Select Committee on Energy Generation Financing
Tuesday, November 29, 2016
403 Blatt Building
Testimony of Frank Knapp Jr., President and CEO, South Carolina Small Business Chamber of Commerce
Chairman Sandifer and honorable members of this Select Committee, I am Frank Knapp, President and CEO of the South Carolina Small Business Chamber of Commerce. Thank you for holding this hearing and for the opportunity to provide testimony.
I’d like to start by recognizing the successful effort by the South Carolina Legislature in passing a statute in 2014 that encouraged the use of solar energy in our state. That law had the results it was intended to produce. The consumer demand for solar energy has grown dramatically. This year I put solar panels on my office building. My experience in working with SCE&G technicians, electronic metering and billing has been outstanding. Over the past four months I have averaged a 37.5% reduction in my energy bills.
Unfortunately not every piece of legislation enacted by the General Assembly is as successful in achieving its intended results. Sometimes there are unintended and negative consequences. Fortunately, the Legislature has the ability to correct these problems when they come to light.
That’s why we’re here today to look at the Base Load Review Act passed in 2006. The bill, as you know, was intended to enable a utility company to build a large energy generation facility while saving money by having the consumers pay the cost of financing the construction as the facility was being built. In theory, it was a good idea especially for the purpose of promoting nuclear energy in our state.
But the bill was novel, complex and written in a language mostly understood by the energy industry. So it should not have been a surprise when there were unintended consequences as SCE&G used the Base Load Review Act to build two nuclear reactors at the V.C. Summer Nuclear Station in Fairfield County.
Here are some of the unintended consequences of building a nuclear plant using the Base Load Review Act.
- There is no incentive for the utility to avoid cost overruns and schedule delays. The utility and its shareholders do not carry the financial risk of the increased construction financing costs because the ratepayers are picking up the tab during the construction. In fact, there is a perverse incentive for the utility to not avoid cost overruns and schedule delays because the utility is annually guaranteed a profit on the additional costs being passed on to the consumers. Today SCE&G’s nuclear plants are about $2.6 billion, approximately 20%, over budget and three years behind schedule. For the SCE&G customers, they have seen 9 annual rate hikes under the Base Load Review Act totaling about 20% since 2009. The latest increase was 2.66% that just went into effect. Over all, SCE&G customers have paid over $1.1 billion more on their electric bills just to pay for the construction financing costs and will pay a lot more since the plants aren’t to go online until hopefully 2019. It is not difficult to see why the ratepayers are upset.
- Financial market forces have no bearing on the Return on Equity the utility will receive because the ROE is essentially set in the law thus not allowing the Public Service Commission to regulate the rate as it does in a normal rate case. Only SCE&G can agree to reduce the ROE. The Return on Equity has been as high as 11%, was reduced to 10.5% in a settlement agreement last year and will be reduced to 10.25% next year thanks to another settlement agreement this month. Since the Return on Equity is a major component of a rate increase, many would like to see the Public Service Commission have the power to regulate it under the Base Load Review Act.
- Any management decision by the utility that impacts the cost and schedule of the project essentially must be deemed prudent by the Public Service Commission if it advances the completion of the project. This interpretation of the Base Load Review Act, stated by SCE&G in 2009 and accepted by the Public Service Commission, combined with the law not giving a definition to the terms “prudent” and “imprudent” as related to a utility’s management decisions has made cost overruns and schedule delays a natural unintended consequence of the Base Load Review Act. Proving beforehand or defending a management decision as being prudent is not a concern to a utility under the Base Load Review Act.
- Contracts entered into by the utility in building a plant under the Base Load Review Act are not transparent and have no public input even though these contracts, when broken without adequate liquidated damages for being broken, are often the source of increased construction costs and thus construction financing costs paid by the ratepayer. Relying on the utility and private sector vendors, all with a vested interest in maximizing profits, to negotiate in the ratepayers best interest has been shown to be a failure. Ratepayers need to be at the table for contractual negotiations especially if all management decisions are accorded to be prudent.
Today you will hear many concerns about the impact of SCE&G’s use of the Base Load Review Act. But, in fact, any actions this Select Committee recommends or the Legislature adopts to address the inherent problems of the Base Load Review Act will have no impact on SCE&G related to its nuclear plants construction at the V.C. Summer Nuclear Station.In regard to this construction project, this month the Public Service Commission approved a settlement between SCE&G, the Office of Regulatory Staff, South Carolina Energy Users Committee, The Electric Cooperatives of South Carolina, Central Electric Power Cooperative and me that we anticipate fixes the final cost of completing the nuclear units and slightly reducing the Return on Equity in future rate hikes under the Base Load Review Act.
The amendments to the Act being sought are for future energy generation projects and their financing.
This isn’t to say that if such a future project is undertaken by Duke Energy or SCE&G that the same problems would occur. But the ratepayers can’t take that chance.
So amendments to the Base Load Review Act have been drafted and they address four areas.
- Utility Accountability – Allow the use of the Base Load Review Act to recover construction financing costs only on the original Public Service Commission approved budget for construction. Any construction financing costs for additional construction expenses will be recovered in a general rate proceeding after the plant is used and useful (i.e. online producing energy for consumers). This will focus the utility on making the most prudent cost projections and construction decisions because the company will have its own finances on the line for cost overruns and delays.
- Utility Profit Regulation – Allow the Public Service Commission to unilaterally regulate the utility’s Return on Equity under the Base Load Review Act. This re-empowering of the Public Service Commission is essential to truly protect the consumers under a state-approved utility monopoly.
- Utility Transparency – The Office of Regulatory Staff shall be an advisory-only party to all contractual negotiations and contract decisions for construction projects being submitted to the Public Service Commission for approval. Such an advisory-only role by the Office of Regulatory Staff does not constitute its approval of any eventual contracts nor is it to be construed that any subsequent contracts are prudent. The SCE&G experience has shown that ultimately the ratepayer will be the victim of imprudent contracts between the utility and vendors.
- Utility Responsibility – The utility shall demonstrate to the Public Service Commission the prudence of transaction costs or management decisions by a preponderance of the evidence. Currently the burden to show that a construction decision is imprudent is on a challenging party, not the utility.
Mr. Chairman and honorable committee members, thank you for your attention to this important matter. I would be happy to answer any questions.