Minsky Visits South Carolina

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Who pays for excessive risk taking on nuclear power investments? You guessed it.

By Bill Tilles:

Last week, the principal investor-owned utility in South Carolina, South Carolina Electric & Gas and its corporate parent SCANA decided to end efforts to build a new nuclear power station called V.C.Summer. The Board of Directors of the utility’s partner, state-owned utility Santee Cooper, had bailed on the project first following revised cost estimates almost 100% above initial cost estimates and an in-service date seven or so years behind schedule.

The governor has recently made noises about putting Santee Cooper up for sale. The purpose of the sale in part is to find a partner willing to complete the now stalled Summer nuclear project. It’s kind of a conservative’s twofer: privatization and they get more nuclear power. I bring this up because nuclear projects are like zombies, they are almost impossible to kill.

But what interested me was the reaction of the stock market. SCANA’s share went up solidly in the face of what should have been interpreted as bad financial news.

The reason for investor glee last week is simple. Investors in the now cancelled project will get all their money back with interest thanks to the generosity of the South Carolina legislature and Governor. The Base Load Review Act of 2007 was passed as SCANA and Santee Cooper were beginning their new nuclear project.

Under the act, a significant departure from traditional utility ratemaking practice was embraced. Simply stated, the utility (and shareholders) now took almost zero risk in embarking upon large capital-intensive projects.

Traditional practice was and is more along the line of the expression, “If we build it (prudently), you (the consumer) will pay.” The basic idea is that the utility consumer was getting a substantial new “something” and that electric rates would have to be adjusted upwards to pay for it.

But the BLRA in effect said, even if the utility customers get no new “equipment,” they still have to pay via higher rates for investments that are cancelled. And the language of the act makes it difficult for the state’s public utility commission to deny the utility a return of its investment.




Investing is about risk vs reward in an uncertain world. The BLRA in South Carolina guarantees its utility a return on its cancelled nuclear investment. SCANA, its management and its shareholders incurred no financial risk for failing to provide customers with “new nuclear equipment” albeit at rather high cost. The legislature in effect said no matter how badly you screw up, raise prices to South Carolinians all you want. And they did. Nine times and 18% since 2008. And they’ll still need to build new power plants, probably natural gas fired, which will cost customers even more!

From a financial perspective, the BLRA is a get-out-of-jail-free card. And SCANA is playing it. And us.

The reason that SCANA, a not particularly large utility, was able to embark on what we now realize was a nuclear boondoggle, was that they and their investors would incur no risk in doing so. Whatever discipline the so called free market could impose was eliminated by the kindness of the legislature via the BLRA.

The noted economist Hyman Minsky warned about over-relying on the promise of stability. His point? Any entity, typically political, offering its business community too much stability, encourages excessive risk taking. And that’s what happened here. The legislature removed financial risk of new nuclear construction. SCANA’s management responded by embarking on a wildly ambitious, now cancelled nuclear project. And why not? They still have about 700,000 captive customers who’ll pay, like it or not. By Bill Tilles.

Billions in cost overruns. Years behind schedule. And the Westinghouse bankruptcy didn’t help. Read…  Nuclear’s Demise Continues: Another Huge Project Cancelled




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  43 comments for “Minsky Visits South Carolina

  1. Willy2
    Aug 13, 2017 at 7:02 pm

    – Another victim of the Westinghouse debacle ?

    • Willy2
      Aug 13, 2017 at 7:26 pm

      – Ooops. Westinghouse was supposed to build the plant.
      – Still wondering, why those cost overruns ? Can’t such a project not be properly estimated ? Changing demands & specifications ? Lack of experience ? Rising prices for building materials ?

      • fajensen
        Aug 14, 2017 at 4:02 am

        In my limited experience with large public procurements, there is a “Political Price” and an “Actual Price”.

