Developing Nuclear Energy with Advanced Cost Recovery: Learning from the V.C. Sumner Project Abandonment
Mary Geer Kirkland*
Climate change presents an urgent need for policy action due to humans’ significant role in causing an increasingly warmer climate each year. Among contributors to increased greenhouse gases associated with climate change, the energy sector is the largest, being responsible for 47% of annual global emissions. Simultaneously, global energy demands are expected to increase by 35% by 2035. Therefore, reducing greenhouse emissions via changes to the energy sector is a critical step towards mitigating the effects of climate change.
Meanwhile, energy policy, particularly related to climate change, remains a highly politicized issue in the United States. The Obama administration implemented many policies aimed at combatting climate change, including those aimed at reducing greenhouse gas emissions produced from energy sources specifically. The Trump administration then quickly overturned or weakened many of these policies, notably withdrawing from the Paris Climate Agreement. The Trump administration also clearly focused on fossil fuel development, particularly coal, the highest polluting fossil fuel. Now, the Biden administration has demonstrated a renewed commitment to environmental concerns, but it remains unclear how energy policy will move forward.
Nuclear energy, although a controversial energy source, is a necessary step in meeting short-term climate change goals due to its low emissions and reliability. However, nuclear energy requires high up-front capital costs, which led states to implement advanced cost recovery legislation. Advanced cost recovery legislation allowed utilities to raise rates on customers as costs were incurred before the nuclear reactors were online, reducing risk and making financing construction easier for utilities. This legislation left utilities largely to their own devices as construction costs skyrocketed and projects were repeatedly delayed. This failure calls into question what exactly allowed utilities to have this freedom at the expense of the ratepayers and how legislation can simultaneously incentivize nuclear energy to move forward in mitigating the effects of climate change and protect ratepayers from similar harm.
This Note will argue that more oversight processes are necessary to make advanced cost recovery a viable option to incentivize nuclear energy. Part II will discuss nuclear energy’s role in efforts to mitigate the effects of climate change. First, Part II will discuss the advantages and disadvantages of nuclear energy. This Note will argue that although nuclear energy has its disadvantages, it must be pursued due to its low carbon emissions and ability to meet growing energy demand. Then, Part II will give an overview of legislation aimed at nuclear energy over time. Finally, it will specifically discuss South Carolina’s Base Load Review Act, the focus of this Note, and how the Base Load Review Act allowed a South Carolina utility to raise rates on customers then abandon the project.
Part III will first analyze the specific aspects of the Base Load Review Act, including the initial project development, the base load review application, and the repeal and amendment of the Base Load Review Act. Then, Part III will provide a regional comparison of other states’ incentivization of nuclear energy, specifically Florida and Georgia’s advanced cost recovery schemes, as a point of comparison to South Carolina. Finally, Part III will discuss elements of the advanced cost recovery framework that may be changed to allow for nuclear energy development without the same negative outcomes, including the prudency standard, lack of public influence opportunities, oversight failures, judicial review of administrative decisions, rate of return determinations, and state subsidies.
Nuclear energy is a highly contested alternative energy source as a means of mitigating climate change. On one hand, many view nuclear energy as a viable option to phase out fossil fuels and decarbonize the energy industry alongside the use of renewable energy sources. Nuclear energy is a highly efficient and reliable energy source, providing 11% of the world’s energy in 2013, while requiring low levels of fuel to operate. Nuclear energy provides constant energy, possessing the same appeal as fossil fuels and distinguishing it from renewable sources like wind and solar. Nuclear energy also produces low greenhouse gas emissions—a stark contrast from fossil fuels presently relied on to provide energy globally. Nuclear energy is comparable to renewable energy in terms of carbon emissions. Nuclear energy is also much less land intensive than other sources like renewable energy, preventing energy sprawl, “the vast amount of land needed to produce certain types of energy.” Thus, nuclear energy could play a key role in the movement towards decarbonization of the energy sector due to its efficiency, reliability, and lack of carbon emissions.
Aside from energy advantages, nuclear energy is also an ideal option for its political viability. Nuclear energy garners bipartisan support, demonstrated by the passage of the Nuclear Energy Innovation Capabilities Act and the Nuclear Energy Innovation and Modernization Act in 2018. Both acts aimed to reduce initial costs and speed up nuclear reactor development. Although nuclear energy development has received bipartisan support, climate change generally remains a politically polarizing issue in American politics, posing an obstacle to efforts to develop nuclear energy as a means of mitigating the effects of climate change.
