Nukegate scandal

The Nukegate scandal is a political and legal scandal that arose from the abandonment of the Virgil C. Summer nuclear expansion project in South Carolina by South Carolina Electric & Gas (a subsidiary of SCANA) and the South Carolina Public Service Authority (known as Santee Cooper) in 2017. It was the largest business failure in the history of South Carolina. Before its termination, the expansion was considered the harbinger of a national nuclear renaissance. Under joint ownership, the two utilities collectively invested $9 billion into the construction of two nuclear reactors in Fairfield County, South Carolina from 2008 until 2017. The utilities were able to fund the project by shifting the risk onto their customers using a state law that allowed utilities to raise consumers' electricity rates to pay for nuclear construction.

The Virgil C. Summer nuclear station in 2013.

In 2008, the utilities contracted with Westinghouse to build two AP1000 nuclear reactors for an estimated cost of $9.8 billion. The AP1000 design was unique because it relied on pre-fabricated parts which allowed for modular construction. In 2013, construction began at V. C. Summer. However, numerous delays occurred from 2014 to 2017 due to manufacturing errors and incompetence. In 2017, the estimated construction cost had grown to $25 billion. Westinghouse, hobbled by the costs of both the V. C. Summer expansion and a separate project in Georgia, filed for Chapter 11 bankruptcy in March 2017. Several months later the project was abandoned by Santee Cooper and SCANA. Ratepayers continue to pay increased rates for the expansion despite its termination.

The economic losses and subsequent public outrage drastically altered the future of both utilities. The total cost paid by both utilities in legal settlements to ratepayers and shareholders exceeded a billion dollars. The stock of SCANA, the only Fortune 500 company based in South Carolina, dramatically fell. Both SCANA and SCE&G merged with Dominion Energy in 2019. Until the COVID-19 pandemic, the largest issue debated in the South Carolina General Assembly was whether or not to privatize Santee Cooper.

In 2020, the former CEO and the former vice president of SCANA pleaded guilty to multiple charges of fraud. Their crimes centred around their efforts to hide the construction delays from shareholders and regulators. The construction of the two units needed to be finished by 2020 in order to qualify for over $1 billion in federal tax credits. The viability of the project relied on receiving the tax credits. However, both men admitted that they knew the project was not going to be completed in time to qualify for the credits and that they hid that information from regulators and shareholders. Both men have also been indicted by the U.S. Securities and Exchange Commission for securities fraud.

Construction

Troubled construction

In May, 2008, SCE&G (a subsidiary of SCANA) and Santee Cooper announced that they had signed an engineering, procurement and construction contract with Westinghouse to build two AP1000 nuclear reactors.[1] The CEO of Santee Cooper cited the state's projected growth as a determining factor for increasing the utility's energy capacity.[1] Both utilities were joint owners (SCE&G owned 55 percent, Santee Cooper owned 45 percent) in the project and shared operating costs. The two reactors, with an estimated cost of $9.8 billion, would be the first built in the United States in the last thirty years and were heralded as leading the United States into a new nuclear renaissance.[2][3][4]

The AP1000 design was seen as novel because of its simplified structure and use of pre-fabricated nuclear reactor parts that allowed for modular construction. Construction began on the units in 2013 after the design was approved by the Nuclear Regulatory Commission. However, contractors lacked the requisite experience because the nuclear power construction industry had stagnated for thirty years. The stagnation also led to a dearth in adequate supply chains.[5] Ultimately, Westinghouse had to take over the construction of the units itself, something the company was not qualified for.[6]

Westinghouse's management of the construction proved to be calamitous. The construction site employed five thousand laborers, who built two new concrete plants on the site to continuously pour concrete as well as a seven-story garage to store nuclear reactor parts.[2] But the site lacked a fully-integrated construction schedule and the pre-fabricated nuclear reactor parts that arrived on-site had been manufactured incorrectly, which caused significant delays.[2] In 2008, the initial cost estimate of the expansion was $9.8 billion, but by 2017 it had ballooned to $25 billion.[7]

During the construction process, Westinghouse and other contractors at V. C. Summer violated state law by having unlicensed workers create mechanical and electrical blueprints without having a professional engineer sign off on them.[8] SCANA received a memo from Westinghouse's deputy counsel which stated that the contractors did not have to follow South Carolina law because the company's federal license superseded the state's requirements. Executives at Santee Cooper claim they were not made aware of the Westinghouse memo.[8] The legality of that memo is in question. Nonetheless, the blueprints were often faulty and resulted in "[d]elays, incorrect parts, thousands of engineering changes, and billions of dollars in wasted money".[8]

2015 audit

Santee Cooper and SCE&G hired Bechtel to audit the project in 2015. Bechtel's draft audit stated that the nuclear reactors would not be finished in time to collect the $2 billion in federal tax credits which the project relied on.[9] However, in Bechtel's final report released in February 2016, the previous finding was removed from the audit at the request of an attorney working for both utilities.[9] Relying on the impression that the reactors would qualify for the tax credits, the state Public Service Commission approved an $800 million increase in the project's budget as well as a fixed-price contract with Westinghouse.[9]

Westinghouse bankruptcy and the project's demise
The construction of twin AP1000 units at the Vogtle Electric Generating Plant in Georgia also faced cost overruns and delays.

