S.C. lawmakers could slash SCE&G's power bills at least 13 percent without forcing the embattled utility into bankruptcy, a new study commissioned by the state Senate says.
Even more could be cut from SCE&G's electric rates — which rose nine times over the past decade to bankroll a now-abandoned nuclear construction project — if the utility reduces its payouts to shareholders and cuts other costs, according to the March 22 analysis by Bates White Economic Consulting.
The Washington, D.C.-based firm's report could become a playbook for the state Senate as it debates a proposal to block, temporarily, SCE&G from continuing to charge its customers $37 million a month for the failed V.C. Summer project.
The report aims to answer a question nearly everyone in South Carolina's energy debate is asking: How much can lawmakers strip out of SCE&G's highest-in-the-region power bills without financially crippling the utility? SCE&G and its parent company, SCANA, were darlings of the Palmetto State's business community before quitting the Summer project last July after racking up nearly $5 billion in debt.
The S.C. House's response to that question, a proposal that passed on Jan. 31, would slash SCE&G's power bills by about 18 percent until the courts can decide who should pay for the Summer project. That plan would eliminate the entire portion of bills now earmarked for two useless, unfinished reactors in Fairfield County. The House plan would cut 5 percentage points more from SCE&G's rates than the 13 percent Bates White is recommending.
But some senators have voiced concern the House proposal is unconstitutional or could leave SCE&G in shambles.
While it doesn't consider the legality of the proposal, which SCE&G has threatened to fight in court, the Bates White study could offer more ammunition to lawmakers who are skeptical of SCE&G's claim that slashing its electric rates would force the utility into bankruptcy.
Senators were given the Bates White study Tuesday, and Senate Majority Leader Shane Massey, R-Edgefield, said he hoped they could debate it — and an SCE&G rate cut — as early as Wednesday.
“This study confirms ... what SCE&G has been telling you is just not true, from the very beginning," Massey said. “They’re going to try to kill this (study) as much as they can because they don’t want to lose that revenue."
A mid-January report from the S.C. Office of Regulatory Staff, the state agency that polices utilities, estimated that there is only a 35-percent chance that SCE&G would file for bankruptcy if lawmakers sliced the nuclear surcharge from its rates — depriving the company of about $445 million a year in revenue.
SCE&G challenged that Regulatory Staff report as "wrong and misleading," and state senators said they wanted more concrete answers before voting to cut SCE&G's rates.
Virginia-based Dominion Energy, which has a pending deal to buy SCANA, said in a statement Tuesday that its "proposal is (the) best long-term solution for SCE&G customers and for South Carolina."
"It is the only one that provides for immediate cash payments to customers — $1,000 for an average residential customer — and lower rates," Dominion said in its statement. "It is the only proposal that ensures a strong energy partner that will be able to invest in further improvements in reliability, grid security and cleaner energy. And, ours is the only proposal that provides certainty and avoids lengthy and expensive litigation that would further damage the state’s reputation and ability to continue to attract and retain business.”
Beyond $1.3 billion in refunds, Dominion has proposed cutting SCE&G's electric rates by about 7 percent, absorbing $1.7 billion in nuclear costs and buying a natural-gas-fired power station for another $185 million to provide power in the future that the V.C. Summer expansion had been expected to provide.
After reviewing SCANA and SCE&G's publicly available financial information, Bates White concluded lawmakers could pass a law removing 13 percent of SCE&G's nuclear surcharge, leaving 5 percent, "without significantly increasing the likelihood of insolvency."
SCANA could make up for the lost revenue by reducing the quarterly dividends it pays to shareholders, delaying any major construction projects and tightening its spending on "nonessential items," the firm wrote in a 58-page presentation.
SCANA paid out $319 million in dividends to its shareholders in 2017 — $120 million of that money directly attributable to the nuclear project.
The Cayce-based company's payouts to shareholders have grown faster than its revenues, Bates White wrote. SCANA's dividend-to-revenue ratio now is higher than 75 percent of similar utilities, the report stated.
“Dividend reductions are the expected response by any corporation to financial difficulties since equity investors take on that risk in exchange for the opportunity to earn a higher return,” Bates White wrote.
SCANA's stock is widely held in South Carolina and the Midlands, particularly among its thousands of employees and retirees. SCANA shares closed at $37.23 a share in trading Tuesday.
Bates White noted two other cases where utilities have reduced their payouts to shareholders. In both cases, their stock prices immediately dropped.
Ameren Corp., a utility company based in St. Louis, cut its dividends in February 2009 in response to the Great Recession and rising costs for power companies. It also cut its construction spending by $800 million. The company's stock price dropped 17 percent in a single day, but the dividend cut was described as "a conservative, prudent and credit positive action" by Moody's Investors Service, a credit-rating agency.
Ultimately, Bates White wrote, the move brought Ameren’s once-high dividends in line with other similar utilities and saved $215 million a year. Ameren’s credit rating stabilized over the next five years and, ultimately, rose.
Bates White also referenced Pacific Gas and Electric Co.'s decision last December to suspend its quarterly dividend in response to potential legal liability after California's recent wildfires. The San Francisco-based utility's stock price sank 14 percent, but Moody's applauded the cash-saving move.
Bates White rejected SCE&G's argument that a rate cut imposed by lawmakers would throw the utility's balance sheet out of whack, breaking loan agreements and setting off a domino effect that would land the company in bankruptcy court.
Even the full, 18-percent rate cut would not raise a key SCE&G debt ratio high enough to trigger the first domino in that chain, Bates White found.
Bates White's report noted SCANA last year had investment banks Morgan Stanley and RBC Capital Markets study how a 9.75 percent rate cut would affect the utility. The utility considered that cut as the deepest it could withstand without having its credit downgraded to junk status by credit-rating agencies.
On its website, Bates White says it advises law firms, Fortune 500 companies and government agencies.