IT’S GOT to be one of the toughest decisions we ever face: When do we bail?
When do we acknowledge that a project we’ve invested in — whether it’s waiting for the train to clear the intersection instead of taking the long way around it, or sticking with an unhappy marriage, or building a $10 billion, now $20 billion, nuclear reactor project — is a bust?
When do we decide it’s going to cost more to stick with the project than to swallow our losses and walk away?
Imagine you’re the chief executive officer of SCANA, the parent company of SCE&G. You’re building the first of a new generation of nuclear reactors, and almost from the start, costs are higher and progress is slower than projected. But delays and cost overruns are a standard part of any big construction project, and they’re even more likely in this case, because it’s been decades since anyone tried to build a nuclear reactor in this country.
So you don’t panic. Instead, you tell regulators the cost and time projections have increased, and ask their permission to proceed. The state Office of Regulatory Staff raises questions about some of your costs, so you reduce them, and your modification sails through the state Public Service Commission.
Then it happens again. And again. And again.
At some point, you have to realize that you can’t keep digging the hole ever deeper. But when? As long as you stick with the project, there’s a chance that it will work out in the long run. The moment you quit, you lock in the losses.
And what would motivate you to make that gut-wrenching decision?
The more you spend, the more stockholders profit, because they’re guaranteed a 10.25 percent return on investment. So you have no incentive to keep costs down. Just the opposite.
You’re a private-sector, regulated utility, so your job is not to protect ratepayers. They’re stuck with you, and besides, it’s the government’s job to look out for them. Your job is to protect your stockholders. And you’re doing that. Magnificently. That’s why you and your executive team keep getting those huge bonuses.
There’s this law, the Base Load Review Act, that your team convinced the Legislature to pass in 2007. It says your stockholders won’t suffer the consequences of your decisions, no matter how much you go over budget.
In fact, the more you spend, the more they profit, because they’re guaranteed a 10.25 percent return on investment. So you have no incentive to keep costs down. Just the opposite.
You have no incentive to get out unless things get so bad that it would be “imprudent” — an important legal term that can yank that profit out of your fingers — to continue. Like, say, if your prime contractor goes belly up. And your 45 percent partner bails on you.
Until that happens, invest more, profit more.
When you add this bizarre economic incentive to the natural human inclination toward inertia, it’s almost impossible not to keep sending money on the project.
When you add this bizarre economic incentive to the natural human inclination toward inertia, it’s almost impossible not to keep sending money on the project. More than you should. Longer than you should.
That situation is not SCANA’s fault, at least not mostly. It’s the fault of our Legislature, which created that disincentive to keep costs down. Or pull the plug.
To be clear: I am not defending SCANA’s decision to allow costs to skyrocket or to stick with this project for so long, or to paint such a rosy picture of it for so long. I’m not defending SCANA’s decision not to make it clear from the start that the projections were all unrealistic because all construction projections are unrealistic. I am suggesting that in order to assign blame and, more importantly, find solutions, we need to understand the obligations that were violated.
Corporations do not have an obligation to anyone except their stockholders. It is government that has an obligation to all of us. And doubly so, I would argue, when government grants a monopoly, which forces us to do business with a corporation whose interests are very different than our own.
Santee Cooper does not have stockholders. Santee Cooper is an agency of the state of South Carolina. Santee Cooper’s job is to serve the people of South Carolina.
Now, Santee Cooper is an entirely different matter. Santee Cooper does not have stockholders. Santee Cooper is an agency of the state of South Carolina. Santee Cooper’s job is to serve the people of South Carolina. Santee Cooper failed us. Miserably.
There are a number of reasons for Santee Cooper’s failure, and I promise I am eventually going to explore them more fully, but one is painfully obvious: Santee Cooper didn’t have to justify its decisions to the Office of Regulatory Staff or the Public Service Commission. It merely had to justify its decisions to … itself.
Santee Cooper’s president — who is also very well compensated, though not nearly so well as the SCANA president — merely had to convince his bosses, the board of directors, that what he was doing was OK. And his bosses? Well, the governor can’t remove them, even when they make lousy decisions.
In both cases, it was the Legislature that created the situation that allowed — even invited — the failure to be bigger than it might otherwise have been.
And in both cases, it is the Legislature that must reduce or eliminate the disincentives to public-focused decision-making, so that someone is looking out for the interests of the utility ratepayers, who are, after all, the public.
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.