On March 31, 2017, Westinghouse filed for Chapter 11 bankruptcy due to the costs incurred from both the V. C. Summer expansion as well as the construction of two additional units in Waynesboro, Georgia.[10] The bankruptcy was seen as a huge blow for the nuclear energy industry.[6][5] At the time, construction on both units was only 30 percent complete but the majority of the reactor parts were on-site.[11] Santee Cooper decided to halt construction against SCANA's wishes. The utilities announced that the halt in construction was due in part to a change in the energy industry brought on by more energy efficient technology and the natural gas boom.[5]

In July 2017, the companies announced that they had made an agreement with Toshiba, Westinghouse's parent company, to release Westinghouse from its prior obligations for $2.2 billion.[7] Further, in 2020, Santee Cooper and Westinghouse announced a separate agreement to sell the remaining reactor parts and to share in the profits.[12]

At the point of termination, SCE&G and Santee Cooper had invested $9 billion into the project.[7] The announcement sent SCANA's stock reeling.[13] The project became known as the largest business failure in the state's history.[13][14] The subsequent federal investigation of the failure led to it being nicknamed "Nukegate", a phrase derived from the Watergate scandal.[15][16]

Base Load Review Act

The failure was made possible by the Base Load Review Act that was passed by the South Carolina General Assembly in April, 2007. The act made it easier for electric utilities to charge ratepayers for the construction of nuclear reactors.[17] The bill, sponsored by state senator Glenn McConnell, essentially allowed the utilities to shift the risk of the construction to ratepayers.[18] Utilities would be able to file a request with the Public Service Commission to raise rates for plant construction. If the commission found the application to be "prudent", the commission would issue a project development order allowing the utility to increase rates.[19] However, the statute did not define what was or was not "prudent". Critics of the act argued that "any management decision by the utility that impact[ed] the cost and schedule of the project" essentially had to be "deemed prudent by the Public Service Commission if it advance[d] the completion of the project", and that this resulted in "cost overruns and schedule delays [becoming] a natural unintended consequence" of the act.[20]

Governor Mark Sanford refused to sign the bill but after a five-day moratorium, the bill became law on May 3, 2007.[21] Sanford's chief of staff later said that the Base Load Review Act "was probably the clearest case [he] could ever see of a special interest using all of its power and leverage to get something passed".[18] From its inception to its enactment, the bill's legislative process was considered remarkably fast.[18]

From 2008 to 2016, SCE&G sought and received nine utility rate hikes to pay for the nuclear expansion.[22] By 2017, SCE&G ratepayers had paid an additional $1.4 billion due to the hikes.[23] A typical SCE&G consumer paid an extra $27 per electricity bill for the expansion, and a typical Santee Cooper consumer paid an extra $6.50.[24] By 2018, South Carolina utility prices were among the highest in the country.[25] This was made easier because in 2004 the General Assembly had gotten rid of the state's consumer advocate.[18]

The South Carolina Senate unanimously repealed the act on May 9, 2018.[17] In June 2018, Governor Henry McMaster's veto of the repeal was overridden by the General Assembly.[26]

Stakeholder lawsuits

Both utilities settled lawsuits as a result of the expansion's failure.[26] Attorneys representing SCE&G ratepayers and shareholders settled with the utility for $392.5 million ($200 million would be for ratepayers and $192.5 million for shareholders). Santee Cooper settled with its ratepayers and local electric co-operatives for $520 million.[26] And in December 2020, the utility settled with investors who purchased bonds from the utility for $2 million.[27]

In 2020, a judge struck down the city of Goose Creek's attempt to annex and then take over the power supply of a local aluminum smelter.[28] The judge stated that it violated state law granting Santee Cooper exclusive service over the aluminum smelter's site.[28] Commentators and lawmakers cited the Nukegate scandal as a reason why the city utility should be allowed to supply the aluminum smelter's electricity.[29][30]

SEC lawsuit

In March 2020, the U.S. Securities and Exchange Commission sued SCANA, SCE&G, Kevin Marsh (SCANA's CEO at the time), and Steve Byrne (a former SCANA vice president) for repeatedly deceiving investors.[24] The complaint alleged that the parties misled investors by claiming that the project would qualify for more than $1 billion in federal tax credits.[31] On December 2, 2020, the SEC announced that SCANA and SCE&G agreed to settle the claims against them for $112.5 million in disgorgement fees as well as a $25 million penalty to be paid by SCANA (now Dominion Energy).[31] The litigation against Marsh and Byrne is ongoing.[31]

Criminal charges

Federal prosecutors probed the V. C. Summer failure from 2017 to 2020. In July 2020, Byrne admitted to taking part in a conspiracy to hide damaging information from regulators as well as the public and therefore defrauding SCE&G customers.[31] On November 24, 2020, Marsh announced he would also plead guilty to federal fraud charges.[13] In December 2020, Marsh also pled guilty to an additional third charge: conspiracy to commit wire and mail fraud.[32] Both men admitted to knowing that the project would not qualify for crucial federal tax credits with a deadline in 2020, and that they hid this information from shareholders.[24]

