While proposals to purchase Santee Cooper could lead to rate reductions as outlined in a recent ICF report, some South Carolina lawmakers at a Feb. 6 hearing said that there were still too many unanswered questions to say with any degree of certainty that rates would go down.
And, if South Carolina needs to import power as part of a Santee Cooper sale, lawmakers are worried about potential reliability issues. Uncertainty over transmission upgrade costs were also discussed at the hearing, which was held by the South Carolina Public Service Authority Evaluation and Recommendation Committee.
The committee has been tasked with providing recommendations to the South Carolina General Assembly regarding the future role and operations of Santee Cooper, the state-owned public power utility in South Carolina. While no sale has been authorized, the committee has engaged ICF as a consultant to conduct an exploratory process.
Several ICF officials including Judah Rose, Senior Vice President and Managing Director at ICF, appeared at the hearing, which was held by the committee to discuss the report’s findings.
Rose noted that there were four full purchase options that met all the previously set threshold criteria and lawmakers spent most of their time focusing on the specifics of those four proposals.
State Rep. Russell Ott raised the question of how there can be a guarantee that by selling Santee Cooper rates will go down.
“We understand what has been put on the table. We understand clearly what has been submitted, but there’s no way for us to guarantee that by selling the utility, we would be able to realize what these particular companies are putting in front of us,” Ott said.
“The only way for us to get there – what I’m hearing from you – is to continue with this process to go more in depth to deal with these particular companies on a more intimate basis to try to make sure that what they’re telling us is factual and something that we’re going to be able to rely on and actually hold them to what they’re saying that they can actually do,” Ott said.
“But at the end of the day, I don’t see how anyone could advocate for either position right now, to sell or not sell, if you were truly looking at this from a perspective of how are we going to be able to benefit the customers of Santee Cooper and the customers of our twenty co-ops across the state. That’s going to take a lot more effort, a lot more study of the issue to ensure that we’re able to do that.”
Projected customer rates
According to the ICF report, among the four responses evaluated, when estimated over 20 years, the levelized average Santee Cooper customer rate decrease projected is 2% to 14% lower than in a business as usual case. This reduction averages approximately 6% or $5/MWh, i.e., it decreases rates from $84/MWh to $79/MWh on average across the four proposals. Every $1/MWh approximately decreases customer costs by $25 million per year, ICF said.
Approximately 40% of the net invested capital of Santee Cooper is associated with the Summer 2 and 3 abandoned nuclear power plant project. Santee Cooper categorizes this amount as a regulatory asset, the report said.
Three of the four proposals assumed no recovery of the regulatory asset of Santee Cooper.
The report said that treatment of the regulatory asset via write-off is important for multiple reasons including that a write-off lowers the rate base and lowers cost of service (investor-owned utility) electricity rates, all else being equal. Therefore, “this compensates for the upward rate pressure on electricity rates that would otherwise arise due to the conversion of Santee Cooper from being a non-tax paying entity with almost all external capital sourced via low cost debt to a tax paying entity with a combination of debt and equity.”
Transmission concerns
According to the ICF report, one area of significant concern relates to the Santee Cooper transmission system.
“This issue figures prominently because the entity with the lowest rates is relying the most on long distance electricity transmission to import power from existing power plants located out of state. This entity has transmission cost estimates,” the report said. “However, this strategy creates the largest transmission cost uncertainty.”
Ott voiced concern that with respect to power reliability, there would be a reliance on electricity “coming from somewhere outside of the state.”
In response, Rose affirmed that he is comfortable that power would be available to South Carolina, with the unknown being the amount of money that would need to be spent on the grid to make sure the electricity could get to the state.
Within the time allocated to evaluate responses to a request for expressions of interest (EOI) issued by ICF, “and based upon wide differences in the level of respondent detail on transmission upgrades required to accommodate their generation investment plans, ICF was not able to definitively determine the optimal amount of transmission infrastructure investment,” the consulting firm said in its report.
