South Carolina's failed nuclear project isn't generating electricity, and it probably never will.
Instead, the scuttled expansion of the V.C. Summer Nuclear Station has produced a lot of heat, including massive debt, questions about whether electric customers should have to pay it off and a swirl of uncertainty about what would happen if they don't.
The latest warnings come from SCANA Corp., the company that owns South Carolina Electric & Gas, and Dominion Energy, which wants to buy it. Stop paying for the nuclear plant, they say, and your rates will go even higher.
Their argument is simple: Make SCE&G foot the bill for the project, and the financial turmoil that follows will cost more than a couple of unfinished reactors. Investors will see higher risk, and they'll demand higher returns.
But their case is falling flat with a core group of lawmakers who insist that it's unfair for customers to pay billions into a project they'll never benefit from.
And the power companies' predictions aren't a sure bet, either. Financial analysts say that for electric rates to go higher than they are today, SCE&G would have to earn extraordinarily high returns. Its financial profile would be unlike any other utility in America.
The result is a dose of uncertainty looming over a debate that’s quickly coming to a head.
The state House voted Wednesday on a measure that would cut rates while regulators and the courts decide who pays for the project. And while the Senate's schedule is hazier, the governor says he's ready to sign it into law.
The question of what would happen to electric rates highlights the uncertainty policymakers face as they begin to divvy up the nuclear project's bill. SCE&G and its partner, state-owned Santee Cooper, spent $9 billion on the reactors.
It also highlights how high the stakes are.
The uncertainty comes at a moment when key politicians say they don't feel they can trust SCANA's executives. Legislative leaders say they've run out of faith in the company's claims — including their warnings of financial ruin.
"SCANA continues to be like 'the boy who cried wolf,'" House Speaker Jay Lucas said in a statement. "The company has lost all credibility amongst ratepayers and lawmakers."
The cynicism started to boil over when a government audit found that SCE&G was "unlikely" to file for bankruptcy if it loses its nuclear rates. The study by the Office of Regulatory Staff, a watchdog agency, said there was a 35 percent chance that the utility would file for bankruptcy.
SCE&G, which first raised the specter of bankruptcy in December and has disputed the findings, says that a one-in-three chance is still a big gamble.
The report, which was ordered by utility regulators, didn't include a full review of the company's finances, though regulators moved Wednesday to order one. The Public Service Commission asked for "a thorough audit, inspection and examination of the company’s books."
And it didn't consider what would happen to SCE&G's rates. No independent audit has looked at what would happen if the nuclear surcharge were cut off. The power company collects $37 million a month for the project, nearly a fifth of customers' bills.
The result: The power companies' dire predictions are running up against the public's frayed trust.
"They are asking us to take their word for it," said Frank Knapp, chief executive of the S.C. Small Business Chamber of Commerce, which regularly participates in utility rate cases. "You cannot take them at their word."
Risk and returns
The power companies' argument is all about risk. They say lenders and investors will demand a premium to put their money into South Carolina if SCE&G is forced to eat billions in debt.
Dominion predicts that SCE&G would have to pay an extra 20 percent in interest when it borrows money, because credit-rating agencies would deem the utility riskier. That checks out: Companies that are seen as speculative pay about a fifth more to borrow money than firms that are considered investment grade.
What's less clear is what it would take to keep investors interested in putting money in company stock. That's a significant question because utilities typically get about half the money they need to operate by selling shares on Wall Street.
Dominion contends that regulators would need to let SCE&G pull in a heftier profit margin to attract investors. The company told The Post and Courier that it believes shareholders would want the utility's returns to increase by 70 percent.
Otherwise, Dominion says, they'd be scared of being left penniless if SCE&G filed for bankruptcy. Dominion has expressed similar concerns: It says it would walk away from its $14.6 billion deal to buy SCANA if the nuclear surcharge were cut.
"You have a severely damaged, probably bankrupt utility that will be involved in a very, very difficult financial situation for many years," Dominion chief executive Thomas Farrell said this month of the damage lawmakers could cause. "You'll almost certainly have actually higher rates than you have today."
Dominion's prediction is that regulators would have to let SCE&G earn nearly 18 cents for every dollar of investors' money they spend, a measure of profitability known as return on equity.
Analysts say that's an extraordinarily high rate compared to other utilities. It would almost certainly be the highest margin in the country, and it would far exceed the 10.3 percent return SCE&G is allowed to collect now.
In fact, no utility in the U.S. has been allowed to collect returns that big since the 1980s. And back then, interest rates were far higher: Even the safest investments, like government bonds, commanded high returns.
"It's a stretch, but you're trying to prove a point," Shar Pourreza, a utility analyst at Guggenheim Partners, said of Dominion and its estimate. "I just know there's going to be significant rate pressure."
SCANA says it doesn't want to guess at specifically how high rates would go, although chief executive Jimmy Addison told utility regulators in early January that if the nuclear surcharge is cut, "we estimate that customers' bills could actually increase."
"If the cost to attract capital increases significantly due to increased perceived risk, then we would expect overall rates to increase significantly as well," company spokesman Eric Boomhower said in an email. "Obviously, that's not our desire."
'This is unique'
The possibility of higher rates was one of the reasons the powerful S.C. Chamber of Commerce urged caution about repealing the Base Load Review Act. That's the law that lets SCE&G charge for the unfinished plant.
In a policy statement last week, the business group said it's worried that lawmakers will "contribute to an already unstable state regulatory environment and could ultimately increase costs for all the state's ratepayers."
That argument is similar to the case the power companies have made.
Dominion spokesman Ryan Frazier says the higher rates would be part of a cascade of financial pressure on SCE&G if the nuclear funds are cut off. Wall Street would be more wary in investing in South Carolina, and credit analysts would likely give the company speculative, or "junk," status.
Frazier says the domino effect that would follow could lead to a uniquely high return on equity.
"This is unique because the situation facing SCE&G is, in fact, unique," Frazier said in an email. "Electric utilities do not usually face downgrades that would take their debt to junk."
Fitch Ratings — one of the three primary credit bureaus — says only two electric utilities currently hold junk status.
One, Entergy New Orleans, was dinged for serving a storm-prone region.
The other, Mississippi Power, faced a public backlash after spending $7 billion on a clean-coal power plant that went far over budget before it gave up on its clean-coal technology. It was originally funded under a law like South Carolina's.