IT WAS CLEAR, from the moment I started reading the law that helped SCE&G pull the plug on its unfinished nuclear reactors, that the problems with the now-infamous Base Load Review Act of 2007 are not as simple — and the law itself certainly isn’t simple — as most people seem to believe.
To help me sort it all out, I turned to the person who probably knows more about S.C. utility law than anyone not on SCE&G’s payroll — and maybe more than the people who are: Dukes Scott. Mr. Scott is executive director of the state’s Office of Regulatory Staff, which has the dual duty of looking out for the interests of the ratepayers and the solvency of the regulated utilities; he’s too pro-utility to suit some environmentalists, but I’ve always found him to be fair-minded and straightforward about where he’s coming from. He previously served as a member of the Public Service Commission, which decides whether to approve SCE&G’s rate requests, and before that spent a career in several top-level staff positions at the agency.
The first thing to know about the Base Load Review Act is this: It did not give SCE&G the ability to charge ratepayers for the reactors during construction; like most U.S. utilities, the company already could do that. The second is this: It did not give utilities the ability to keep charging us after they abandon a project; they could already do that as well.
We almost certainly would have been paying for construction costs over the past decade even if the Legislature had not passed the law SCE&G asked it to pass. And we almost certainly would be on the hook for at least some of the utility’s additional costs now that the reactors have been abandoned.
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Mr. Scott says we could be looking at even higher costs now if the law had not allowed SCE&G to raise our rates by $1.4 billion to start paying down interest. Of course, SCE&G might never have begun construction without the law, which would have seemed to most of us like a bad thing at the time but, it turns out, would have been a blessing.
What the Base Load Review Act did was make it much easier for utilities to raise rates during construction, to raise them more often and to be confident that they could recoup any cost overruns. It did this by allowing utilities to get a declaration up front that the project was “prudent,” and by flipping the burden of proof going forward.
In the 1970s, Mr. Scott recalled, some utilities built nuclear reactors but couldn’t get them licensed, because regulators decided they weren’t prudent. “The idea (of the up-front determination) was that there’s a lot of risk involved in building a nuclear reactor, and we don’t want to put ratepayers at risk without even having a prudency ruling,” he said.
Under the old law, each time SCE&G wanted to raise rates, or increase the projected cost or time line, it had to prove that it was managing the project prudently. Under the 2007 law, once the Public Service Commission makes that initial declaration of prudency, it has to approve rate increases unless someone can prove that the company is not being prudent. And it isn’t enough to show that a contractor was making imprudent decisions; SCE&G gets its rate increases unless someone can prove that SCE&G made bad decisions itself. As Mr. Scott explains it, the law allows a utility to “contract away its obligation to be prudent.” This is one of the worst parts of the law.
Additionally, the Base Load Review Act says that beyond charging ratepayers for projects that go bust, utilities can make a profit off of any of their own money they invested in the project. In fact, the law guarantees them a return on that investment. Mr. Scott likens the return on investment to a what a bank gets for lending you money for a mortgage: “You borrow $100,000, and the interest is on top of that.”
Go ahead, do the math yourself. If you think you have the stomach for it.
So far, ratepayers have paid $1.4 billion to offset interest payments down the road, and SCE&G has spent $4.9 billion on construction costs. It borrowed some of that money, and some came from stockholders. The law allows the company to charge us for some or all of the $4.9 billion plus the interest it has to pay on the money it borrowed plus that return on investment, currently set at 10.25 percent.
Mr. Scott believes that both the rate of return and the amount of money to be reimbursed are subject to challenge. Even so, the guaranteed return on investment is my current nominee for the absolute worst part of the law.
SCE&G wants to charge us over 60 years for some portion of that $4.9 billion; Mr. Scott’s staff says the average of the 10.25 percent return and interest on the borrowed money likely would be around 8 percent. His staff said there were too many variables to calculate how much SCE&G would be able to charge if it gets everything it wants. But Mr. Scott noted that as a rule of thumb, if you take out a 30-year mortgage at 8 percent interest, you end up paying three times the principal.
Ms. Scoppe writes editorials and columns for The State. Reach her at email@example.com or (803) 771-8571 or follow her on Twitter or like her on Facebook @CindiScoppe.
$11 billion: Original projected cost of the two reactors; that estimate was revised upward to at least $20 billion because of delays and cost overruns
$4.9 billion: SCE&G’s estimate of the money it has invested, which it hopes to recoup from ratepayers
$9 billion: What SCE&G and Santee Cooper have spent already on the project
9: Rate hikes, thus far, that SCE&G customers have been assessed for the now-abandoned reactors
$1.4 billion: What SCE&G customers have paid in rate increases to bankroll the two new reactors