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Selling Santee Cooper: Competition should be part of the plan

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Santee Cooper (copy) (copy)

Santee Cooper's Cross plant is the largest coal burning power plant left in South Carolina. Brad Nettles/Staff

State legislators continue to wrangle over whether and how to sell Santee Cooper, the state-owned electric utility. But privatization alone will not eliminate the incentives for cost inflation that are built into the current regulated monopoly system. To fully protect customers from future cost debacles like the V.C. Summer mess, retail electric competition should be part of any privatization plan.

ICF, the consulting firm advising the committee that is studying a Santee Cooper sale, reported that three of the four best proposals for a complete purchase of the utility would avoid charging customers for the V.C. Summer nuclear debt. Gov. Henry McMaster characterized the results as “a happy surprise.”

A privatized Santee Cooper could be run more efficiently, generating savings that would allow the purchaser to write off the V.C. Summer debt. Nevertheless, it would still be an investor-owned monopoly (like its V.C. Summer partner, SCE&G) whose future profitability would depend heavily on legislation and regulation. Regulated utilities profit by adding investments to the “rate base” they are allowed to recover from customers who have no alternative source of supply.

Therefore, privatization alone will not protect customers from the ongoing incentives for cost inflation that regulated monopolies face. But retail electric competition could. South Carolina lawmakers can learn from successes — and failures — of utility competition in other states and other industries.

Texas is widely regarded as the state with the most extensive retail competition for residential customers. In a January report on electric power competition, the Texas Public Utility Commission concluded that average fixed prices available from competing electricity suppliers are 10 to 24 percent below the last regulated rates in 2001. Customers can choose prepaid plans, time-of-use pricing, free electricity on weekends, power from 100 percent renewable sources, and contracts ranging from one month to 60 months. Ninety-two percent of residential customers in the parts of Texas where competition exists have chosen a competitive supplier.

California’s electric restructuring, on the other hand, created skyrocketing rates and bankrupted a major utility due to policy mistakes that allowed generating companies (which sell the electricity that utilities distribute to residential customers) to jack up the wholesale price power. Texas succeeded where California failed because Texas avoided the temptation to mandate large price cuts for customers who do not shop for a better deal, allowed competitive energy marketers to offer consumers a wide variety of contract terms, and left marketers free to negotiate whatever kinds of supply contracts they believe are prudent.

Closer to home, new industrial customers in Georgia enjoy robust competition for their business because co-ops and municipal utilities negotiated voluntary access to Georgia Power’s transmission lines in the 1970s. The utility granted this access in exchange for investments by co-ops and municipal electric companies to help cover cost overruns at two nuclear plants (sound familiar?). Even a small electric company distant from a new industrial plant can compete to serve the plant.

A study from the Palmetto Promise Institute even suggests that competition between local electric companies with their own wires could be feasible. A map of the state shows a patchwork of adjoining service territories served by investor-owned utilities, co-ops, municipal electric companies and Santee Cooper. Statistical studies by Walter Primeaux Jr. and John Kwoka found that towns served by two electric companies with competing wires have costs 11 to 16 percent lower and prices 20 to 33 percent lower than those without competition.

This is consistent with the U.S. experience in other industries once thought to be “natural monopolies,” such as cable television and telephone service. Economists like Clemson University’s Thomas Hazlett have found that prices for these services are lower under competition than under monopoly. Competition in both services is now national policy.

Privatization of Santee Cooper is a worthwhile goal. But selling Santee Cooper in a way that fosters retail competition would better protect customers by eliminating the incentives for cost overruns that are built into the current system of regulated monopoly.

Jerry Ellig is a research professor at the George Washington University Regulatory Studies Center and a Santee Cooper customer in Horry County.

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