During testimony before the South Carolina legislature’s Public Service Authority Evaluation and Recommendation Committee this past summer and fall, a number of seemingly insurmountable hurdles to selling Santee Cooper were floated. In an attempt to sift through what we have heard and to separate fact from fiction (and real hurdles from stepping stones) we offer the following analysis. This understanding will be crucial as international utilities consulting firm ICF begins the process of vetting and scoring potential buyers.
Myth #1. If Santee Cooper goes private, it will cost the state a fortune in lost fees.
If Santee Cooper were to become a private company, the state would lose the fee that government-owned Santee Cooper pays annually. Yes, but this loss would be more than offset by the state income taxes that investor-owned utilities pay. Private industry taxes would almost certainly exceed Santee Cooper’s fees as a public agency that merely mimic taxes. The same is the case for local property taxes. As for the suggestion we heard that only a utility with government agency status has a unique requirement to “do good” for the state, the South Carolina Public Service Commission (PSC) would disagree. The PSC is a state agency that provides oversight to all utilities and requires that they “do good” for South Carolina. All utilities except Santee Cooper, which has its own politically-appointed board not accountable to anyone, must have their rates approved by the PSC.
- South Carolina utilities are monopoly. Unlike 14 states in the U.S. and a number of countries around the world, South Carolinians are not allowed a choice in electricity providers. Having their rates set by the PSC is the price that all utilities (except Santee Cooper) must pay in return for that monopoly status.
Myth #2. Santee Cooper is doing all it can to minimize its debt.
Santee Cooper has received approximately $900 million from a settlement with Toshiba/Westinghouse in connection with the nuclear debacle. Instead of using all those proceeds to repay debt associated with the V.C. Summer crash, Santee Cooper is using a significant portion of those funds to fund operations, and artificially keep rates down. This may seem fine now, but the funds will run out, and when they do, Santee’s customers will bear the brunt of higher rates and the repayment of the debt. (Note: Because Santee Cooper is a political agency, perhaps the efforts of its executives to pay on the principal have been hampered by anticipating what Columbia might expect them to do with the settlement funds they received from Toshiba/Westinghouse.)
- Settlement funds from the bankrupt V.C. Summer contractor should be used to pay off principal now, rather than used to keep rates artificially low. If not, more debt and higher rates will be bourne in the not-so-distant future, and be shifted from the current to the next generation of ratepayers.
Myth #3. To pay off the debt from V.C. Summer 2 & 3, rates will need to rise “only” 7%.
When Palmetto Promise Institute released its analysis in March 2018, saying that a minimum 10.32% rate increase would be required, then revised that figure to 12.03% based on new numbers, Santee Cooper reacted by telling The State than only a 7% increase would be required. We knew 7% was not accurate based on Santee Cooper’s own Annual Report (2017) where they reported that they were capitalizing interest rather than paying down debt. Now, based on their presentation to the Evaluation & Recommendation Commission, they report rates will increase from 7.38 cents per kWh in 2018 to 8.28 cents/kWh in 2024. Basic math tells us that is a 12.2% increase.
- To date, Santee Cooper has been adding interest due to the amount it borrowed (the principal) for V.C. Summer 2 & 3 rather than paying it, that is “capitalizing interest.”
- SCANA (SCE&G) has started paying down its nuclear debt already.
- Time will tell, but 12.2% will likely prove low (as consumer behavior responds to rising rates) and will not be enough to pay off the debt in full.
Myth #4. General myths about V.C. Summer 2 & 3.
There are a number of myths associated with V.C. Summer units 2&3. These include: that there were no other alternatives in 2007 to building a new set of nuclear reactors, that expenses for new transmission associated with V.C. Summer would have been a good investment anyway, and that calling V.C. Summer an asset (admittedly accurate by accounting standards) in any way reflects reality due to the inability to sell much more of V.C. Summer for scrap. Then there’s the full meaning of V.C. Summer debt being a liability. It is not just an accounting term. Someone must pay the debt and Santee Cooper has no investors to chip in, only ratepayers.
- A liability is a real cost to someone in the future. This returns to the idea mentioned earlier of burdening future ratepayers, some not yet born.
