September 19, 2024
The Honorable Shane Massey, Chair
Senate Special Committee on SC’s Energy Future
311 Gressette Building
Columbia, SC
Re: Capital Cost Trackers
Dear Senator Massey,
At the September 12th meeting of your Special Committee on SC’s Energy Future, I believe you asked the question, “Is there any benefits to ratepayers for capital cost trackers.”
Several of those who testified provided their concerns about this regulatory change championed by the utility companies that would allow regulated utilities to recover construction costs while a project is being built instead of waiting until the project is used and useful, the standard by which South Carolina has traditionally operated.
Let me provide our input on your important question. Our concerns about capital cost trackers are these.
- There is no guarantee that any utility project will be completed. Thus, allowing a utility to recover costs during construction from ratepayers for a project that ultimately fails is not prudent. This isn’t just about the failed nuclear plants at the V.C. Summer Nuclear Station in Fairfield County and the Base Load Review Act. In August of 2020 there was a report in the Environmental Working Group with the headline, “Duke Energy’s Epic Fails: $11.6 Billion in Scrapped Projects Since 2013”. While most of the projects included in this report were for pipelines, those projects never became a reality. However, it is likely that any capital cost tracker approved by the legislature would also be applied to other utility projects.
- There is no guarantee that any approved project will not have cost overruns. This happens all the time and the cost overruns are usually approved by the Public Service Commission. Allowing
construction costs to be recovered from ratepayers as they are incurred offers no incentive to the
utility’s contractors to complete a job on time and on budget. Any process that could potentially
encourage poor construction management or even intentional cost overruns for economic gain is
certainly not to the benefit to the ratepayer. - There is no guarantee that any state agency oversight of a utility construction project will be able to tell if work completed at the time of inspection is prudent regardless of the requirements put on the utilities to show that it is. The failed nuclear plants in Jenkinsville had periodic onsite inspections. Yet, that failed project was billions over budget and years behind schedule before it collapsed. Claw back provisions, that could take years to enforce, are of no benefit to the ratepayer who has already paid the higher utility bills under a capital cost tracker.
- Residential customers who leave the state and small businesses that close before a construction project is completed will have paid for service they will never receive under a capital cost tracker.
- The construction time for a gas plant is far shorter than the seven years to build a nuclear plant. Using that example to characterize regulatory lag is disingenuous as is only intended to gain support from the legislature and ratepayers.
- While some ratepayers might see incremental increases each year in their utility bills rather than a larger increase at one time, those increases may add up to higher consumer costs than if there had been a full rate hearing in front of the Public Service Commission. Over the past 22 years of our experience intervening in rate cases, utility requests for increased revenue have always been dramatically reduced by the Public Service Commission, even up to a 50% reduction. Most recently Duke Energy and Dominion Energy had their proposed revenue increases reduced by 23% and 27% respectively. Rate hearing give the Office of Regulator Staff and intervenors the opportunity for discovery and to identify unallowable costs. Plus, financial markets change from year to year thus making an approved return on equity at the beginning of a project possibly higher than what might be approved at the completion of a project.
There does not appear to be any real benefit for the ratepayer by adopting capital cost trackers. The benefit is only for the utilities.
Utilities complain that waiting for a construction project to be used and useful before recovery of costs and return on equity is approved harms their ability to attract capital. What they mean is that they don’t make as much profit as they want.
Your committee has heard that Dominion Energy is proud to have the lowest utility rates in at least the Southeast, rates that industry finds a compelling reason to move into our state. All of these Southeastern states have some form of capital cost trackers. Being the singular state holdout to these riders does not seem to be a negative for South Carolina.
The legislature should not change the regulatory process simply to benefit the utilities and their investors when there is no clear benefit to the ratepayer or the state’s economy.
Sincerely,
Frank Knapp Jr.
President & CEO