        Sure, of course one can make a decent estimate. One and several other people will in facts spends months and months doing it. Then one presents one’s work, it is well received and everyone agrees that it is through and probably accurate …. and …. then the key decision maker behind the estimation will say something like: “This is very good work, but, I like number much better!” With number being the “Political Price” that is already decided and will later be approved when officially presented to the political decision making layer.

        This means that often it is a given that there will be a cost/scope overrun, because that was already decided when the dealmakers were setting the “Political Price” (This helps supports the neoliberal narrative that all of government is always useless and stupid and/or leave a convenient mess for the next government to handle, probably there are sound reasons ….)

        More than 100% is clearly over-egging it, but 20-40% is not unusual.

        Maybe the contractor decided that they didn’t like the contract in the end and decided to really lay it on when pulling the scope in that was previously removed to get at the “Political Price”? To get it cancelled.

      • BTilles
        Aug 14, 2017 at 6:30 am

        Hi Willy2,
        You’re asking a great question. Why can’t companies like Westinghouse design and build a nuclear power station at anything close to on time, on budget. The brief answer is some nations (South Korea and France) have been able to do this with particular reactor designs, improved over and over in successive construction sites. But the AP1000 reactors under discussion here had never been built before. First builds can be likened to bespoke tailoring. It ain’t cheap.
        BT

      • Willy2
        Aug 14, 2017 at 9:11 am

        – This article also says that Westinghouse’s partners delivered “poor quality” work.

        https://www.reuters.com/article/us-toshiba-accounting-westinghouse-scana-idUSKBN1AC3DN

        • BTilles
          Aug 14, 2017 at 9:27 am

          I saw the article. Poor quality work is pretty vague. It could mean poorly designed equipment that had to be returned and caused delays. Or, it could mean things like important welding operations not being up to design spec and thus having to redone at considerable expense.

  2. JK (the other John)
    Aug 13, 2017 at 8:25 pm

    Oh, thank you. I was considering taking a job in S. Carolina but now it is off the table. Let the poor taxpayers there suffer the consequences of their poor voting decisions.

    • John
      Aug 13, 2017 at 9:10 pm

      Are you saying they should stay home on election day? Because there hardly ever is a good choice to be made, when its one liar vs the other liar. They all say what they think you want to hear, and then they all work for someone other than their constituents. No different wherever you land for a job.

      • Fftg
        Aug 13, 2017 at 9:42 pm

        That there are no choices, IS a voting decision. The public is not trapped in ANYTHING, or beholden, or fooled or anything else. People never want to accept that the people are bad, because where does that leave us?

        But in fact the people are bad. So where does that leave us? Wake up. Face the fact. Deal with it. Don’t ward off the conclusion and pretend there is a convenient out. There is no convenient out.

  3. Suzie Alcatrez
    Aug 13, 2017 at 8:43 pm

    The Comanche Peak nuclear plant in Glen Rose Texas was estimated to take five years to build and cost $779 million. It took 15 years and $9.1 billion.

    I am still paying for that extra $8.5 billion in my electric bill.

    • BTilles
      Aug 14, 2017 at 7:23 am

      If Commanche Peak were a river we’d say it sits at the confluence of three “ugly” (from a financial perspective) tributaries: an inexperienced builder (Brown and Root), Three Mile Island, and Runaway Inflation. Not a pretty place.

      • Thunderstruck
        Aug 14, 2017 at 11:33 am

        “If Commanche Peak were a river we’d say it sits at the confluence of three “ugly” (from a financial perspective) tributaries:”

        It’s funny you should put it that way. The area is locally known as Tres Rios (Three Rivers) due to the confluence of the Paluxy River, Brazos River and Squaw Creek (which feeds the reservoir used for cooling said power plant).

    • Petunia
      Aug 14, 2017 at 8:47 am

      Stupid question of the week:

      Why does/did an oil and gas producing state need a nuclear plant?

