Higher power bills? How a SCANA bankruptcy could affect ratepayers, South Carolinians

When a New Hampshire electric utility struck a deal to escape bankruptcy, the proposal included a series of rate hikes that its customers had to pay for years afterward.

That agreement didn’t sit well with some New Hampshire ratepayers. But higher power bills were the reality of a bankruptcy that rocked the small New England state three decades ago.

In South Carolina today, questions center on how SCANA’s possible bankruptcy could affect customers of the Cayce-headquartered utility.

A bankruptcy would take years to resolve, ultimately driving up rates, destroying the value of stockholders’ investments, causing SCANA’s best employees to quit and costing hundreds of millions of dollars in legal fees, the utility’s advisers and allies warn.

Not everyone agrees with those dire predictions.

But even utility skeptics suggest they should not be ignored.

“Utility bankruptcies are bad for customers and shareholders,’’ said New Hampshire Consumer Advocate D. Maurice Kreis, who often opposes rate hike requests by utilities. “You can’t just liquidate a public utility. It has to keep serving the public.

“If it is going to have to keep serving the public, the public is going to have to pay rates to support that.’’

SCANA insists there is a better option – its proposed buyout by Virginia-based Dominion Energy, a proposal that includes rate cuts and refunds for customers of SCANA’s SCE&G subsidiary. But that deal hinges on Dominion being allowed to continue to charge SCE&G customers for a failed SCANA nuclear project.

Without that ability to continue to charge its customers, SCANA says it could be forced to file for bankruptcy protection.

SCANA’s bankruptcy could force higher rates to resolve the case, according to a memorandum by Columbia bankruptcy lawyer Michael Beal, written for a Dominion Energy lobbyist.

The New Hampshire bankruptcy, which involved the Public Service Co. of New Hampshire, is a prime example of what happens when a utility seeks protection from its creditors, he said.

Utility bankruptcies typically require “state regulators to approve previously rejected rate increases in connection with settlements” so the utility can emerge from bankruptcy, according to Beal’s memo, citing the Public Service Co. of New Hampshire case.

Beal’s memo builds on warnings from SCANA that it faces bankruptcy if S.C. regulators do not allow the utility to keep charging its customers for the cost of a nuclear construction project it abandoned last year. Residential customers of SCANA subsidiary SCE&G now are paying about $27 a month in their electricity bills for the failed nuclear project in Fairfield County.

An expert testifying on the behalf of SCANA wrote last year that halting those charges would force SCE&G to write off its nuclear debt, throwing its balance sheet out of whack and sinking its credit rating. The utility’s cost of doing business would soar while it struggles to find the cash to pay for its day-to-day operations, forcing SCANA eventually to file for bankruptcy.

New Hampshire Consumer Advocate Kreis says the 1988 bankruptcy of Public Service Co. of New Hampshire resulted in that utility’s customers paying some of the highest utility bills in the country. “The agreement basically forced customers of Public Service Co. of New Hampshire ... to pay exorbitantly high electricity rates.’’

Only now are New Hampshire’s electric rates beginning to drop.

‘It means bad things’

As in South Carolina, the New Hampshire bankruptcy followed arguments over the construction of a nuclear plant.

In New Hampshire, that state’s legislature passed a law preventing Public Service Co. from charging its customers while construction was underway. When construction costs escalated by billions of dollars, the utility filed for bankruptcy.

In South Carolina, legislators approved a law – the Base Load Review Act – that specifically allowed some upfront costs for two new nuclear reactors to be charged to SCE&G’s customers. But costs soared by billions and, last July, SCE&G abandoned the project.

S.C. legislators and utility watchdogs now are pushing to end the charges for the V.C. Summer nuclear project that SCANA subsidiary SCE&G and its junior partner, the state-owned Santee Cooper, quit building after spending $9 billion and charging ratepayers more than $2 billion. Many lawmakers and customers are infuriated SCANA, which they accuse of concealing V.C. Summer’s woes while winning nine rate hikes, wants to continue charging for a construction project that it won’t finish.

