September 19, 2017
Quorum
By Ron Aiken
Before it rolled the dice on the biggest gamble in its 70-year history, Santee Cooper was warned it was pushing too many chips in the pot.
A source familiar with the negotiations prior to the finalization of partnership percentages for the construction of new nuclear reactors at the V.C. Summer Nuclear Station said the Electric Cooperatives of South Carolina, the largest purchaser of electricity generated by the state-owned utility, warned Santee Cooper leadership against taking on such a large share of the risk without the financial clout or legislative guarantees enjoyed by its senior partner, SCE&G.
With a customer base of just 177,000 compared to SCE&G’s 1.1 million and — most importantly — without the financial protection afforded by 2007’s Base Load Review Act (BLRA), many thought the utility was biting off more than it could chew.
“Back in 2006, 2007, the co-ops did not want Santee Cooper to own 45 percent of that project,” said the source who spoke only on condition of anonymity. “(The co-ops) want stable rates, not risk and uncertainty. They definitely did not want to put their members in a position to subsidize Santee Cooper if something did go wrong, and Santee Cooper has had big projects go wrong before.”
“The co-ops begged Santee Cooper to take a smaller share but they refused. When (Santee Cooper) was negotiating the building of Units 2 and 3, (then-SCANA CEO) Bill Timmerman only wanted Santee Cooper to own a third of each (reactor), which would be consistent with what they had with Unit 1.
“But (Santee Cooper CEO) Lonnie (Carter) insisted that Santee Cooper own 45 percent. So even though here’s their largest customer, who pays about 70 percent of their bills, saying, ‘You don’t need but about a 5-to 10-percent interest in this,’ they ignore that. Santee Cooper likes to say it is the largest producer of electricity in South Carolina. It’s what they’re most proud of. It’s their purpose. This deal would have maintained that for decades to come and provided them with a lot of extra energy to sell.”
Despite serving just 174,000 customers, state-owned utility Santee Cooper provides electricity to two million South Carolinians.
The project’s attractiveness wasn’t limited to just SCE&G and Santee Cooper.
At the time, high-level conversations with other utilities were taking place on potential partnership arrangements for a project that, thanks to the generous provisions of the BLRA that allowed SCANA to seek rate increases from customer each year to cover costs during construction and greatly multiplied its borrowing power, was viewed as not so much a safe bet as a sure thing.
AN ODD COUPLING
One of those potential partners was Charlotte-based Duke Energy, a Fortune 125 company serving 7.4 million customers in six states, including 733,000 in South Carolina.
“Duke Energy could have and should have been brought in right at the beginning as partners in the construction,” the source told Quorum. “They weren’t.”
On Monday, before the S.C. Senate’s V.C. Summer Nuclear Project Review Committee (one of two legislative committees investigating the decision to abandon the project), both SCANA CEO Kevin Marsh and Carter said sincere efforts to sell Duke Energy roughly 25 percent of Santee Cooper’s share failed because, they alleged, Duke proposed conditions on the sale to limit their risk that weren’t acceptable to Marsh or Carter.
“By the time (Duke was) reached out to, of course they weren’t going to assume too much risk,” the source said. “Why would they?
“The time to have gotten them involved had long passed. They should have been part of the original partnership team, and arguments were made for that at the time. They could have structured it any way they wanted to if they’d have done that, but they chose not to. That was a mistake.”
Frank Knapp, president of the South Carolina Small Business Chamber of Commerce, said not spreading the risk to as many stakeholders as possible up front was bad business.
“I’ve always advocated that when you’re going to do a huge project like this was, you need as much buy-in as you can,” Knapp said. “Everybody possible should be included to make sure everyone stays accountable.
“Duke should have been in the game, but they were shut out, and I think that sunk SCE&G’s chances to finish.”
CRACKS IN THE CONCRETE
It wasn’t long before cost overruns and missed timetables became the norm, and while publicly both utilities continued to praise the project and award huge executive raises and bonuses for its perceived success, privately things were slowly falling part thanks in part to the fundamental differences between Santee Cooper and SCE&G’s business model.
“Santee Cooper answers to a board appointed by the governor, and there’s no oversight of that board,” Knapp said. “There’s no other regulatory body involved. They operate on their own, and obviously that’s a bad recipe. They also didn’t have the protections of the BLRA that SCANA did.
“Looking at it now, I have no idea how Santee Cooper did not do enough critical analysis of the BLRA to realize that there was no incentive for SCE&G to stay on budget or on schedule. The BLRA made sure they could keep revising rates every year without penalty so long as the (Public Service Commission) approved it, and they approved everything.
“While SCE&G was using the project as a cash cow, Santee Cooper just got deeper and deeper in trouble.”
Stopping the bleeding, finally, was the Office of Regulatory Staff, which brought all stakeholders to the table in 2016 to put an end to what appeared to be exorbitant spending with little-to-no accountability measures in place.
“It’s disappointing that some people view the project’s failure as a regulatory failure when SCANA failed to disclose material facts about the project’s chances for success and weren’t adhering to the schedule,” the source said. “The fact is that if it weren’t for (The Office of Regulatory Staff) negotiating a fixed-price settlement in September 2016, Westinghouse wouldn’t have had Fluor produce the kind of fully resource loaded integrated schedule that had been missing for years.
“By the first of October 2016 is when Westinghouse saw what it actually was going to take to get the work done and they determined there was no way to get it done with the fixed price they had negotiated. That’s what brought it down.
“I think that fixed price proceeding is what precipitated all the financial problems that have followed. It’s when reality hit. All of a sudden we’re dealing with real dollars, not monopoly dollars. Until that point, I think Westinghouse and Toshiba had proceeded as if there was a blank check.”
And while SCANA’s Marsh has said he intends to continue utilizing the BLRA, which guarantees the utility’s ability to cover project costs even in the event of project abandonment, Santee Cooper has no such remedy.
“It’s clear that Santee Cooper got in over their heads and was duped by both SCE&G and Westinghouse,” said Tom Clements, an environmental watchdog and owner of the website srswatch.org. “Santee Cooper naively placed trust in SCE&G and was very late in realizing that huge mistake.”
“I’m afraid that the people who will pay for Santee Cooper’s mistake will be the co-ops via rate increases.”
In other words, the same people who tried to warn Santee Cooper will suffer for its sins.
“It was an awfully big risk for an awfully small state-owned utility to take,” the source said.
“It was either going to win big or lose big.
“It lost big.”