      • BTilles
        Aug 14, 2017 at 9:00 am

        Hi Petunia,
        The industry answer to your question is because it reduces excessive reliance on any one fuel source to produce electricity. In the past, US natural gas prices have been quite volatile and these increases get passed along to consumers.

      • Ambrose Bierce
        Aug 14, 2017 at 10:16 am

        The answer is probably somewhere between the elected officials and the lobbyists. Wasn’t this the story in Mr Smith Goes to Washington?

  4. raxadian
    Aug 13, 2017 at 11:57 pm

    What’s the people who is supposed to control these things doing?

    • Hiho
      Aug 14, 2017 at 12:18 am

      Bought

    • BTilles
      Aug 14, 2017 at 6:37 am

      Funny you should ask. Normally the Public Service Commission is supposed to “have the people’s back” so to speak. But here, the state legislature tied its commission’s hands and, not to put too fine a point on it, essentaly caved in a shameless fashion to big business interests.

      • Meme Imfurst
        Aug 14, 2017 at 5:13 pm

        Public Service Commission..hahahahhah…come to Florida. Find one that is not in the pocket of the electric companies ( which are ALL privately owned).. The ‘commission’ does whatever the companies ask ( so does the legislature). Turkey Point outside of Miami has been pumping radioactive water….no no no, sorry, the company says leaking, into the drinking water aquifer for years, and the PSC and the legislature have no balls to make them do anything about it. A scandal that if the maid stream media was worth a RED cent, they would be covering. Miami doesn’t need to worry about high sea water, they need to worry about the water they and their kinds are drinking right now.
        As for S.C., when I lived in Savannah and went to a friends house on the river and saw THREE EYE FISH, and crabs with big sores, I would not eat dinner.
        What becomes ‘normal’ for people has a significantly shorter time span that it used to. isn’t that the problem?

        This is yet one more example of the corporations mean everything and YOU mean nothing. I think everyone has given up…given up even trying.

  5. Truth Always
    Aug 14, 2017 at 12:00 am

    America – Land of the corrupt enabled by the ignorant and the foolish.

    Private or Public sector both are susceptible to massive insidious corruption and nepotism in America.

    As long as Kim Kardshian or Kim Jong Un and cries of racism cover the airwaves this country is going to get pilfered from within.

    Where is CNN or Fox against such serious issues? The former mostly bashes and the latter mostly sucks up to Trump and no one covers problems like these except maybe in the passing.

    At least there is a lion in Wolf’ clothing :)

  6. mean chicken
    Aug 14, 2017 at 12:04 am

    I’m pretty sure both new and old nuclear installations are dead in the water. According to what I’ve read and heard.

    Of course we never get the whole truth from MSM, that’s a given.

    • BTilles
      Aug 14, 2017 at 6:51 am

      Hi,
      I don’t know about “dead in the water” but aging, single unit power stations in places like Ohio and Pennsylvania are no longer viable economically.

  7. Raymond C. Rogers
    Aug 14, 2017 at 12:14 am

    In a functioning free market system, a company who wanted to provide power would be able to distinguish whether they could comply with the regs, build the plants, and sell the product. Too much regulation and you strangle competition (like our wonderful ACA did).

    The government should have minimal involvement in power generation. And stop the handouts. That goes for wind and solar too. If an industry can’t do it alone, it is not a viable practice to begin with.

    • Hiho
      Aug 14, 2017 at 1:42 am

      The saddest thing is thata you guys do not seem to realize that regulation is not the sameas crony capitalism.

      Erase every single regulation and energy monopolies will be able to extract the sh*t out of you.

      Utilities should owned by the state and provide a subsidized service. Or at least the prices regulated and rents taxed away. Don’t you like it because it sounds as socialism? Well then enjoy having your rent extracted and watching how your exports are priced out of the market.