Both men admitted to providing false information in "earning calls, presentations and press releases" in order to benefit SCANA.[24] They were made aware in 2015 that only 8% of the expansion had been completed and therefore V. C. Summer was unlikely to qualify for direly needed federal tax credits that had a deadline in 2020.[24] Neither shared this information with shareholders or state regulators. Additionally, Byrne and Marsh ensured that the Bechtel report sent to Santee Cooper lacked damaging information.[24]

The SEC has charged both Byrne and Marsh with securities fraud. The complaint alleges that:

[Marsh and Byrne] claimed the project was on track even though they knew it was far behind schedule. This could make it unlikely to qualify for the tax credits. A SCANA executive said that officers of the company "flew around the country showing the same . . . construction pictures from different angles and played our fiddles" while the project itself "was going up in flames." SCANA abandoned the project in mid-2017 with neither nuclear unit completed. The false statements and omissions enabled SCANA to boost its stock price, sell more than $1 billion in bonds, and obtain regulatory approval to raise customers' rates.[33]

Consequences for SCANA and Santee Cooper

SCANA-Dominion merger

SCANA faced virulent criticism following the collapse of the V. C. Summer expansion. The company was criticized for not having anyone with nuclear power experience on its board.[34] The board itself was further criticized for either neglecting its financial oversight of the V. C. Summer project or for overseeing the incompetent management of the project.[34] It was determined that throughout most of the project's existence, executives at SCANA knew the project's viability was at risk.[11] But the company lacked the necessary oversight to oversee the project.[11]

In 2018, Dominion Energy submitted a bid to purchase SCANA and SCE&G. The company offered and advertised a refund of $1,000 to customers. However, lawmakers realized that Dominion wanted to then recoup that money with higher rates over the next decade.[24] In December 2019, Dominion Energy purchased SCANA and SCE&G with an updated bid that replaced the $1,000 checks with lower rates for customers.[24] Customers will continue to pay an extra $2.3 billion to cover the expansion costs over the next two decades.[24]

2019-2020

Following the V. C. Summer failure, the predominant issue facing the South Carolina General Assembly from 2018 until the COVID-19 pandemic in 2020 was whether to sell Santee Cooper or to reform the utility's management.[35] The sale of the utility is favored by Governor McMaster. He has called Santee Cooper a "rogue agency" due to its independence and financial problems.[35] But the utility's debt consisting of $7 billion has complicated proposals.[35] The legislature passed a law at the end of the 2020 session prohibiting Santee Cooper from "entering into agreements that could make it harder for the General Assembly to sell the state-owned utility" in 2021.[36] In November 2020, Hugh Leatherman, the chairman for the senate finance committee, called for the chairman of Santee Cooper to resign after the utility entered into a $638 million debt deal.[36] Leatherman stated the deal may have violated state law.[36]

Several companies submitted bids to purchase the utility and in February 2020, the South Carolina Department of Administration chose NextEra Energy of Florida as the recommended bidder.[37] However, Santee Cooper submitted a separate plan to the general assembly to save ratepayers $2.3 billion over the next twenty years by pivoting from coal power plants towards renewable energy.[38] The utility also advocated for reform of its board to bring in more expertise, and for a more open rate-setting and construction process.[38]

Hugh Leatherman stated that without "meaningful reform that includes a new board and increased oversight" the only option was to divest the state from the utility.[39] Santee Cooper consumers will continue to pay an extra 5% per electricity bill over the next twelve years to pay off the utility's debt.[24]

2021

The future of Santee Cooper is a priority of the 2021 legislative session.[40] In the first week of the 2021 session, the House Ways and Means Committee passed a bill creating a committee composed of members of the General Assembly to revisit a sale of Santee Cooper.[41] The bill, which will be considered by the entirety of the House next, also includes "an amendment that would do away with NextEra as the preferred buyer" and "a provision for reforming Santee Cooper".[41] On the Senate side of the General Assembly, the Senate Judiciary Committee, concerned about NextEra's behavior in a separate deal in Florida, requested more information from the utility concerning its bid in early January 2021.[41] However, NextEra rejected to meet with the committee.[42] On January 28, 2021, a Senate subcommittee unanimously passed a resolution that could force NextEra to provide the senators with "correspondence, documents and information on consulting fees" related to the purchase of Santee Cooper. The resolution will be voted on by the full Senate judiciary committee next.[43]

Political ramifications

Although most state legislators serving in the General Assembly when the Base Load Review Act was passed have since left office, some who were not in office at the time have faced criticism in the aftermath of the V. C. Summer failure. Commentators believed state senator Luke Rankin's association with Santee Cooper led him to have an unexpectedly tight primary race in 2020.[44] Rankin was forced into a run-off which he ultimately won.[45] Additionally, Governor McMaster has faced criticism for how he has handled the future of Santee Cooper.[46]

The Coastal Conservation League has criticized the General Assembly's consumer-centric approach when considering the future of Santee Cooper. The organization has claimed that the legislature has failed to evaluate potential consequences to the climate potentially caused by the different proposals.[47]

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External sources
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