Big utility rate hikes need more scrutiny

An aerial photograph taken December 2014 shows construction at the V.C. Summer nuclear site. (SCE&G/Provided)

With SCE&G’s electrical rates growing 26 percent over the last five years, protecting the consumers’ interest has never been more important.

Unfortunately, the consumer was the loser in the state’s recent decision to allow the utility to keep confidential part of its rate hike request.

The information in question dealt with financing costs for the construction of two new nuclear reactors at the V.C. Summer site in Fairfield. SCE&G claimed the information contained “trade secrets” protected under the Freedom of Information Act.

Absent a more substantial explanation from the utility, which serves roughly one-third of South Carolina residents, the PSC should have required that the entire document be made public.

That’s because any and all financial information used to justify another rate hike — this would be the seventh so far to pay for the new reactors — matters to residents who depend on South Carolina Electric & Gas for reliable, affordable electricity.

The Public Service Commission carries the mandate of protecting those consumers by ensuring that rate increases are prudent and justified. But steadily growing electric bills call their commitment into question.

SCE&G electricity rates are already the highest in the state and among the highest in the Southeast, with more nuclear construction-related increases planned through 2018.

It is a critical time for strong consumer advocacy.

In South Carolina, electric utilities can finance major capital expenditures through up-front rate increases, thanks to the 2007 Base Load Review Act. Under that law, customers pay for new power plants long before those plants ever generate any actual power.

That provides a troubling incentive for utilities to invest in much larger and more ambitious projects than they might otherwise, since they — and their stockholders — assume comparatively little financial risk.

Another well-intentioned regulation pushes utilities to go even bigger on capital projects.

South Carolina law caps utility company profits at around 10 percent of assets and expenditures. The rule seeks to protect ratepayers from price gouging by utilities, which act as monopolies allowed to earn what the state deems a fair rate of return.

But capping profits also encourages utilities to spend more and more each year, as Rebecca Smith pointed out in an April article published in the Wall Street Journal.

If a utility takes on $1 billion in new capital projects over the course of a year, it can legally claim $100 million more in profits, for example. And the cost of that $1 billion investment can be passed along to customers in the form of rate hikes.

“That’s always been a criticism, and it’s not totally invalid,” said Dukes Scott of the state Office of Regulatory Staff, which serves as a consumer advocate before the PSC. “We just haven’t come up with a better way to regulate in a monopoly situation.”

In any event, rate increases must still be approved by the PSC. But the commission seems to have little inclination of late to seriously question SCE&G rate requests, even given the alarming upward trend.

Utilities currently have a financial incentive to invest in large capital projects, can pay for those projects up front with customers’ money, and have limited financial liability if those projects hit bumps along the road to completion.

State leaders should consider shifting those incentives to encourage savings for customers rather than costly investment outlays. And the Public Service Commission must do more to demonstrate a real commitment to keeping electricity affordable for all South Carolinians.