- A stranded asset is an asset that isn’t performing. It is inconceivable that the ending of V.C. Summer 2&3 on the power generation asset side left no transmission asset stranded as Santee Cooper seems to indicate.
Myth #5. Santee Cooper bond covenants can’t be tampered with and bond agreements represent a huge roadblock to a sale of the agency.
The State of South Carolina will have the ability to negotiate settlements with the bond trustee for Santee Cooper, BNY Mellon, should the utility be sold. There are legal complications to seeing that old debt is restructured or bonds defeased (converted or covered in other ways), but none of those are insurmountable. It would be a mistake to assert that a jittery BNY Mellon would oppose a sale of Santee Cooper solely due to current bond instruments in place. (By contrast, it seems like common sense that BNY Mellon would be receptive to any reasonable proposal that assures repayment of the bonds.)
Myth #6. A sale could force Santee Cooper to surrender its FERC (Federal Energy Regulatory Commission) license, and FERC would then require dams to be removed and lakes to be drained leaving state taxpayers on the hook to protect endangered fish.
This scenario, like that of bond covenants, sounds ominous. But it is not likely to happen. Here are three reasons why draining the lakes and leaving a huge fiscal hole isn’t a true hurdle. First, the hydro-generated electricity sold would be sufficient to cover the costs of the lakes. Second, a buyer could conceivably leave the lakes with the state to own and operate. Third, the state might insist on the continued operation of the lakes as a condition to the sale. Bottom line, this is not likely to be a problem and is an attempt to create false hurdles.
Myth #7. The Central Electric Power Cooperative can exit the Coordination Agreement and thereby shut down discussion of the sale of Santee Cooper.
Central has a contract with Santee Cooper that goes until 2058, and Central must honor this contract, unless Santee Cooper is sold. Because Central represents roughly 70% of Santee Cooper’s business, it is legally and logically apparent that any sale must be consented to by Central.
- Notably, Central has indicated that it is dissatisfied with Santee Cooper (a lawsuit is in progress) and does not want the status quo to continue. Central has also indicated that it could be willing to continue its purchase contract with a future owner/buyer, if the terms are appropriate.
Myth #8. Santee Cooper’s fuel and generation choices have been about as good as can be expected in a volatile market. A private (investor-owned utility or IOU) would have done the same.
This myth relates to the efficiency of Santee Cooper’s current generation, the fuel used to achieve it, the other options available, and fuel decision-making in general. Cross and Winyah, both of which use coal, may indeed be the best sources for generation in Santee’s current fleet, but that isn’t saying much. Each is aging and more expensive than other options. They wouldn’t have much of a future under a forward-looking ownership with a truly Integrated Resource Plan. Clearly, upgrades are needed. New or existing gas-fired generation could be accessed and existing plants could be converted to gas.
- SCE&G’s Columbia Energy Center is an example of a modern, efficient gas-fired plant. The purchase of that existing plant replaced 40% of SCANA’s nuclear capacity.
- Even nuclear V.C. Summer 1 made the Bloomberg analysis of money-losing plants.
Myth #9. Santee Cooper’s strategic planning process is sound.
It is apparent that unlike the typical investor-owned utility, Santee Cooper does not have a comprehensive strategic plan that anticipates future scenarios. It is our view that Santee Cooper isn’t preparing for the future by properly maintaining their asset base. This means that at first glance, they may look efficient, but in reality, they are setting themselves up for collapse in the future because they are not investing in capital expenditures like an investor-owned utility would. Their assets are older, more depreciated and with less useful life left. This makes them look satisfactory now, but they will decline soon if they don’t start investing in their infrastructure like their counterparts are doing. Compared to Duke and SCANA, Santee is under-investing.
Myth #10: Santee Cooper has made prudent and wise economic development decisions.
The V.C. Summer crisis appears not to be a just “one-off” in bad decision making at the agency. Santee Cooper entered into a contract that would sell American Gypsum the byproducts of the aging Winyah coal units. This synthetic gypsum is used to produce wallboard. The contract (through 2070) continues to be a challenge for Santee Cooper, which is currently not meeting delivery expectations. The American Gypsum agreement is typical of economic development by a government enterprise like Santee Cooper: well-intentioned, but not practical.