Santee Cooper agrees to reform proposal it says will be good for customers

After expressing fear that a change of oversight of the state-owned utility could result in higher costs to customers, utility officials have now come to an agreement on a proposed change in a reform bill under consideration in the Senate.

Santee Cooper has agreed to allow the Supreme Court to review appeals of the utility’s future rate changes if someone objects to whether Santee Cooper erred in determining the need for such a change.

The process would include public notice, a study of rates and future costs, and involvement by the Office of Regulatory Staff, and is part of the proposed reform. A party then can appeal to the state Supreme Court if they believe a mistake was made during the process.

But the Supreme Court would not have a final say on rate changes. Rather the court could order the utility to redo the process, according to the agreement between Santee Cooper and the Central Electric Cooperative.

Santee Cooper officials on Tuesday said they agreed to the language in the proposal.

“We believe that this provides greater certainty than what we currently have,” said Pamela Williams, the chief of public affairs and general counsel for Santee Cooper. “We think this is better for customers, the state, for Santee Cooper, and we believe the market will view that way as well.”

Santee Cooper’s future has been in question in recent years after the state-owned utility and its partner S.C. Electric & Gas abandoned a multi-billion dollar nuclear project in Fairfield County. The failed deal led to Dominion Energy buying SCANA, SCE&G’s parent company, and prompted a push from lawmakers to sell Santee Cooper, which has billions of dollars in debt.

The debacle led to ratepayers suing Santee Cooper over increased rates to pay for a project which never produced a watt of electricity. Santee Cooper last year agreed to pay $200 million toward a $520 million settlement.

Last year lawmakers reviewed proposals from NextEra to purchase the utility, have Dominion Energy manage the utility, or allow Santee Cooper to reform itself. All three options were rejected.

Earlier this year, the House passed a plan to have a group of lawmakers review purchase offers for all or parts of the utility as well as a set of reforms and oversight measures. State senators are considering their own reform package, while a separate piece of legislation in the chamber proposes negotiating a sale of the utility.

Senators and representatives from Santee Cooper, a state owned electric utility which directly or indirectly serves 2 million people, and the Central Electric Cooperative, Santee Cooper’s largest customer which buys power for the state’s 20 electric co-ops, are wrestling over language over who can review the utility’s rates.

Santee Cooper’s board currently has the flexibility to set rates to make sure it can recover costs of generating and delivering electricity and have the ability to repay debt, without a veto from an outside entity.

In contrast, investor owned utilities have their rates approved by the state Public Service Commission, which provides regulatory oversight and can reduce rates that an investor owned utility requests. However, decisions by the PSC can be appealed to the state Supreme Court.

When the state Legislature created Santee Cooper, it didn’t put the utility under Public Service Commission’s regulatory oversight, and state law says Santee Cooper can’t have any external supervision over its customer rates.

Senators and utility officials are discussing whether the state Supreme Court should have the ability to review Santee Cooper rate increases, if a party appealed to the state’s highest court, bypassing the PSC, which has no authority over the utility. Santee Cooper, the Central Electric Cooperative and conservation groups have worked on the language and parameters in the reform bill being debated in the Senate Judiciary Committee.

In addition to Santee Cooper’s directors acting as a governing body over the utility, it’s also a regulator over the utility’s rates.

“Once you realize the Santee Cooper board functions as the regulator, then I think it makes sense for the appeals to go directly to the Supreme Court,” said Frank Ellerbe, an attorney for the Central Electric Cooperative.

A part of the proposal is setting up a process where the board also receives information and comments from outside the utility’s management on proposed rate increases. If someone is unhappy with new rates, the decision can be appealed to the Supreme Court.

Supporters say the change would give the public utility similar oversight that investor-owned companies must deal with.

In an interview with The State, Ellerbe said giving the state Supreme Court the ability to review rates would encourage Santee Cooper’s board and management to be more careful with considering rate increases.

“The whole rates process and the judicial review actually is protective of Santee Cooper because it gives definition and certainty and rules and a very deferential standard of review,” Ellerby told a panel of senators. “I think it improves Santee Cooper’s situation and likely prevents the kinds of cases that were settled.”

Currently Santee Cooper sets its own rates, which allows the utility to ensure it can collect money to cover its costs, including the cost of interest on borrowing money.

Santee Cooper had worried judicial review could hurt the utility’s ability to repay bondholders, and the utility worries losing rate flexibility would lead to lower credit ratings, which in turn would lead to higher interest rates.

“It costs more to borrow money. You get better interest rates with better credit ratings. You get worse interest rates with lower credit ratings,” said Mollie Gore, a spokeswoman for Santee Cooper. “The better your credit rating, the more participation you’re likely to have with investors. You’re a good risk.”

Gore would not say customer user rates would go up, but “whether it results in a rate increase or not, it certainly costs customers more because it costs more to repay the debt. We repay the debt with customer generated revenues.”

Whether the utility can absorb the higher costs in current customer rates will depend on the difference in interest rates, Gore said.

“We can look for operational efficiencies to offset increased debt costs, which is exactly what we’ve done in the reform plan,” Gore said, citing a plan to renegotiate fuel and coal transportation contracts and to reduce personnel costs by leaving some positions unfilled as people leave or retire.

The question over what legislators might do with Santee Cooper has led one ratings agency to give the utility a negative outlook for investors.

In an October 2020 credit rating report, Standard and Poor’s gave Santee Cooper an “A” rating with a negative outlook, but S&P worried about whether the state would continue to own the utility or whether legislators would “seek further concessions on behalf of taxpayers” as lawmakers discuss the utility’s future.

“In our view, the state might impose conditions that could further limit Santee Cooper’s operational and financial flexibility, at a time when it seeks to ‘remake’ its power supply while grappling with the effects of the pandemic and economic downturn, which may extend and deepen,” S&P wrote.

Within the next two-and-half weeks, ratings agencies Fitch, which gave Santee Cooper an ‘A minus’ rating, and Moody’s, which gave the utility an A2 rating, both said Santee Cooper had a stable outlook citing the settlement on the V.C. Summer-related lawsuits and stabilization of the utility’s management.

Both the House and Senate have taken aim at reforming Santee Cooper’s board, and how they’re overseen.

A House reform plan members calls for a Public Service Commission-style review of rate increases for Santee Cooper, but would keep ultimate authority over rates with an independent Santee Cooper board. The House plan also opens up a potential sale of all or part of Santee Cooper, by allowing potential bidders a period of 10 years to submit offers.

The House version of a reform plan includes changes that would allow all of the current board members to be replaced immediately by putting all of them on expired terms. Current board members would continue to serve until replacements are named.

Senators on the Judiciary Committee also are considering other reform measures within the bill expected to be in front of them this week. One of those reforms is the structure of board. Senators are debating the length of board member terms, how board members can be removed and when terms would start.

Lawmakers and the governor have criticized current Santee Cooper board members following the V.C. Summer failure, accusing them of not being fully transparent with when issuing hundreds of millions in debt.

Separate from the rate review question, both chambers are also considering whether the PSC would review Santee Cooper’s long term energy generation plan and demand projections, as well as any proposal for major energy producing facilities.