Why Santee Cooper Matters

Why take an action that’ll result in higher electricity prices? The dismantlement of a New Deal institution in South Carolina.

By Bill Tilles and Leonard Hyman, Oilprice.com:

Lonnie Carter, President and CEO of Santee Cooper, the state owned electric utility in South Carolina resigned last week. In his position he was the highest paid “state employee not involved in athletics,” according to the local press. His resignation came after legislative hearings about Santee Cooper’s management of and involvement in the cancelled V.C.Summer nuclear project. The utility’s Board continues to retain his counsel in numerous ways and he leaves with a generous six-figure pension.

But at his final press conference he said literally nothing. As Baker Street irregulars know, when the dog doesn’t bark you got problems.

Mr. Carter’s immediate predecessor, Graham Edwards, was a tad less reticent. He almost single handedly ended then Governor Mark Sanford’s plan to privatize Santee Cooper. He did so by making one very simple statement: Privatization means higher electricity prices for everyone in return for no meaningful benefits. The issue was quickly dropped and even disavowed.

South Carolina’s effort to privatize, like Jack Nicholson’s maniacal character in the movie The Shining, just announced, “He’s Ba-ack”. But instead the announcement came via Mr. Carter’s eloquent silence at his farewell press conference. The agency’s chairman said he was cooperating with the governor to find a way to complete the facilities and selling Santee Cooper might be part of the process.

Let’s begin with the obvious. Why take an action that would inevitably result in higher electricity prices for customers, large and small in the 46 counties served by this utility?

In a way, Santee Cooper is like a monument to Franklin Roosevelt, to the New Deal and the women and men who literally drained swamps around the Santee and Cooper Rivers. Navigation and flood control efforts also produced electricity, for the first time in the region,    when the big, privately owned utilities had no interest in serving rural areas.

Santee Cooper and many publicly financed entities like it were set up to do that. Bring electrification to rural areas. Mission accomplished?

We think it’s a fair question to ask should the government be in a business the private sector provides perfectly well, albeit at higher cost.

But that’s not the conversation we’re hearing.

Governor Henry McMaster has said he either wants to sell Santee Cooper or find a buyer for its interest in the unfinished V.C. Summer nuclear project. That’s like saying: “We need to raise  cash in a hurry. We can either try and hock the Bentley or sell last week’s dirty laundry.” Well,  no one wants an unfinished, wildly over budget nuke project. The utility is another story.

Following advice of independent consultants, Santee Cooper’s Board of Directors terminated  participation in the nuclear project last month. The project, originally slated to cost $9 billion and be in service by now, was looking at completion costs of $25 billion and a 2024 in service date. (By the way, Southern Company which is building identical units in Georgia recently indicated that perhaps $27 billion was a more accurate cost estimate.)

As an aside we should point out that in our view Santee Cooper’s executives and board took the correct move. Recognizing they were in a hole so to speak they chose to stop digging. Good.

Our knock on nuclear in this case has nothing to do with electricity being produced by nuclear fission, but rather that nuclear power plants have characteristics that may make them increasingly problematic in the future. They are very costly to build.  Have long lead times between initiation and completion of construction during which time the market needs for the power may change. And their need to run continuously renders them inflexible. Nuclear plants are increasingly ill suited to a grid that values decentralization, flexibility and low cost.

The Governor’s goal, if taken at his word, is to find a suitable replacement partner to join with SCANA, corporate parent of South Carolina Electric & Gas. SCANA’s CEO Kevin Marsh indicated that despite cost overruns and delays the company would have opted to salvage something from the construction mess and complete one of the two planned nuclear units.

SCANA may want to go forward but has no credible partners waiting in the wings to help it.

But, according to reports, the Governor’s office also solicited indications of interest in purchasing Santee Cooper from supposedly the three principal regional utilities (Southern, Dominion and NextEra).

We think the cover story, if Governor McMaster and the legislature can pull it off, is that they  sold Santee Cooper to whomever because the buyer said it would “consider” completing the nuclear project. After much deliberation, though, the new owner of Santee Cooper could  respectfully decline to participate. We think they might cite changes in the wholesale power markets. And will return to their two primary goals in the aquisition, adding new customers and raising electricity prices to pay for the deal.

Like it or not, this is history in the making. We are watching the dismantlement of an 83 year old New Deal institution in South Carolina.  If it works, the sale might embolden the Trump administration to sell neighboring TVA.