But some lawmakers, including state Sen. Larry Grooms, increasingly are concerned that halting the nuclear-related charges could force SCE&G into bankruptcy, which, they say, could do more harm than good.

“There’s a chance that they’re bluffing,’’ Grooms said of SCANA’s bankruptcy warnings. But, the Berkeley Republican added, “I’m not willing to take that risk, because I know what bankruptcy means.

“It means bad things for ratepayers and South Carolinians.”

New Hampshire state Rep. Robert Backus said bankruptcy isn’t pleasant.

But the Democrat thinks his state ultimately benefited from Public Service Co.’s bankruptcy. The utility became more efficient, Backus said. New Hampshire also now allows customers to choose their power suppliers, he said.

“For a long time, it truly was awful. But, eventually, we got past it,’’ Backus said. “Now, we have rates that people still complain about, but they no longer can say they are the highest in the country. They’re right in the middle of the New England regional average.’’

In addition to Public Service Co. of New Hampshire, a handful of other major utilities have filed for Chapter 11 bankruptcy protection over the last three decades. They include El Paso Electric Company in Texas in 1992, the Cajun Electric Power Cooperative in Louisiana in 1994 and California’s Pacific Gas and Electric in 2001.

In some of those cases, utility rates ultimately rose dramatically.

Pacific Gas and Electric’s electric customers, for example, were expected to pay up to $8.2 billion more in higher electric prices – up to $1,700 per customer, according to the Associated Press.

How bankruptcy works

SCANA spokeswoman Cathy Love said the utility’s proposed merger with Dominion Energy “remains the most positive path forward for our customers and our state.’’

Love said SCANA is concerned about its financial stability if the Legislature takes away its ability to continue charging its customers for the failed nuclear plant. Utility officials have said losing the entire $27-a-month nuclear charge could cost SCANA $450 million a year.

“Ultimately, an increase in borrowing costs – as either a result of bankruptcy or continued financial pressure in the markets – will result in substantially higher costs for our customers over the long term, and impact all stakeholders negatively,’’ Love said in an email Friday.

One problem now is the lack of certainty as to what would happen if SCANA did file for bankruptcy.

To try to answer that question, the state Office of Regulatory Staff, one agency that regulates utilities, soon will launch an extensive study that addresses bankruptcy.

One certainty is SCANA would continue operating and providing power. In a bankruptcy, the utility is protected from legal action by its creditors and it stops any interest from accruing on debts.

The company’s management team would remain in place, but significant decisions or transactions would have to be authorized by a federal bankruptcy judge. However, that judge would not set power rates, a power that would remain with the state Public Service Commission.

The utility’s mission also would be different after a bankruptcy.

Before bankruptcy, the main goal of executives is to maximize profits for shareholders. During bankruptcy, their job would be to maximize the value of the bankruptcy estate for creditors, primarily, but also other parties.

The goal would be for the utility to come up with an accepted reorganization plan that explains how its debts would be paid – some in full, others partially, still others not at all, becoming worthless – and then to emerge from bankruptcy.

That process is complicated in large, complex cases like a potential SCANA bankruptcy, where creditors have conflicting interests. That process also could become more strained by tensions between the bankruptcy court and state regulators.

A SCANA bankruptcy could cost $250 million in legal fees alone and take two to three years in court to resolve and possibly longer – given anticipated litigation surrounding the Base Load Review Act, according to the seven-page legal opinion written by Columbia lawyer Beal. That opinion was requested by former S.C. Gov. Jim Hodges, now a Dominion Energy adviser and lobbyist.

In bankruptcy, SCANA would have a legal obligation to “pursue potential sources of value that could be used to satisfy claims of creditors,” Beal writes. That means SCANA would have to challenge any retroactive repeal of the Base Load Review Act or attempt to stop SCE&G from using that law to continue charging its customers for the nuclear project.

How bankruptcy works

Meanwhile, some of SCANA’s creditors – the businesses and individuals it owes money to – almost certainly would lose money.

