South Carolina’s nuclear debacle heats up in court

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The South Carolina electric cooperative that pays for 70% of the energy produced by state-owned Santee Cooper wants the state’s high court to let a lower court decide a legal dispute over rates tied to a failed nuclear reactor project.

Central Electric Power Cooperative Inc., a nonprofit wholesale provider, told the South Carolina Supreme Court in a July 18 brief that a petition filed by Santee Cooper last month was misleading and misconstrued some state laws.

The court, Central Electric said, should send the matter to a circuit judge who is already hearing a nearly year-old class-action lawsuit filed by individual ratepayers concerning the nuclear debacle. It also involves cross claims for damages by two of the state’s electric co-ops, including Central.

“It’s abundantly clear that Santee Cooper’s latest legal maneuver is not about protecting ratepayers – it’s about protecting Santee Cooper, its investors, and the status quo,” Central’s brief said. The “petition is a transparent bid to score a quick and complete victory for itself and its bondholders in this court without regard for the competing claims and interests of its customers and ratepayers.”

In a June 25 petition, Santee Cooper – formally known as the South Carolina Public Service Authority – asked the Supreme Court to confirm its legal authority to set rates to pay its expenses and debt service on bonds the utility issued to finance its 45% ownership of the shelved reactor project.

While the petition addresses one underlying lawsuit, at least four complaints have been filed challenging the handling of the project and its costs.

At risk, in a class-action suit, is Santee Cooper’s repayment of billions in bonds plus damages and the potential claw-back of costs sought by individual ratepayers and cooperatives that have statutory agreements requiring them to purchase most of their energy from Santee Cooper.

Central Electric contends that the Supreme Court petition will only delay litigation in the lower court while ratepayers continue bear the burden of paying for the two reactors at the V.C. Summer Nuclear Station that won’t be completed.

“Santee Cooper has taken this issue to the Supreme Court in hopes of achieving resolution as quickly and efficiently as possible. That is hardly a delay tactic,” Mollie Gore, the utility’s spokeswoman, told The Bond Buyer Tuesday.

“Santee Cooper’s first and foremost concern has always been our customers,” she said. “As you know, we have no shareholders, and so our efforts are, and have always been, focused on delivering the biggest benefits to our customers.”

Central Electric is Santee Cooper’s largest customer. The co-op buys electricity from the state power agency. It then sells wholesale power to all 20 of South Carolina’s electric distribution cooperatives, which have 700,000 accounts in all 46 counties in the state.

In 1980, Santee Cooper and Central Electric entered into a Power Systems Coordination and Integration Agreement that requires Central to purchase most of its electrical power and energy needs from Santee Cooper.

The Coordination Agreement was amended in 2013, and Central agreed to pay for its share of costs associated with Santee Cooper’s capital expenses, including the V.C. Summer nuclear project, according to filings by Santee Cooper.

Construction on the twin reactors ended in July 2017 before they were completed by Santee Cooper and South Carolina Electric & Gas, an investor-owned utility with a 55% share in the project.

The decision to stop working on the project came months after Toshiba-owned Westinghouse Electric Co., filed for bankruptcy March 29, 2017 to shed debt related to its nuclear contracts in South Carolina and Georgia.

Westinghouse was the engineering, procurement, and construction contractor for both projects. Its similar twin reactor project in Georgia remains under construction by a new contractor.

A consultant hired by Santee Cooper said that the completion cost, including interest, would increase to $11.4 billion from $8.1 billion, leading the authority to shelve the project. At the time, Santee Cooper had already spent more than $4.5 billion on it.

Santee Cooper has $7.4 billion of outstanding revenue obligations, $4.2 billion of which were issued for the abandoned project, leaving debt to be paid even though there will be no asset.

That’s the crux of Central Electric’s legal argument. The co-op contends that South Carolina law doesn’t give Santee Cooper the authority to collect revenues through its rates for an asset that will not generate power.

Central said that Santee Cooper’s request for the Supreme Court to determine whether it’s required to set rates to pay for its debt should be heard in a class-action suit called Cook v. South Carolina Public Service Authority, which was filed on Aug. 22, 2017 in the Court of Common Pleas for the 14th Judicial Circuit.

Central Electric, Palmetto Electric Cooperative Inc., SCE&G and its parent company SCANA Corp., are also named defendants in the Cook suit, which was filed as an exhibit with Santee Cooper’s petition.