But it’s not a terrible time to be selling an electric utility. Valuations look rich. If the state took the proceeds and extended broadband internet throughout the state on a heavily subsidized basis, that would certainly be in keeping with the New Deal spirit of Santee Cooper. Likelihood? Zero. By Bill Tilles and Leonard Hyman, Oilprice.com

Who pays for excessive risk taking on nuclear power investments? Read…  Minsky Visits South Carolina

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  31 comments for “Why Santee Cooper Matters

  1. Frederick says:

    Here’s a thought Why doesn’t Trump and Kushner start a consortium and buy the plant and finish it below estimates and earlier than scheduled Isn’t that what he claims to be so good at? And if they fail they can always declare bankruptcy He could have the reactor in lieu of a worthless presidential library

    • TJ Martin says:

      The former would never happen under T/K in light of both their past records with costs exceeding estimate , failure to pay and bankruptcy being the absolute no questions asked guaranteed outcome .

  2. Hiho says:

    Leveraged buyouts that later on are paid via rent extraction. That’s like getting it for free.. Carlos Slim-style’

    and to add injury to insult, banks will create this fresh money out of thin air.

    Talking about a rigged system. Only leeches will prosper. Gotta love crony capitalism.

  3. Alan says:

    What about migration to renewables as a business strategy?. It is and will continue anyway despite Perry and the other fossilites, and is already underway in FL.

    • BTilles says:

      Hi Alan,
      Renewables as business model is a reality. But Santee Cooper’s history is to produce electricity by being big, dirty and cheap, as in “king coal”. Separately, the scale or increments of added capacity between renewables (potentially small) and big, base load plants (large) can be an issue.

  4. Kent says:

    I’m sure the newly privatized utility will need a former governor on its Board to help it navigate difficult political issues. And, of course, said former governor will need a seven-figure income because of market rates for that kind of expertise.

    • Hiho says:

      That just follows extremely well the playbook of politicians in my country, that is, Spain.

      Here we have dozens of former public officials “advising” utility companies which they themselves have previously privatized (or written favorable legislation). E.g. Aznar (right) in Endesa, Gonzalez (socialist) in Gas natural…

    • BTilles says:

      The fees for Board service probably wouldn’t exceed the mid six figures. Otherwise no meaningful disagreement.

  5. David, by the lake says:

    I work at a publicly-owned, rather than an investor-owned, utility for a reason. I’d go so far as to argue that any natural monopoly (which, at the very least, the T&D portion of the power business unequivocally is) ought to be publicly owned and operated on a not-for-profit basis. As one who grew up in SC, this effort to dismantle Santee Cooper saddens me deeply.

    • wkevinw says:

      The old model wasn’t “all or nothing” “profit/not-for-profit”. Many utilities, and some insurance companies were regulated at the state level as private companies; either monopolies, or near-monopolies; decades ago. They had a profit margin (tight range) that was allowed. That’s usually the best compromise, and worked in the real world for many decades.


      • David, by the lake says:

        Understood. However, I’d argue that there is no public benefit from private, for-profit ownership as there is no competition for monopoly operations. Shareholders do not deserve large risk premiums (ROE on the order of 9%) when they bear very little risk. At the very least, their ROE should be tightly bound with their cost of debt. But that begs the question, why have private ownership at all when the exact same operation, simply owned publicly at an appropriate level (municipal, state, or federal), can provide the exact same service at a far lower cost of capital? As presently regulated, an IOU’s ROE is essentially unearned profits extracted from captive ratepayers.

      • BTilles says:

        Hi Kevin,
        Sorry but I have to disagree–if we’re talking about public vs private ownership of, in this case, electric utilities. The two forms of ownership, as we’ve seen can co-exist, but are utterly incompatible. One, a shareholder owned corporation seeks to maximize profit. The muni model, so to speak, is a not for profit.
        The state regulation of utility monopolies that you described, why do you think this has ceased to be current regulatory policy?

        • Scott says:

          Munis do provide lower rates to their customers than IOUs. However, as I’ve worked in the energy industry, I’ve increasingly come to the belief that munis, and especially co-ops, need to be regulated to reduce waste.

          Because they charge less than for-profits and often poor governance, these organizations often lack sufficient oversight. This includes inefficient operations, wasteful spending and insider dealing. They get away with it because their rates are lower than the for-profits (one local muni reportedly shows the price that you would pay if you lived in two IOU’s service territory).

    • BTilles says:

      Hi David,
      I strongly agree about the not for profit aspect of t&d. But I think it actually happens sooner than people realize. Once distributed renewables reach a point where they avoid peak daily usage and pricing, profitability may quickly erode.

  6. MD says:

    Neoliberalism…a bankrupt ideology which is literally bankrupting us.

    But on we plow. Because apparently there is no other way, and anyone who thinks there is is ‘naiive’.

    • TJ Martin says:

      Correction . There are plenty of other ways . The problem is none of those other ways stuffs piles of cash into the back pockets of the .1% … not to mention those other ways would require a bit of at least short term sacrifice in order to be fully implemented .

