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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Privatization Is The Only Hope For This Nuclear Project

Lonnie Carter, President and CEO of Santee Cooper, the state owned electric utility in South Carolina resigned last week. In his position, he was the highest paid “state employee not involved in athletics,” according to the local press. His resignation came after legislative hearings about Santee Cooper’s management of and involvement in the cancelled V.C. Summer nuclear project. The utility’s Board continues to retain his counsel in numerous ways and he leaves with a generous six-figure pension.

But at his final press conference he said literally nothing. As Baker Street irregulars know, when the dog doesn’t bark you got problems.

Mr. Carter’s immediate predecessor, Graham Edwards, was a tad less reticent. He almost single handedly ended then Governor Mark Sanford’s plan to privatize Santee Cooper. He did so by making one very simple statement: Privatization means higher electricity prices for everyone in return for no meaningful benefits. The issue was quickly dropped and even disavowed.

South Carolina’s effort to privatize, like Jack Nicholson’s maniacal character in the movie The Shining, just announced, “He’s Ba-ack”. But instead the announcement came via Mr. Carter’s eloquent silence at his farewell press conference. The agency’s chairman said he was cooperating with the governor to find a way to complete the facilities and selling Santee Cooper might be part of the process. Related: An Energy Independent North America Needs NAFTA

Let’s begin with the obvious. Why take an action that would inevitably result in higher electricity prices for customers, large and small in the 46 counties served by this utility?

In a way, Santee Cooper is like a monument to Franklin Roosevelt, to the New Deal and the women and men who literally drained swamps around the Santee and Cooper Rivers. Navigation and flood control efforts also produced electricity, for the first time in the region, when the big, privately owned utilities had no interest in serving rural areas.

Santee Cooper and many publicly financed entities like it were set up to do that. Bring electrification to rural areas. Mission accomplished?

We think it’s a fair question to ask should the government be in a business the private sector provides perfectly well, albeit at higher cost.

But that’s not the conversation we’re hearing.

Governor Henry McMaster has said he either wants to sell Santee Cooper or find a buyer for its interest in the unfinished V.C. Summer nuclear project. That’s like saying: “We need to raise cash in a hurry. We can either try and hock the Bentley or sell last week’s dirty laundry.” Well, no one wants an unfinished, wildly over budget nuke project. The utility is another story.

Following advice of independent consultants, Santee Cooper’s Board of Directors terminated participation in the nuclear project last month. The project, originally slated to cost $9 billion and be in service by now, was looking at completion costs of $25 billion and a 2024 in service date. (By the way, Southern Company which is building identical units in Georgia recently indicated that perhaps $27 billion was a more accurate cost estimate.)

As an aside we should point out that in our view Santee Cooper’s executives and board took the correct move. Recognizing they were in a hole so to speak they chose to stop digging. Good.

Our knock on nuclear in this case has nothing to do with electricity being produced by nuclear fission, but rather that nuclear power plants have characteristics that may make them increasingly problematic in the future. They are very costly to build. Have long lead times between initiation and completion of construction during which time the market needs for the power may change. And their need to run continuously renders them inflexible. Nuclear plants are increasingly ill suited to a grid that values decentralization, flexibility and low cost.

The Governor’s goal, if taken at his word, is to find a suitable replacement partner to join with SCANA, corporate parent of South Carolina Electric & Gas. SCANA’s CEO Kevin Marsh indicated that despite cost overruns and delays the company would have opted to salvage something from the construction mess and complete one of the two planned nuclear units.

SCANA may want to go forward but has no credible partners waiting in the wings to help it.

But, according to reports, the Governor’s office also solicited indications of interest in purchasing Santee Cooper from supposedly the three principal regional utilities (Southern, Dominion and NextEra). Related: Russia’s Comeback In The LNG Race

We think the cover story, if Governor McMaster and the legislature can pull it off, is that they sold Santee Cooper to whomever because the buyer said it would “consider” completing the nuclear project. After much deliberation, though, the new owner of Santee Cooper could respectfully decline to participate. We think they might cite changes in the wholesale power markets. And will return to their two primary goals in the acquisition, adding new customers and raising electricity prices to pay for the deal.

Like it or not, this is history in the making. We are watching the dismantlement of an 83-year-old New Deal institution in South Carolina. If it works, the sale might embolden the Trump administration to sell neighboring TVA.

But it’s not a terrible time to be selling an electric utility. Valuations look rich. If the state took the proceeds and extended broadband internet throughout the state on a heavily subsidized basis, that would certainly be in keeping with the New Deal spirit of Santee Cooper. Likelihood? Zero.

By Leonard Hyman and Bill Tilles for Oilprice.com

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