Nuclear energy also has drawbacks that have been highly criticized by nuclear opponents. First, there are safety concerns associated with nuclear accidents, manifesting most notably from the accidents at Chernobyl and Fukushima. Nuclear energy produces highly radioactive waste from its processes, presenting safety and pollution issues if it is released. Disposal of this waste also poses challenges as effective waste management systems have yet to be implemented globally. Second, nuclear energy requires large amounts of water for cooling reactors, a process that has been made even more difficult with rising global temperatures reducing the availability of water at a temperature that can be used for cooling.
International agencies, such as the International Atomic Energy Agency, mitigate some safety concerns through nuclear energy regulation. Safety risks in the United States are also mitigated by the regulatory structure enacted by the Nuclear Regulatory Commission under the authority of the Atomic Energy Act, which includes well-established and detailed requirements for nuclear reactors. Further, experts urge that developments in technology can reduce risks and provide waste solutions.
Of particular note to the issue at hand, nuclear energy has high up-front capital costs, including the cost of the facility and amounts needed during construction.” High up-front capital costs also include higher interest and financing costs due to the high overall construction cost and longer time for construction. The capital costs of nuclear power account for 71.4% of all costs, compared to 60% of costs of coal and 14.3% of costs of natural gas. However, the operating, maintenance, and fuel costs of nuclear power are lower than other energy sources and have remained stable over the last twenty or so years.
Overall, although nuclear energy has its drawbacks, it is a viable—if not necessary—option to mitigate the effects of climate change due to its reliability, efficiency, and lack of carbon emissions.
Nuclear energy development is necessary to mitigate the effects of climate change. Thus, climate change mitigation in the nuclear context turns on the best way to go about incentivizing nuclear energy development. Nuclear energy legislation is enacted at both the federal and state levels. Nuclear energy development began in the mid-twentieth century at the federal level providing for tax credits and favorable loan and risk insurance assistance. State efforts to incentivize nuclear energy development commonly focus on cost recovery, allowing utilities to raise energy rates in advance to recover the costs of constructing nuclear reactors before the nuclear reactors were online.
In the wake of World War II and the Manhattan Project, Congress passed the Atomic Energy Act of 1946, prohibiting private involvement in nuclear energy. The Atomic Energy Act of 1954 subsequently allowed private companies to enter the industry. Three years later the Price-Anderson Act of 1957 was passed to limit the liability resulting from accidents that previously deterred investment in nuclear energy. The Price-Anderson Act caused a great increase in the development of nuclear power until the late 1970s. However, nuclear development came to a halt from 1978 to 2008. This was due in part to safety concerns following the meltdowns at Three-Mile Island and Chernobyl, increased construction costs, and the development of other energy sources.
Congress passed the Energy Policy Act of 2005, which incentivized nuclear development via tax credits, loan guarantees, and risk insurance assistance. The Act marked the end of the “dark period of nuclear policy” in the United States and began the short-lived period of nuclear energy resurgence dubbed the “Nuclear Renaissance.” The Act still presented some limitations to nuclear energy development, including timeline limitations on tax credits which provided set dates by which construction had to be started and completed, creating risks in relying on the credits. The loan guarantee program, however, reduced risk through government backing and provided lower interest rates. Finally, risk insurance assistance provides backing to facilities in which the federal government pays any excess liability to the required insurance policy limits. These benefits also require the implementation of new or improved technology in the construction of nuclear reactors.
Although federal law is important to understanding the development of nuclear energy in the United States, states play a more significant role in energy policy because states regulate which electric power plants can be built. Due to the division of jurisdiction between the federal and state governments, “utilities’ business environment and earnings potential is largely determined through state regulatory and legislative initiatives.” Many states have passed legislation to supplement the aforementioned federal incentives. States commonly allow utilities to either recover costs from customers during or after construction or receive annual approval of costs to be charged to customers. State legislation also includes tax credits and exemptions to utilities for new construction of nuclear plants.
The national energy policy trend in the 1990s was deregulation of the energy sector and a movement towards a market-based approach, yet Southern states, including South Carolina, rejected the deregulation trend, opting to maintain investor-owned corporation monopoly control of energy. In this traditional cost-of-service model, utilities do not compete in an electricity market. Instead, investor-owned utilities enter into long-term monopoly franchises to provide electricity for a geographic area at rates set by the state public utility commission. Typically, state public utility commissions set rates via “rate case” procedures in which the commissions decide rates based on evidence presented by the utility concerning capital invested, expenses, and a rate of return necessary to cover financing costs. While the aim of the ratemaking is to provide utilities with a reasonable rate of return and provide customers with electricity at stable prices, the public utility commissions’ ratemaking authority vests it with authority to use ratemaking to accomplish various policy goals.
