What to do with a $10 billion hole in the ground? We wrote on this problem recently as it related to #NukeGate, the state of South Carolina’s spectacularly failed command economic intervention in the energy economy.
To recap: Crony capitalist utility SCANA and its government-run partner, Santee Cooper, spent the past decade building a pair of next-generation AP1000 pressurized nuclear water reactors in Jenkinsville, S.C. at a cost of $9.8 billion. The money was spent, but the reactors were never finished. In fact they’re not even half-finished – with the cost to complete them reportedly ranging anywhere from $9-16 billion.
Unable to pony up that kind of cash, Santee Cooper pulled the plug on the project on July 31 … killing an estimated 5,600 jobs, squandering billions of dollars in investment (including more than $2 billion raised through rate increases on consumers) and throwing the state’s energy future into chaos.
Recently released documents revealed executives at the two utilities knew over a year-and-a-half ago that the project was doomed – yet continued to raise rates on consumers anyway. In fact, ratepayers are shelling out an estimated $37 million per month on these reactors … still.
These payments are thanks to the controversial “Base Load Review Act,” a piece of constitutionally dubious special interest legislation advanced by liberal “Republicans” – and then allowed to become law by former governor Mark Sanford.
Not surprisingly, the failure of this project has spawned numerous lawsuits and a pair of criminal investigations – one state, one federal.
It’s also cratered SCANA’s stock price and prompted a desperate effort on the part of current governor Henry McMaster to unload Santee Cooper … for a song.
Unfortunately, McMaster (below) is hopelessly conflicted on this issue … which we’ll address in more detail momentarily.
(Click to view)
(Via: S.C. Governor)
While McMaster tries to negotiate Santee Cooper’s sale, the politicians who presided over this catastrophic command economic failure have been busy trying to “investigate” what amounts to a disaster of their own making.
What are they going to do?
That’s a good question.
SCANA’s recent gambit regarding the impending ouster of two top officials failed to ease the pressure on the embattled utility (thanks to our exclusive reporting), but there are still cards the utility can play.
For example: Abandonment.
If SCANA “abandons” the project, it can seek a federal income tax write off of roughly $2 billion (per the company’s most recent investor presentations). However, if the site is preserved for future use, they cannot seek this write-off.
“It is in Santee Cooper and the State of South Carolina’s best interest to preserve the equipment for future use – either at the site, as spare equipment for other AP1000s, or for future construction of an AP1000 site elsewhere (China, India, etc.),” a source familiar with the situation told us. “Otherwise the material is worth nothing more than scrap metal.”
Clearly, SCANA will use this as leverage in an effort to force lawmakers to accede to cost recovery for their spending on #NukeGate.
How would that work? Well, SCANA could conceivably sell its 55 percent stake to Santee Cooper (a.k.a. the state) for $1 – generating a demonstrable tax loss.
The utility isn’t going to do that, though, unless it gets what it wants – cost recovery for the $2.2 billion in remaining sunk costs related to this project.
Here’s a look at the numbers from SCANA’s presentation …
(Click to view)
“It’s a game of chicken with a suicide bomber,” our source explained.
One option reportedly under discussion as it relates to “recovering” the remaining $2.2 billion? Securitization.
Securitization is a complicated and controversial concept – especially as it relates to the utility business.
Basically it works like this: Utilities (especially those operating in virtual monopolies) have guaranteed customer bases – future revenue streams upon which financiers can rely upon. This revenue can be used to secure a bond, which can then be sold to raise money to retire debt or expand infrastructure.
According to the website Energy Vortex, securitization is “most commonly used to recover stranded costs … (but) can be used for virtually any funding purpose.”
It’s not easy to get approved, though … in any political climate.
In the current political climate? It could be radioactive.
“Before the security can be sold, a legislative body usually has to approve its issue,” the site noted. “This is because there will be added costs incurred as a consequence of issuing the security, and those costs will have to be passed on to the consumer in some fashion. Eventually this security must be paid off. For example, if it’s a bond, the principal and interest will have to be paid to investors when the bond becomes due for payment. Utilities are frequently allowed to add a non-bypassable charge to their customers’ bills to cover the costs of the bond’s principal and interest.”
“Securitization has been used to finance market transitions and large one-time event costs such as storm recovery,” one industry website noted. “Securitization methods share common elements, including extended collection timeframes, reduced carrying costs and recognition that alternative financing is beneficial to ratepayers.”
Obviously any such negotiations must be conducted in public … unfortunately, that’s not what is happening.
Sources familiar with the debate tell us McMaster’s private residence in the prestigious University Hill neighborhood in downtown Columbia, S.C. has been the site of several “offline discussions” regarding these matters.
In fact we’ve confirmed from multiple sources that Kenny Jackson – a SCANA executive appointed by McMaster to the influential S.C. Ports Authority (SCPA) board – has been seen entering and leaving this residence on several occasions within the last two weeks.
Why would these two allegedly meet at McMaster’s private residence? Why not the Governor’s Mansion (located atop another downtown Columbia, S.C. hill a few miles away)?
Good question … but the bigger question is whether legislators are being duped (again).
“Who is SCANA negotiating with right now?” one of our sources wondered. “Settlement negotiations need to be conducted in the open, otherwise the (legislative) panels are a total farce.”
Well, the panels are a total farce … as we’ve said from the very beginning.
But if #NukeGate negotiations are being conducted in secret, that’s a big deal.
According to our sources, McMaster isn’t the only politician conducting “offline discussions” with SCANA. State representative Bill Sandifer (below) – chairman of the influential House labor, commerce and industry committee – has also reportedly held private conversations with executives from the besieged utility.
(Click to view)
(Via Travis Bell Photography)
Sandifer’s alleged “offline discussions” with SCANA would obviously be far more important than McMaster’s.
How come? Well, his committee would likely be responsible for any legislation addressing this debacle – unless S.C. Speaker of the House Jay Lucas were to strip him of that authority by routing #NukeGate matters through another committee.
“Sandifer needs to be real careful in this whole mess,” one of his colleagues told us.
We agree …
South Carolinians have already been screwed over once related to this debacle. They absolutely cannot afford to be screwed over again.
This is not a time for more backroom deals. This is a time for the elected officials who got our state’s taxpayers and ratepayers into this mess to be held accountable for their failure. Let’s hope the ongoing multi-jurisdictional investigation into this mess provides that accountability.
More importantly, let’s hope this disaster prompts our state’s “leaders” to fundamentally rethink their failed big government approach to … well, everything.
It is failing our state on multiple levels …
WANNA SOUND OFF?
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