Differences among proposals on the required investment in items such as transmission debottlenecking, affected system impacts, transmission service costs, and losses, exist. They are compounded by differences in the costs of greater storm resiliency, and greater cyber security, ICF said. One estimate was as high as approximately $1.5 billion over a long period.
“Hence, when comparing proposals, a proposal with a higher EOI purchase price or lower customer rates may not ultimately be the most desirable economic offer (if that highest scoring offer did not include transmission investments on par with other proposals).” The report said that reconciling necessary transmission investment levels can be addressed “clearly and efficiently during any subsequent negotiations” the state has with these parties.
South Carolina State Sen. Larry Grooms asked Rose to elaborate on ongoing concerns related to the issue of transmission.
“What we’re most uncertain about is the extent to which there are additional costs associated with upgrades of the transmission system in order to accommodate some of the alternative sources of supply for power,” Rose said.
Grooms said that “the energy policy and future of our state and our economic well being is based on what we’re doing here right now. I want to make sure that we have certainty in what we’re talking about.”
He said that “when we’re talking about a reduction in rates and that being contingent upon uncertain transmission, we need to have some certainty about the transmission. Is there a way that this committee can receive information regarding the certainty that there is the availability of such transmission from multiple systems into the Santee Cooper grid or is that still just going to be some unknown?”
Reliability for industries and residential customers “is something that’s extremely important. I want to make sure that we have reliability.”
Rose said that with respect to transmission, there are ways “to improve our understanding of what those costs will be.” The ICF official believes that it is likely that there are “going to be some transmission upgrades and therefore there are limitations right now. I think really the question is how much are the incremental costs and whether the numbers that were budgeted, are they sufficient and already include those costs.”
Committee to provide recommendations
A number of parties are interested in either purchasing all of Santee Cooper or making offers related to the state-owned public power utility in South Carolina that include long-term asset management agreements, long-term power supply arrangements or partial acquisitions.
The four full purchase proposers that passed the threshold criteria are U.S. electric utility companies and non-utility companies, including leading financial entities involved in the electric power space, ICF said in its report. “Some entities have significant presence and a long history within the state and two of the four responses were from major utility companies with significant operations in the Southeast.” Names of the bidders were not disclosed in the report.
One proposal represented a consortium of parties including a major financial investor in power markets, an investment company with utility ownership and utility operational experience, a utility management company, and an infrastructure investment company. Each party would provide substantial experience and expertise in support of its response.
The final entity submitting a compliant response includes a major energy infrastructure investment company and an institutional investor. “This party provides a strong management team with highly relevant experience at a sizable public utility,” the report said.
Of these four respondents, three proposed a structure that would convert Santee Cooper to an investor-owned utility and subject it to rate of return regulation by the South Carolina Public Service Commission and the Federal Energy Regulatory Commission.
One proposal maintained public ownership of the utility, but the details of the structure cannot be fully discussed due to confidentiality issues, ICF said.
ICF issued request for expressions of interest in December
On behalf of the legislative committee, ICF issued a request for EOI and indicative offers for Santee Cooper. ICF released the request in December 2018 and interested parties were asked to provide responses by January 2019.
In its report, ICF said that it received 15 proposals from 10 parties, including small and large electric utilities, large private investment firms, and industrial firms.
Seven of the 15 proposals are for the potential acquisition of the full utility, while the remaining proposals constitute a variety of offer types, ranging from long-term asset management agreements, to long-term power supply arrangements, to partial acquisitions. “Most participants have outstanding technical and financial capabilities and several own independent power plants in the southeastern U.S.,” ICF said.
Prior to issuing the EOI request, ICF worked with the committee to understand key criteria which were deemed important in their deliberations regarding a possible sale or restructuring of Santee Cooper.
While the committee was interested in all potential solutions that might be offered, it decided that the initial focus should be on solutions involving the sale of the full utility. The EOI was therefore designed to accept all responses, but ICF’s initial evaluation of responses focused only on full purchase proposals.
Governor has stated preference for sale of Santee Cooper
South Carolina Gov. Henry McMaster, who is a member of the committee, has called for the sale of Santee Cooper.