      • Raymond Rogers
        Aug 14, 2017 at 6:55 am

        I am not saying all regulation is bad. But a good deal of regulation has been written for the most part, either directly or indirectly. The big insurance company were behind the ACA, as they knew it would push the smaller players out of the market. And then they tried to get subsidized through Paul Ryan’s plan.

        This article is yet another example of government needing to be limited in scope. It is inefficient at most things. None of this means we cannot enforce anti-monopoly laws. Regulation should promote competition, not eliminate it.

    • BTilles
      Aug 14, 2017 at 6:43 am

      I agree completely. We should remove government mandated Price-Anderson liability limits on the nuclear power industry.
      “You break it you fix it” works in other industries.

  8. Lee
    Aug 14, 2017 at 6:14 am

    “Nine times and 18% since 2008.”

    Geez, that is pretty poor compared to Australian standards. The SC government should send a junket over here to really learn how to rip off and screw consumers.

    We have no nuclear power plants, very few new plants being built although they shut one plant down here in Victoria that supplied 25 of the electricity and get this – electricity prices are up over 100% in the past ten years.

    Mine are up about 130% as I have solar panels and the utility gets to charge me an extra 10% over the normal rate for any electricity I use because of those panels!!

    Nice, huh?

    • BTilles
      Aug 14, 2017 at 7:12 am

      Hi Lee,
      Wow, those are real price inceeases. A few thoughts.
      First, why did they close the Hazelwood coal plant removing as you said a big chunk of capacity from the markets? Then, natural gas prices spiked at the same time.
      From a political perspective do you think deregulating your power markets about 8 years ago has anything to do with this?

      • Lee
        Aug 14, 2017 at 11:54 pm

        Various stories about the Hazelwood plant – most likely that the company that owned didn’t want to spend the bucks needed to bring it up to compliance in a variety of areas.

        Probably also interested in getting out of ‘the dirty brown coal’ generating business to appease the greenies.

        NG prices spiked here for a number of reasons. One is that much of the NG is now being exported to Asia at prices that are much lower than here in the domestic market – such is life when entering into long term contracts. The other is that there have been a number of restrictions or bans on NG drilling and fraccing.

        Deregulation has resulted in higher prices as companies compete for customers – higher costs of marketing and salaries for all those people need to be paid.

        We have a ‘gold plated’ system with gold like prices!!

        • Lee
          Aug 18, 2017 at 1:18 am

          “Electricity prices are forecast to rise by as much as 20 percent through June next year for almost 90 percent of the population, according to Citigroup. That’s after costs already more than doubled in the decade through 2016. The bank estimates the coming hit to household income will be equivalent to a quarter-point interest-rate increase.

          “This impact may be larger if companies are successful in passing through their increase in electricity costs,” Citigroup analysts said in a report this month. “While harder to quantify, this impact could easily double the drag.”

          The growing strain on household finances from soaring energy costs opens a new front in the income squeeze faced by Australians already struggling with record-low wage growth and record private debt.”

          SEE:

          http://www.theage.com.au/business/markets-live/markets-live-politics-earnings-to-hit-asx-20170817-gxyxl3.html

  9. nick kelly
    Aug 14, 2017 at 7:48 am

    ‘From a financial perspective, the BLRA is a get-out-of-jail-free card. And SCANA is playing it. And us.’

    I think author meant last sentence to read: ‘On us’

    Very interesting piece. With the removal of risk could there also be an introduction of ‘moral hazard’ ? Could the contractors sell a scheme they know to have dubious prospects, or are these failures just misfortune on the technical and market side of things?
    These do happen, it’s just with nuclear they seem to happen a lot.

    In this case the project was cancelled. This is unusual.
    Usually it just rolls along, cost be damned, because the customer is hooked. He’s built the new capacity into his equations, he’s already spent billions, what else can he do but proceed?

    • BTilles
      Aug 14, 2017 at 9:08 am

      Hi Nick,
      I meant the sentence the way it appears. But your interpretation is consustent with my meaning.

