Dominion Energy, the owner of the old S.C. Electric & Gas franchise, is fighting state officials over an estimated $442 million tax bill that is allegedly owed for the failed V.C. Summer nuclear project, and there is no sign that the utility company is ready to settle up just yet.
The multimillion-dollar dispute stems from a sales tax exemption the state gave SCE&G more than a decade ago when the Cayce-based utility began planning for the construction of the two reactors at the Fairfield County plant.
The deal allowed SCE&G and its contractors to buy building materials and nuclear components for the project without worrying about the 7 percent sales tax that would normally be owed on those multimillion-dollar purchases.
Had the decade-long project been completed, most of those taxes would have been forgiven. But that's not what happened.
Instead, the unfinished V.C. Summer expansion was abandoned in July 2017 after years of cost overruns and schedule delays.
That decision generated a long list of lawsuits. It prompted law enforcement officials to open a criminal investigation into the project. It also led to Dominion's decision to acquire SCE&G nearly two years ago. And it prompted the S.C. Department of Revenue to launch an audit into the purchases that were made for the reactors over nine years.
It's that review that has landed Dominion in its dispute with the state tax department. Dominion, which inherited all of SCE&G's power customers and its liabilities for the failed nuclear project, filed a case with the S.C. Administrative Law Court in 2019 contesting the tax assessment.
Dominion, which is headquartered in Richmond, Va., is arguing the state should honor the tax deal that was approved for the V.C. Summer project in 2008 and give up its attempt to collect nearly a half-billion dollars for the state government.
But that's not how the Department of Revenue sees it. In a legal memorandum, officials with the agency argued the utility gave up its right to claim the exemption the day SCE&G's executives announced they were halting construction on the unfinished reactors in July 2017.
"Despite the state of South Carolina's investment in the project — through the availability of hundreds of millions of dollars in sales tax exemptions — the taxpayer asserts it is entitled to abandon the project, convey no meaningful benefit to the state's economy and pay virtually no tax on the billions of dollars of taxable purchases," an attorney for the revenue agency wrote in the court document. "The department disagrees."
"Tax exemptions are a matter of legislative grace, not a right," the memo continued. "The Legislature often grants substantial tax breaks to achieve milestones advancing the state's economy, not millstones diminishing the economy."
A spokeswoman for the Department of Revenue did not respond to specific questions about the dispute with Dominion, saying the agency "does not comment on matters related to current litigation."
Utility spokeswoman Rhonda O'Banion said the company is looking forward to "resolving" the dispute "in the best interest of both parties."
But that's yet to happen.
Dominion has taken issue with the fact it is the only company being pursued for the uncollected taxes, when Santee Cooper, South Carolina's state-run utility, was a 45 percent co-owner of the nuclear project.
The company's lawyers also argued state officials can't legally collect the taxes because they can't prove the nuclear project won't be finished at some point.
That's a bold strategy, considering SCE&G already claimed a $1 billion federal tax break for officially abandoning the reactors. Santee Cooper is in the process of selling off the parts and material left at the construction site near Jenkinsville.
A bad taste
The tax dispute has played out behind the scenes for more than a year now. Meanwhile, the public's attention has been drawn to another legal battle that is being waged by the utility company.
Dominion filed a request with the S.C. Public Service Commission last summer asking for permission from regulators to increase the monthly power bills for its 753,000 customers by 7.7 percent. But the proposal was delayed last week. At the urging of Gov. Henry McMaster and other officials who cited concerns about the impact of a rate hike on an economy weakened by the COVID-19 pandemic, Dominion put its request on ice for at least six months.
McMaster's office did not respond to emails seeking comment about the ongoing sales tax dispute. But several state legislators said they are growing increasingly frustrated with Dominion.
Rep. Kirkman Finlay, R-Columbia, said the utility has a right to contest the tax bill. But the company's simultaneous effort to avoid the state tax assessment and collect an extra $178 million per year from its power customers is tone deaf, he said, especially during a major public health crisis when residents have lost jobs and businesses are struggling to stay open.
"It certainly leaves a bad taste in people's mouths," said Finlay, who also sits on the House committee that is responsible for balancing the state's budget. "They have damaged their public perception dramatically."
The estimated $442 million Dominion allegedly owes could provide a substantial one-time boost to the state budget, which lawmakers could use to finance a host of priorities they've noted in the past.
The money could be used to cover items like bonuses for state employees, long-overdue safety upgrades at South Carolina's prisons, emergency funding for the state's health department or grants to small businesses that are still reeling from the pandemic.
But for Dominion, the tax assessment represents a huge threat to the company's bottom line. Its utility operations in South Carolina netted a profit of roughly $266 million through the first nine months of 2020, according to the company's financial records. That means its entire profit margin from South Carolina could be wiped out this year if it is ordered to pay up.
Still, that potential tax liability is something Dominion's leadership should have known about before they finalized the purchase of SCE&G and its parent company, SCANA Corp. State records show the Department of Revenue opened its audit into the nuclear project in January 2018, more than a year before Dominion cemented its takeover of the utility.
Who is on the hook?
If Dominion loses its legal challenge, the company may need to cover the multimillion-dollar tax payment by itself.
Santee Cooper said Dominion already agreed to hold the state-run utility harmless for the taxes allegedly owed for the reactors as part of a legal settlement signed in 2020.
And Dominion is likely to meet a lot of resistance if it attempts to pass the tax bill on to its utility customers.
In most cases, investor-owned electric utilities, like Dominion, are allowed to charge their customers for the taxes they pay. That's part of the benefit of operating a regulated monopoly.
Officials with the Office of Regulatory Staff, the state's utility watchdog agency, said there's nothing preventing Dominion from asking regulators to shift the cost of the taxes to power customers in the future.
But that move is not a guarantee.
ORS, which represents ratepayers in regulatory cases, said the agency would likely scrutinize any proposal that tries to pass along more costs related to the abandoned nuclear project.
S.C. Senate Majority Leader Shane Massey, R-Edgefield, said it would be "insulting" if power customers were forced to pay for the tax bill on top of the $2.3 billion they are already required to cover for the useless nuclear reactors.
"I think Dominion's leaders are trying to get the best deal for themselves and their shareholders, and they don't care who is harmed by it," Massey said. "Dominion has attempted to shift every cost it is faced with to customers and taxpayers, while increasing dividends and shareholder benefits."
"Customers have taken it on the chin multiple times on this one," he added. "The company can't have everything."
For now, the tax dispute continues to wend its way through the administrative law court. Lawyers for Dominion and the state tax department are set to face off in a hearing in the case in March. Depending on the outcome, the ruling could be challenged at the S.C. Court of Appeals if similar tax disputes are any guide.