership worked well for decades.

Then in 2009, Santee Cooper joined with SCANA to build two new nuclear reactors at the V.C. Summer station in Fairfield County, where they jointly owned a 1970s-era reactor.

Co-op leaders complained that Santee Cooper’s 45-percent share of the project would give the utility far more generation capacity than it needed—and needlessly drive up their costs since they are contractually obliged to pay 70 percent of Santee Cooper’s construction costs. They urged Santee Cooper to sell part of its ownership. But they were rebuffed.

So it might seem strange that, in 2013, Central agreed to extend its contract with Santee Cooper from 2030 to 2058. But as Couick explains, “If you don’t have a choice about them building nuclear, and they’re saying you have a choice between a 10-year mortgage or a 40-year mortgage, it’s an easy decision.”

And, it might turn out, a smart one. The renegotiated contract also allowed the co-ops to opt out of any future building plans and to opt out of the entire contract if Santee Cooper were ever sold.

At some point, the nuclear construction project went horribly out of control, but Santee Cooper and SCANA kept spending money on reactors that will never be completed. Finally, on July 31, 2017, the utilities abandoned the project.

SCE&G said it would charge its ratepayers for its $4.9 billion debt, plus interest, plus a profit of 10.25 percent.

Santee Cooper put a temporary halt to new rate increases for retail customers, but it continued to charge Central Electric 70 percent of the debt, plus interest, plus its own 9-percent add-on, which may increase to 10 percent.

Within weeks, plaintiffs’ lawyers filed suit against SCANA, SCE&G and Santee Cooper, and before year’s end, Virginia-based Dominion Energy offered to buy SCANA and reduce the nuclear surcharge. Legislators, regulators, the governor, the attorney general, environmental groups and some business groups demanded better, and through legislation and a highly contested case before the state Public Service Commission, they got a better deal at the end of 2018: SCE&G ratepayers have to swallow the $2 billion they’ve already paid for the abandoned reactors, but instead of paying an average of $27 per month for the next 60 years to pay off nuclear debt, they’ll pay around $5 a month for 20 years.

SCANA was the easy problem to solve. Santee Cooper is more complicated, because there are no stockholders to help pay off the debt, it doesn’t have a regulatory overseer to control its rates, and in 2005, the Legislature —fearful that the governor might try to sell the utility—gave itself the power to decide whether and under what circumstances that could happen.

The sum of the parts vs. the whole

Santee Cooper owns all parts of the energy supply chain: generation, transmission and distribution to its retail customers. Your local co-op, by comparison, handles only distribution. It buys its electricity from Central Electric (a transmission cooperative), which purchases a quarter of its energy from Duke Energy but most of it from Santee Cooper, under that contract that runs through 2058.

Santee Cooper owns some natural gas plants and part of the existing nuclear reactor at V.C. Summer, but nearly half of its power comes from coal plants. It’s unlikely that other utilities would be willing to pay much for any of that generation capacity. Instead, what’s attractive is Santee Cooper’s right to sell power directly to 180,000 residential and business customers in Horry, Georgetown and Berkeley counties—and its contract to sell power to Central. That contract is estimated to be worth $52 billion over the next 40 years, but only if the new owner can convince Central not to opt out.

And this, at last, brings us back to that planned transition idea.

Central has sketched out a three-part concept: Central could buy Santee Cooper’s transmission system. Berkeley, Horry and Santee electric cooperatives could buy the distribution system to serve those 180,000 customers in Berkeley, Horry and Georgetown counties, and Santee Cooper’s generation system could be either sold to, or managed by, a third party under contract with the state.

The state association of electric cooperatives and individual distribution co-ops haven’t endorsed that plan, but a similar arrangement could work regardless of who bought Santee Cooper’s transmission and distribution systems. In fact, Couick told legislators  that they should reject a purchase bid by the co-ops if someone else makes an offer that can produce better rates over the long term.

The key to both scenarios is that Santee Cooper would be sold in parts rather than as a whole. Lawmakers have asked companies to submit non-binding bids to purchase or run either part or all of Santee Cooper, to help them decide whether it’s worth trying to sell. But the bids to purchase just part of the utility are being evaluated in less detail than the bids to purchase the whole thing, and this has the potential of making the bids to buy the whole thing look more reliable to legislators. The risk with this approach is that it could discourage companies (and proposals) that might be better for ratepayers.

It also could artificially lower the price companies are willing to pay in two ways.

The first involves that lawsuit that claims Santee Cooper doesn’t have the right to charge anything for the nuclear debt. At this point, all we can say for sure is that Circuit Judge John Hayes ruled in November that Santee Cooper did not meet the extraordinarily high bar to have it thrown out of court without a trial. But it’s worth noting that his order seemed to reject Santee Cooper’s central legal arguments: that state law lets it charge whatever rates it needs to pay its bills, and that Central is contractually bound to pay 70 percent of the cost of the construction project, no matter what Santee Cooper might have done wrong.

What does this have to do with the best way to consider selling Santee Cooper? Well, until the lawsuit is resolved, someone trying to buy all of Santee Cooper would have to consider the fact that if the co-ops win the case, Santee Cooper would be responsible for that $4 billion nuclear debt, but it wouldn’t be allowed to recover that money from ratepayers.