  10. RG
    Aug 14, 2017 at 8:03 am

    “But what interested me was the reaction of the stock market. SCANA’s share went up solidly in the face of what should have been interpreted as bad financial news.”

    Scana’s stock price was at a 52-week low as of Friday’s market close. The stock probably initially rallied because the stockholders were relieved that the project was cancelled.

    • BTilles
      Aug 14, 2017 at 8:31 am

      Hi RG,
      You’re right. My comment about stock price was about a likely “relief rally” on the part of investors. And you’re also correct about 52 week lows in the stock price. But, off the 2014 price lows, SCANA’s shares moved up almost 50% before plateauing and starting to decline. Perhaps investors began to reevaluate SCANA’s nuclear prospects.

  11. Petunia
    Aug 14, 2017 at 8:45 am

    Most governors are captives of the energy utilities. The utilities contribute money to every candidate and insure they “own” them. It’s so bad, that until fairly recently, solar power was for practical purposes outlawed in the Sunshine State of Florida. Homeowners were barred from putting solar panels on houses.
    Sometimes it was done by ordinance and sometimes by restrictions imposed by HOAs.

    • BTilles
      Aug 14, 2017 at 9:14 am

      Hi Petunia,
      Perhaps it will help to think of the companies as simply regulated monopolies. But some states, perhaps due to the inordinate influence of campaign contributions and the like, have chosen to “go easy” on the regulating part. That just leaves us with monopolies.

  12. Drango
    Aug 14, 2017 at 9:06 am

    I had a friend who worked for a construction company, and he said government projects were always over budget because the specs were constantly changed to comply with new regulations. Just imagine how that works for the military, where constant changes in technology require redesigns in the middle of a project. That’s how we end up with billion dollar jets that still don’t perform like they should.

  13. Enquiring Mind
    Aug 14, 2017 at 10:41 am

    Two comments:

    First, recommend some type of Truth in Legislating requirement that shows the life cycle costs of any project or legislation under defined scenarios to identify endpoints and divergences. Spell out any Greenspan Put type features to show who bears cost of failure, and then include the flipside of who reaps benefit of gain. Showing how the SCANA companies of the world can put back their failures on the populace is a small step toward a little transparency. Notice how I have to qualify everything to manage even the smallest expectation in today’s world of lobbyists, lawyers, graft and corruption.

    Second, (kind of similar to how lending regulations about APR use defined terms), spell out the costs, fees, revenues, charges and whatever else goes into any and all monetary aspects of a project. Why do nuke plants cost so much? What is due to regulatory changes, cost overruns, interest, debt issuance fees, etc.

  14. Mary
    Aug 14, 2017 at 11:38 am

    Situations like this aren’t just a matter of voters being gullible or politicians being for sale. There is a distinct political philosophy evident in a number of state legislatures and it goes something like this. On the economic front, government’s only role is to enable free enterprise. Even a hint of regulation is unacceptable. Where government control does have a role is in matters of sexual morality, reproductive freedom and definitions of gender. Hence the furious debate over whether transgender men and women can use public restrooms.

    Why have ordinary people bought into this political ideology? Good question. But make no mistake, this has been a conscious choice in many states, South Carolina included.

  15. c smith
    Aug 14, 2017 at 12:08 pm

    “Investing is about risk vs reward in an uncertain world.” See, that’s where you’re wrong. Our overlords at the Fed and governments at all levels have determined that risk will be removed from the equation for all those with enough money to lobby successfully. Risk is dead, and so, therefore, is growth.

    • BTilles
      Aug 16, 2017 at 4:05 pm

      I think Professor Minsky might have said, “where risk appears to be dead, it is in reality probably thriving, perhaps somewhere unexpected”.

  16. RG
    Aug 18, 2017 at 10:27 pm

    So…. Scana withdrew their request to abandon the nuclear plants…

    Wow. There must be some real 3-D political chess going on.

Comments are closed.