The seven class-action litigants, residents of Hampton, Richland, Charleston, Aiken, York and Horry counties, allege that Santee Cooper and others improperly financed $4.7 billion in “pre-construction, capital, in-service, construction, interest and other pre-operational costs” associated with the nuclear project through rate increases.

In a cross claim to the Cook suit and in its Supreme Court brief, Central Electric said the nuclear project suffered from substantial delays and cost overruns, and that Santee Cooper’s “mismanagement” of the project only became apparent after an independent assessment by Bechtel Power Corp. disclosed problems.

The Bechtel report was released to the public late last year by the governor. Central Electric said it had not seen the report until then.

Central has asked the circuit court to find that Santee Cooper and its directors violated South Carolina law “by charging rates associated with the abandoned and mismanaged project.” Central also charges that Santee Cooper breached its Coordination Agreement with the cooperative for exceeding contractual limits on costs and failed to provide it with material information about the project.

In a May 24 material event notice, Santee Cooper disclosed that Central had also filed a motion asking the court to withhold $6.6 million a month that it pays to Santee Cooper for charges allegedly associated with the suspended nuclear project.

Santee Cooper’s said it would “fully defend itself against the motion and expects Central to continue making full regular payments unless and until otherwise authorized by the court.”

Central Electric raised numerous issues in its brief to the Supreme Court last week, including details from the Bechtel report.

The co-op also said the Supreme Court had already ruled that four lawsuits filed to date, including the Cook class-action complaint, should be heard by Circuit Judge John Hayes.

“Santee Cooper argues that it will suffer material prejudice and/or irreparable harm based on potential consequences of hypothetical rulings by Judge Hayes and on the reaction of certain credit ratings agencies to the underlying litigation,” Central said. “Neither argument holds water.”

Moody's Investors Service placed Santee Cooper’s A1 bond rating, A2 bank bond rating and the P-1 rating on outstanding commercial paper notes under review for downgrade in May because of continued uncertainty surrounding the agency’s ability to maintain its self-regulated framework, pending legislative actions, increased litigation risk, and a weakened balance sheet.

On June 28, Moody’s said that Santee Cooper's Supreme Court petition was credit positive because it asks the court to affirm the authority’s statutory requirement to set rates sufficient to pay debt service and expenses.

“The South Carolina statutory provisions are very clear that Santee Cooper’s board has authority to establish rates and charges to pay its costs, including debt service and O&M, [and] also that Central is required to purchase its energy and capacity from Santee Cooper,” Moody’s analyst Dan Aschenbach told The Bond Buyer Tuesday.

“An adverse ruling by the state Supreme Court that Santee Cooper could not charge for the past nuclear costs, in particular debt service, would have a severe impact on Santee Cooper’s cost recovery capability and would likely result in rating downgrade,” Aschenbach said.

Moody’s rating review is expected to be concluded in August, he said.

In March, Fitch Ratings and S&P Global Ratings revised their outlooks on Santee Cooper’s bonds to negative from stable, with both citing similar concerns as Moody’s. Fitch and S&P assign A-plus ratings to Santee Cooper’s debt.

Santee Cooper is also facing scrutiny from the new Public Service Authority Evaluation and Recommendation Committee.

The nine-member panel was created by the Legislature in the state appropriations bill, which was signed by Gov. Henry McMaster on July 5.

The committee is charged with analyzing the feasibility of selling Santee Cooper, getting bids from potential buyers, and making a recommendation to the General Assembly about whether the utility should be sold “as soon as practicable,” the appropriations act says.

Other duties include obtaining a valuation of Santee Cooper’s assets, determining if the utility should be overseen by the Public Service Commission, and discerning if there are alternative governance structures for Santee Cooper other than operating under a board of directors. The committee will also evaluate the electric cooperative structure, including the role of the Central Electric Power Cooperative.

McMaster has advocated selling Santee Cooper on numerous occasions. On July 18, he appointed himself to the committee. Other members to be appointed by various legislative leaders haven’t been announced.

McMaster is a Republican running for his first full term as governor this year. He was lieutenant governor and ascended to the governor’s office on Jan. 24, 2017, after Gov. Nikki Haley became ambassador to the United Nations. McMaster will face Democrat James Smith in the November general election.

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Lawsuits Energy industry Revenue bonds Bankruptcy Henry McMaster South Carolina Public Service Authority South Carolina