On the other hand, someone who bought only the transmission or distribution system wouldn’t be responsible for any of that. Now, it’s true that what remained of Santee Cooper would still be responsible for those debts, but proceeds from the purchase of the transmission and distribution components could be used to offset the obligation. Someone buying just the transmission and distribution systems wouldn’t have to worry about the risk of losing the lawsuit and being saddled with all that debt—and therefore might be willing to pay more.

Remember, there’s a second reason that selling Santee Cooper as a whole could artificially lower the purchase price: Doing so would instantly add $1 billion to its debts, which likely would reduce the amount of money the state would receive by … $1 billion. Here’s why:

Santee Cooper’s $4 billion nuclear debt—as well as $4 billion in non-nuclear debt—was financed by selling government bonds, which only governmental entities can do. If the state sells all of Santee Cooper, the buyer will have to pay off all $8 billion worth of government bonds early and replace them with $8 billion worth of private bonds. Not only would it have to pay higher rates on those new private bonds, but it also would have to pay a $1 billion defeasance, or cancellation, penalty to the bondholders.

But nearly all of those bonds are tied to electricity generation, so most of them wouldn’t have to be called in, and the bulk of the penalty wouldn’t have to be paid—if the state kept the generation capacity (and its debts) and just sold Santee Cooper’s transmission and distribution components. Santee Cooper would still be responsible for all the debt, but the money from the sale of the other assets could be used to pay down the obligation.

This is why the co-ops want the Legislature to use a process that evaluates all bids the same way, whether they are to buy all or just parts of Santee Cooper. Or, if it won’t do that, at least to require bidders to explain how they would handle the defeasance penalty, and the potential of losing the lawsuit, and a long list of other considerations.

The details make the difference

The specific actions the co-ops want from the Legislature are simple enough: The General Assembly should test the market to find the best way to reduce the nuclear debt, whether that means selling all or part of Santee Cooper or restructuring the utility. And no option should be eliminated before it’s fully vetted.

But what looks simple outside the State House can be extremely controversial inside. One of the deepest philosophical divisions in the Legislature is over the idea of privatization, or allowing the private sector to take over what are currently government duties. Some see this as essential to making government more efficient, while others are just as certain that it will destroy the quality of services the government provides. And selling Santee Cooper would be by far our state’s biggest effort at privatization.

There’s a danger that privatization advocates could be so determined to complete a sale that they ignore the details—and they end up with an ideological victory, but Santee Cooper customers end up paying more for electricity than they would have otherwise.

An equal danger is that opponents could block any effort to sell all or part of Santee Cooper, no matter what the benefits might be to the people who pay the power bills.

What we need, Couick and other co-op leaders argue, is to set aside our individual beliefs about privatization (and anything else) and let the work show us the way. To gather the facts, and then let our decisions be guided by those facts. Specifically, how would a buyer pay off the $4 billion nuclear debt without raising rates by $4 billion? Or more?

Note that the question isn’t how much money a buyer is willing to pay the state; logically, the more it pays, the more it will insist on charging in rates. The question is how that buyer will make the payment without raising rates, or how much it will raise rates in order to cover its investment. Not just in the first year, or the first 10 years, but for decades to come.

And how, precisely, will it get to those numbers?

Is the utility big enough that it can create efficiencies of scale large enough to make a difference? Does it have enough modern power plants that it can shutter old coal plants yet still meet peak electricity demand when needed? Are its power plants spread out far enough east to west, or north to south, that it can sell S.C. customers power generated in another state during the part of the day when that’s cheaper than power generated in South Carolina, and vice versa? Will it consider participating in a regional transmission arrangement with other utilities, where the power that’s provided to customers at any given time of the day comes from the company that’s producing it at the lowest cost? Will it treat efficiency as a meaningful alternative to building new power plants, an option that can indirectly cut costs by helping customers use less power?

Electric cooperatives have been investing for years in programs to help members alter their energy consumption: large-capacity water heaters that store heat and turn off during peak demand, and weatherization programs that save members enough on their utility bills to offset the cost of the improvements. Programs like that could be turbocharged if the next Santee Cooper is willing to focus less on building new energy generation.

Central’s option to sign or not sign a contract with a potential purchaser—a decision that will turn on the rates Santee Cooper’s new owner is willing to guarantee—gives it a great deal of leverage to protect co-op members from too-high rates. But the fact that it can reject a deal it doesn’t like doesn’t necessarily mean it can get the partner it wants. Couick’s idea of the best path forward is with a utility that’s committed to innovation and a consumer-focused energy future.

“We don’t want a purchaser who’s just going to trade one generation source for another, bringing along the new debt that would accompany that,” he says. “What we want is someone who understands that putting the customers first is going to be essential in the evolving energy world. Someone who’s willing to embrace the future, rather than fighting against it.”

If that happens, the co-ops could end up with an energy supplier that’s truly a partner in their mission: to provide reliable electricity at the most affordable cost possible. And many co-op members could find themselves paying lower power bills—even if their rates are elevated by part of the nuclear costs—because those partners would have made it easier for them to use less power.

Cindi Ross Scoppe, a former associate editor of The State newspaper, has written extensively about the collapse of the V.C. Summer nuclear construction project.

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