How SCE&G Profits From Its Rising Costs

Lexington County Chronicle
July 7, 2016

By Frank Knapp Jr.

In 2002, just two years after we formed, the South Carolina Small Business Chamber of Commerce officially intervened in an SCE&G rate hearing to oppose a 14% electric rate hike on small businesses.

We were successful in having the Public Service Commission (PSC) reduce the increase by over 42%. We have had other successes on utility rates but the most valuable lesson I learned in 2002 was to focus on the utility’s Return on Equity (ROE).

The PSC must approve utility rate increases to cover allowable expenses in producing the electricity we use. On top of those expenses, the PSC approves a Return on Equity.  This is how the private utility makes money on its investment in a state-regulated utility structure.

The PSC approves the needed utility expenses and then decides what profit the utility should be able to make.

That’s how the process works in determining how much SCE&G customers pay for electricity. The PSC has the authority to make its ruling and the utility and customers must accept the decision.

In 2008 the South Carolina General Assembly passed the Base Load Review Act (BLRA). This guaranteed that every year SCE&G could request a rate hike to pay financing costs of constructing the two new nuclear plants in Fairfield County.  In theory, having SCE&G pay the costs right away to build these plants would over the life of the plants save the consumers money.

Unfortunately, the BLRA has become a “blank check” for SCE&G. It stripped the PSC of the power to make on-going decisions about allowable expenses and the profit SCE&G makes on those expenses.

While the Small Business Chamber has grievances about the BLRA, this Return on Equity is a great example of the problem.

Under the BLRA—written by the utility—the PSC has no power to reduce the Return on Equity—the profit—SCE&G can make on approved expenses. None.

Last week SCE&G filed a petition with the PSC to raise electricity rates overall by 3.06% that would result in its customers paying over $74 million more to the utility in 12 months. Included in this BLRA rate hike is a Return on Equity of 10.5%.

If you are thinking that 10.5% is a pretty sweet profit, you are correct. And the PSC might also think that 10.5% profit is excessive in today’s economy.

But it doesn’t matter what you or the PSC thinks. Only SCE&G, under the law the way it is written, can give permission to the PSC to lower the Rate on Equity.  This would only happen if SCE&G agrees to a settlement with other parties which are opposing it in the rate case.

Surely the legislators didn’t intend to strip the PSC of its authority. But they did and now only they can correct this and the other problems with the BLRA.

The question is who among them will stand up to the powerful utilities.

Knapp is president and CEO of the South Carolina Small Business Chamber of Commerce

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