Blog of Frank Knapp, President/CEO of the South Carolina Small Business Chamber of Commerce
March 12, 2020
A subcommittee of the SC Senate Judiciary Committee held a hearing yesterday on Senate Bill 1129, a bill to reform Santee Cooper. The Senate Finance Committee has already passed a separate bill for this purpose.
The Senate has recently stated its preference for reforming rather than selling the public utility, but the take-aways from the expert testimony was not what the Senators who support keeping Santee Cooper as a state agency probably wanted to hear.
- Santee Cooper’s Board is not the problem.
Mr. Michael Mace, Managing Director of Public Financial Management Investments which gives investment advice on tax exempt bonds to public utilities including Santee Cooper, said that the Santee Cooper board members have “quite good” qualifications. The implication is that the bad decisions the Board made in the past that resulted in $4 billion of nuclear debt for the failed project with SCE&G were not due to their qualifications.
- The Santee Cooper Board cannot be wholly removed or markedly changed.
Mr. Mace said that the bond market, which holds $6.5 billion of Santee Cooper’s debt, would not react well to significant changes to the utility’s Board. Bond values could fall, and new bonds would look riskier. The latter would mean the need to offer higher interest rates on bonds to attract investors, taking away the argument that Santee Cooper can borrow money cheaper than a private utility. Higher interest on bonds would mean raising electric rates on customers. In addition, lowering the value of the existing bonds could set off a class action lawsuit of bondholders against the state (i.e. taxpayers)—and more unknown and unanticipated costs.
- The Public Service Commission cannot set rates for Santee Cooper.
Mr. Mace and Mr. Steve Hamm of the SC Office of Regulatory Staff pointed out that Santee Cooper’s bonds have covenants that require the utility’s Board to set rates that will guarantee that Santee Cooper raises enough revenue to repay its debt. Putting the SC Public Service Commission in charge of setting Santee Cooper’s rates to protect customers would probably violate these covenants which would force bonds to be paid off immediately and with financial penalty. Santee Cooper would then have to offer new bonds at higher interest rates, raising costs for customers.
- Santee Cooper does include a profit in its rates.
Santee Cooper supporters have long argued that a private utility must charge higher rates because they need to make a profit. The experts at the hearing made it clear that Santee Cooper also has rates that include costs and a “margin” (“profit”) above costs.
- Bondholders would not look favorably on a Santee Cooper reform plan that later looked to be in jeopardy.
Mr. Mace said that while the Santee Cooper proposed reform plan that included changing the mix of electricity generation (i.e. less coal and more gas and solar) looked good. However, if in the next two years that plan looks like it is not going to happen, bondholders will lose confidence in Santee Cooper, the utility’s bonds lose value and new bonds would become riskier requiring higher interest rates to be offered.
Conclusion: The Senate subcommittee hearing yesterday was supposed to show how Santee Cooper could be reformed. Instead, what it showed was how hard or impossible it would be to reform Santee Cooper. Odds of meaningful reform of Santee Cooper are now not good. It is clear that there are only two outcomes that are likely to happen this legislative session. First is a negotiated sale that removes $6.8 billion of Santee Cooper’s debt off the backs of the ratepayers, pays back customers for past rate hikes for the nuclear debt and reduces rates going forward. Second is no real change to Santee Cooper leaving customer to continue to pay all the debt, no refund of past nuclear rate hikes and questionable future rate reductions.