      So … nativity is not the issue … blatant greed fueled by hyper verging on anachro capitalism is

    • Gershon says:

      As long as the sheeple remain docile and apathetic while their oligarch overlords and their political prostitutes of the Republicrat duopoly are robbing them blind, neoliberalism and globalism will continue to pillage the productive economy and escalate the oligarchy’s larceny and frauds against the 99%.

    • Hiho says:

      Neoliberals have performed something which is nothing short of a miracle. They have managed to make the west lose the competitive industrial advantatge it had achieved and expanded for centuries.

      Developing countries could have never dreamt of taking the lead and leaving us behind but for this bankrupt ideology, which by the way is not new nor liberal.

      Neoliberal pundits and whores should be declared guilty of high treason, and judged accordingly.

    • BTilles says:

      Hi MD,
      Yes, but somewhat less negatively, can we find a difference between the capitalism of the Progessives and the New Dealers versus the present seemingly somewhat rabid strain or neoliberalism.

  7. TJ Martin says:

    A challenge ;

    Name one solitary instance when privatization of a public sector service / commodity has ever worked out in favor of the consumer .

    Just one ! Can’t ? Gee … I wonder why …………..

    • c smith says:

      First show me an example of full cost accounting for a public sector service – including all costs for long-term employee benefits – and then we’ll compare it with the costs of the private alternative.

      Just one! Can’t? Gee…I wonder why………

      • Smingles says:

        No, you first :)

      • c_heale says:

        I would like to point out that many private and public sector services have underfunded long term employee benefits, especially pensions. Both public sector and private sector organizations are cheating in this regard as far as costs go.

    • BTilles says:

      Hi Mr Martin,
      I accept your challenge. And I’m a man of two words: Citizens Utilities, a modest sized, privately held multi-utility corporation. They intentionally sought out capital starved small utilities both public and private. They rebuilt systems and paid for it throught rate increases granted by the state’s PUC. At one point I believe they carried a AAA senior debt rating.

  8. Petunia says:

    I think all utility companies should be public trusts, however, that’s never going to happen, so the next best thing, in my opinion is for Next Era to buy this SC provider.

    Next Era is the parent company of Florida Power & Light an extremely expensive provider of power in FL. FPL has been facing the possibility of closing a nuclear plant they operate south of Miami. A deal with SC will give them a way to finish the nuclear plant, as a replacement for the FL plant, which is one good hurricane away from catastrophe. The SC plant is in Next Eras backyard, so it is a natural fit into it’s grid.

    It was my observation as an FPL customer, that Next Era was so politically connected it was hard to see where the public and private lines were drawn. Having captured the entire political machine of FL, I am sure they would have no trouble bringing SC into the fold.

    • BTilles says:

      Hi Petunia,
      Nextera is definitely a bidder for this utility if it really comes on the market–and that looks like it ‘ll be decided by their state legislature. But I don’t think they’re in it for the nuclear construction project. The crown jewel here is the transmission and distribution network and most importantly, the additional customers.

  9. Lune says:

    As someone who doesn’t live in So Carolina I say, go for it! It will only help my state be more competitive. Heavy industry, the type that generates good, stable jobs for people without college degrees, looks at electricity rates when deciding where to place their plants. It’s not the only consideration of course, but depending on their consumption, it can be a pretty big deciding factor (one reason why e.g. Intel places their $10-bil+ fabs in Oregon and AZ).

    So Carolina is going to bring in a rent extractor who will raise utility rates and siphon those profits to shareholders (most of whom live outside of So Carolina). In order to compensate for the loss of competitiveness, they will then need to offer bigger tax incentives for companies to set up shop in their state.

    For that matter, I hope they go ahead and build that $27bil white elephant. It’ll be easy to convince a private buyer to do so in exchange for a hefty price increase that guarantees them $30bil+ before the plant is even finished, which is the way these things are usually financed.

    I’m sure Boeing won’t mind paying double for electricity on their brand new 787 factory. And if they do, they can just ask the state to pony up some more incentives like they’ve already done ($900mil in public money for a $750mil factory).

    I’m just really glad we don’t have a socialist economy like publicly run utilities. They’re ruining this country. Far better to build a company with public dollars, guarantee its profits, then give it away to a private entity because that’s capitalism, and capitalism is always better!

  10. Mary says:

    This takes me back to 2010, when Pacific Gas and Electric managed to get Proposition 16 onto the California ballot. Prop 16 would have made it virtually impossible to set up new publicly owned retail power companies. The irony–voters in Southern California were in favor; Prop 16 lost because PG&E’s customers in Northern California voted solidly against it.

    I’ll spare you my rant on California’s ballot initiative system, which thanks to court decisions equating money and protected speech, is now the plaything of big business.

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