As South Carolina considers whether to sell Santee Cooper, the state-owned electricity utility that is nearly $8 billion in debt, it should keep in mind the immortal words of Kenny Rogers: “Know when to walk away; know when to run.”
Santee Cooper has been involved in a number of high-profile boondoggles in recent years. In 2008, it joined several other South Carolina electricity utilities and Westinghouse, a nuclear construction company, in building two new nuclear reactors at the V.C. Summer plant in Jenkinsville. Subsequent delays and massive cost-overruns ultimately led the utilities to abandon the project. Customers of Santee Cooper are projected to pay an average of $6200 in higher electricity rates because of the failed plant, which of course will never produce power. The whole experience has left a bad taste in the mouths of state officials, with Gov. Henry McMaster pushing hard for a sale. Several companies have made offers to purchase Santee, and the state General Assembly is now considering their proposals.
Selling Santee Cooper is the right thing to do. In fact, if done right, the sale has the potential to improve South Carolina’s entire electricity system. The state operation of Santee Cooper is actually something of a historical accident, and evidence from other states as well as the rest of South Carolina shows that private companies are perfectly capable of delivering reliable electricity in a more efficient manner than state-run enterprises. Yet to reap the full benefits of the sale, the South Carolina Legislature should include some strictures on how the new utility is to operate. The sale of Santee Cooper should include two mandates in particular.
First, the Legislature should require that any power generation the new Santee Cooper buys for its customers be acquired through competitive bidding, rather than being built and owned by Santee or its new owner. If we have learned anything from V.C Summer, it’s that incumbent monopolies should not be trusted to build and own power plants. Keeping generation separate from ownership would help encourage the new utility to be fiscally prudent.
In addition, Santee Cooper’s new owner should be subject to “performance based regulation” rather than “cost of service regulation.” Under cost of service regulation, utility rates are based on the utility’s expenses, along with a rate of return on equity. This leads to a perverse incentive structure where the more a utility spends, the more it makes, which encourages wasteful spending on the part of utilities. At times, the effects can be grimly comic. For example, Dominion Energy, which is seeking to buy SCANA (another utility involved in V.C. Summer), has sought to have the expenses of the failed V.C. Summer plant be included in the base on which its rate of return is calculated. This means that the utility would earn a profit on a failed plant that never produced power. By contrast, performance based regulation collars a utility’s rate increases to economy-wide measures like inflation and productivity, which encourages the utility to lower costs, not inflate them.
If subject to the right regulations and market forces, the new Santee Cooper could provide a model for electricity utilities throughout the state and beyond. While the desire to be done with the whole mess is understandable, a few key reforms now could provide great advantages to South Carolina for many years to come.
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