During bankruptcy, a judge would rank, in priority, the claims of SCANA’s creditors to be paid off. Near the bottom of the list would be SCANA’s unsecured creditors, including trade suppliers and many local businesses.

“Thus, most vendors that supplied goods and services to SCANA on credit could be left waiting years for a distribution from the bankruptcy estate,” Beal wrote. “That distribution could prove to be only pennies on the dollar after SCANA pays its lenders, professional fees, and priority creditors in full.

“For many local businesses that are dependent upon SCANA, that delay, or discounted payment could be ruinous,” Beal wrote.

SCANA bondholders – many of them S.C. residents – could lose some of their investment in the bankruptcy, if those bonds are not secured by collateral.

SCANA’s stockholders would be at the very bottom of the creditor list and face being wiped out, Beal said. Unless other creditors are paid in full, “shareholder value is usually wiped out” in a bankruptcy, Beal wrote.

A bankruptcy also could affect SCANA’s retirement plans, Beal said. The bankruptcy could reduce the benefits that current payees receive and cut off future contributions to the plans for current and new SCANA employees.

The bankruptcy likely would cost SCANA employees as well. Some employees would flee the uncertainty, and skilled workers would be cherry-picked by competitors, Beal reckons.

Also, Beal writes, SCANA could be sold while in bankruptcy, and possibly not to a preferable buyer.

To finalize a sale, the utility would have to prove to a bankruptcy judge that it got the highest and best price available. That price could be offered by a “strategic buyer” – a hedge fund – that planned to operate SCANA for short-term profit and a quick profitable resale with little consideration for its customers or employees.

One aspect of bankruptcy could prove beneficial to SCANA, Beal writes. Bankruptcy would give the utility time to defeat legal challenges to the Base Load Review Act, litigation that could take years to resolve in court. If it wins, SCANA could continue to charge its customers for the failed nuclear project.

The utility then would have the money needed to pay off its creditors and emerge from bankruptcy, possibly as a still-independent company.

Skeptics abound

While nobody is happy SCANA is in a financial mess, some remain skeptical about whether the utility’s bankruptcy really is a possibility or would hurt its customers.

Scott Elliott, a lawyer for a group of large industrial SCE&G customers, said SCANA could sell some of its assets to help avoid a bankruptcy – or offset its impact on customers. Elliott also thinks SCANA and Dominion have sounded alarms about bankruptcy that may not be accurate.

“The ratepayers still have a fighting chance in bankruptcy,’’ Elliott said. “I’m not persuaded that this is a choice of either Dominion or bankruptcy. I’m not persuaded that a bankruptcy would not work to the benefit of ratepayers.’’

Anti-nuclear activist Tom Clements, an ardent foe of the V.C. Summer expansion project, said he also wants more information about how a bankruptcy would affect S.C. ratepayers.

“As far as I’ve seen, they have not produced much that shows bankruptcy would cause severe harm,’’ Clements said.

Lawmakers don’t want SCANA to file for bankruptcy, said state Sen. Mike Fanning, D-Fairfield, whose district includes the V.C. Summer site. But perhaps they should evaluate whether a SCANA bankruptcy would cost customers more or less than Dominion proposes to continue to charge SCE&G’s customers for that failed project, Fanning added.

Senate Majority Leader Shane Massey, R-Edgefield, also is unconvinced SCANA could file for bankruptcy. But, he conceded, “you lose a lot of control’’ to protect SCE&G’s power customers the minute that SCANA seeks bankruptcy protection.

Rick Mendoza, a private Columbia bankruptcy attorney who is working with the state Office of Regulatory Staff, said he doubts SCANA’s initial bankruptcy filing would have much impact on rates. But that could change over time, he said. The impact on rates would depend on whether another company acquired SCANA or if it reorganized under its existing management.

“There are some scenarios where it would not affect (rates), but others that could dramatically increase them,’’ Mendoza said.

This story was originally published February 24, 2018 at 1:41 PM with the headline "Higher power bills? How a SCANA bankruptcy could affect ratepayers, South Carolinians."