How not to sell a state asset: An update on Santee Cooper

This past session, lawmakers finally took action on Santee Cooper – without actually taking action. Instead of authorizing a sale of the troubled state-owned utility, they passed a resolution (H.4287) to explore three different options – to sell, to outsource the internal management to a third party, and to keep-but-reform. In theory, lawmakers will review their three options in the next legislative session and adopt the one they like best.

Not only has the legislature not committed to selling Santee Cooper, they have established a process of soliciting bids and offers which is neither accountable nor transparent. The governor – who, unlike lawmakers, answers to the entire state (along with the rest of the Santee Cooper Advisory Board) – is sidelined, and the public will be kept entirely in the dark throughout the bidding and selection process.

What’s happening with Santee Cooper

Here’s an overview of the current process and how it will play out:

• The legislation invited three types of offers, and established evaluation criteria for each:
  • Purchase of Santee Cooper by an outside organization
  • Management of Santee Cooper by an outside organization
  • Internal reforms of Santee Cooper performed by Santee Cooper itself
• Bids and offers will be submitted to the Department of Administration, which will hire experts to help evaluate them and negotiate with bidders. However, the bill instructs staff from the State Fiscal Accountability Authority (formerly known as the Budget and Control Board) to “assist” the Department.
• Bidding, evaluations and negotiations must be completed by January 15, 2020. If the department needs more time, the law allows one 60-day extension (and the department must notify the House and Senate appropriations chairmen, not the governor).
• The experts hired by the department must negotiate between each bidder and Central Electric Power Cooperative. Central is composed of the 20 electric cooperatives throughout the state, and is Santee Cooper’s primary customer. Central’s current contract with Santee Cooper allows it to effectively veto a sale by opting out of the contract.
• All of Santee Cooper’s assets are on the table – although some of these assets (particularly the lakes Marion and Moultrie and their hydro-electric dams) are under a Federal Energy Regulatory Commission license, which regulates what can be done with the properties. Should the license be surrendered, FERC would decide the future of the lakes. Whether the lakes should be on the table at all for possible sale was a point of contention for lawmakers. The final legislation includes the lakes and dams, and any purchase offers that don’t include those assets will be evaluated on whether the bidder would provide revenue streams to maintain the lakes.
• At the end of the process, the department’s experts will select the final purchase offer and management bid to be presented to the General Assembly along with Santee Cooper’s “reform” proposal. These offers must include contracts binding the bidders to the terms of their bids if accepted by lawmakers, proposed contracts to execute the sale or management proposals, and proposed contracts with Central, as well as the department’s evaluations and supporting documents.
• The three final offers must be submitted to the House and Senate appropriations committee chairmen, and those committees must review and make a recommendation within 30 days.
• The General Assembly will then consider any legislation to sell, outsource the management of, or reform Santee Cooper. If this process wraps up before the start of the next session, the bill requires the House and Senate’s presiding officers to call a special session to consider the issue.
• Any money from a potential sale will be placed in a separate account and spent by separate legislation – and that money may not be included in the appropriations bill. Also, the purchaser may not recover purchase costs from the ratepayers.

A nontransparent, unaccountable process

There are two major issues with this process:

1. The mandate is not to sell Santee Cooper.

Lawmakers did not authorize a sale: they merely directed the official exploration of three different possible outcomes and left their options open. Nothing will happen to Santee Cooper without further action by the legislature – either a joint resolution to sell or to authorize a third-party management arrangement, or a bill to adopt Santee Cooper’s “reform” proposal.

Moreover, two of those options should not even be considered. While selling Santee Cooper would not itself eliminate the energy monopoly, it would remove a major barrier to the ultimate goal: empowering customers to choose their own power providers.

Not only would this take South Carolina one step closer to deregulation, Santee Cooper’s debt would no longer be state-owned. Technically, that debt is revenue bond debt – debt guaranteed with the revenue stream of a government agency rather than being backed by taxpayers. Revenue bond debt cannot constitutionally be paid off with tax dollars, but lawmakers have violated that constitutional provision before – as they did by renaming the gas tax a “fee” and funneling it to State Transportation Infrastructure Bank revenue bonds. As long as Santee Cooper is state-owned, the possibility of a taxpayer bailout for its $15.8 billion in debt (much of which came from the failed V.C. Summer nuclear construction project) cannot be entirely eliminated.

Even if lawmakers outsourced Santee Cooper’s management, Santee Cooper would still be a state agency and a major barrier to deregulation – and the internal management would fall to an outside company, which would be unaccountable to the public. This option as described in the bill does not include reforming Santee Cooper’s governance structure, and the agency as a whole would remain as unaccountable to taxpayers as it is today.

Worse, the bill instructs the department to “consider” if the companies submitting management proposals offer to pay a “franchise fee or other form of consideration” to the state in exchange for management privileges. This is a suggestion that lawmakers would welcome payments – not from Santee Cooper itself, but from a private company, in exchange for running a branch of state government and (assumably) enjoying its proceeds – which come from the electric rates paid by customers.

This means that how much the various companies are willing to pay state government for the privilege of running Santee Cooper may well be a factor in which company (if any) is chosen – not merely how efficiently such companies could do the job and how much money they could save ratepayers. In fact, this “franchise fee” would likely be passed down as a cost to ratepayers.

2. The bid process is nontransparent and unaccountable.

Santee Cooper is the property of the taxpayers, not the government, and any exploration of a sale should be conducted in a fully transparent, accountable process.

• There was no comprehensive audit and report to taxpayers before examining “solutions.” The process should have started with a moratorium on all non-essential activity and a full, comprehensive audit of assets and liabilities, contracts and economic development activities, with all information and official findings fully disclosed. The Santee Cooper Advisory board, which is comprised of five constitutional officers (including the governor) was perfectly positioned by state law to oversee this part. While the value of Santee Cooper has been investigated by two legislative committees and their consultants, there has been no moratorium on non-essential activity and the information disclosed was far from comprehensive. In particular, lawmakers did not thoroughly examine the agency’s economic development activity and did not release a full report with official findings to the public.
• The bill cuts the governor out of the entire procurement process as well as the rest of the advisory board. Not only is the governor not overseeing the process of negotiating a sale, this bill bypasses the Department of Administration’s (a cabinet agency) accountability to the governor. It micromanages every step of the process, directs staff from the State Fiscal Accountability Authority (formerly known as the Budget and Control Board) to “assist” the department, and specifically prohibits information from being shared with the governor (despite the constitutional mandate that state agencies provide him with information upon request). In a nutshell, the bill leaves no doubt that the department is working for the legislature during this process. If the sale is to be as beneficial as possible to the taxpayer-owners of Santee Cooper, it must be executed by someone the entire state can hold accountable – not 170 lawmakers, none of whom represent the state as a whole.
• The competing offers and bids will remain a secret, never released to the public. The public will not be afforded the opportunity after the fact to examine all the bids submitted. Only the information related to the final proposals will be released. It should be noted that the bill specifically exempts this process from any conflicting provisions of the Procurement Code, effectively creating a special one-time procurement process that is less transparent than state law requires for ordinary government procurements.

Selling a multi-billion dollar state asset will be a complex process, and it should not be rushed in secret and managed by groups of unrepresentative lawmakers. Unfortunately, while legislators have not committed to selling it, they are evidently committed to retaining their own control over Santee Cooper and its future.

Accordingly, the process they have put in place is nontransparent, unaccountable and designed to benefit lawmakers rather than the people of South Carolina.