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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