With federal incentives to develop nuclear energy, power companies lobbied for utility-friendly state legislation to help front the large capital costs of constructing nuclear reactors. In 2007, South Carolina implemented advanced cost recovery, along with several other states, including Georgia and Florida. Advanced cost recovery is the mechanism by which states allow utilities to recover costs before the reactors are placed online to provide electricity to customers, reducing the utilities’ financial risk in pursuing the project. Under advanced cost recovery, a utility includes costs in its rate base as soon as the costs are incurred, making it able to earn a rate of return on the costs to pay financing expenses. Prior to advanced cost recovery, the traditional approach was allowance for funds used during construction (“AFUDC”), in which the construction costs were not recovered in the base rate until the plant was in service. By allowing cost recovery before and throughout construction as opposed to only after project completion, advanced cost recovery lowers risks to utilities to increase investment in the development of nuclear energy.
The South Carolina legislature enacted the Base Load Review Act (BLRA), which allowed energy companies to raise energy rates before completing construction of a nuclear reactor. The BLRA, drafted by utility attorneys, had a stated purpose “to provide for the recovery of the prudently incurred costs associated with new base load plants . . . when constructed by investor-owned electrical utilities, while at the same time protecting customers of investor-owned electrical utilities from responsibility for imprudent financial obligations or costs.” The BLRA establishes a prudency standard for preconstruction costs in order to gain approval for advanced cost recovery. The BLRA also allows cost recovery even in the case of project abandonment if the utility makes a prudency showing by a preponderance of the evidence. The BLRA was repealed in 2018, largely in response to the failed Virgil C. Summer Nuclear Expansion Project.
Prior to the events leading to repealing the BLRA, the V.C. Summer Nuclear Expansion Project appeared to be a “smart move” for South Carolina Electric & Gas Company (SCE&G). SCE&G had plans to shut down coal power generators when the nuclear reactors were completed, a goal in line with President Obama’s crackdown on greenhouse gas emissions from coal. At the time of project approval, South Carolina was on the cutting edge of the “Nuclear Renaissance,” as the nuclear reactors would have been the first new nuclear reactors in the U.S. in thirty years. With the national pressure to move away from coal and advanced cost recovery allowing utilities to raise rates on customers to foot the bill of new reactors before their completion, South Carolina became an ideal environment for utilities to develop nuclear power.
Thus, SCE&G moved forward with the project, and in 2012, SCE&G received two combined licenses from the Nuclear Regulatory Commission to construct two nuclear reactors. SCE&G and Santee Cooper entered into a contract with Westinghouse Electric Company for the engineering, procurement, and construction of two reactors, which at the time were projected to cost $9.8 billion. Then, construction of the reactors began in March of 2013. Under the BLRA, SCE&G raised rates nine times over the course of construction, amounting to an almost 20% increase. Along with increases in the total cost estimate of the project, the projected completion date was also pushed back multiple times.
In 2017, Westinghouse declared bankruptcy, citing financial challenges due to delays and cost overruns on the reactor projects in South Carolina and Georgia. Although SCE&G and Santee Cooper considered continuing construction of one or both reactors, they ultimately halted construction on both reactors after spending around $9 billion on the project. At the time of abandonment, the project’s estimated cost had increased by 75% from the original estimate. SCE&G announced the abandonment in 2017 and cited multiple contributing factors, including plummeting natural gas prices, reduced state energy demand due to energy efficient technology and low economic growth, manufacturing failures and design changes leading to project delays and failure to meet deadlines, and President Trump’s rolling back of Obama-era carbon regulation policies. Governor McMaster forced Santee Cooper to produce auditor Bechtel’s report, which revealed numerous flaws in the project, including “unfinished blueprints, unorganized warehouses and ineffective oversight.”
The abandonment resulted in criminal and legislative investigations, as well as multiple lawsuits. The BLRA was challenged as unconstitutional due to the customer’s inability to challenge rate increases during construction. Former shareholders of SCANA, the parent company of SCE&G, sued on grounds that stock was traded at artificially inflated prices due to SCANA’s reassurances concerning the progress of the project. Ratepayers also sued on allegations that company executives misled consumers and the commission when petitioning for rate increases.
The timeline leading up to the abandonment of the nuclear project is complex, with contributing factors including “corporate-friendly politicians, an ambitious for-profit utility, an untested nuclear design, utility regulators who didn’t raise questions, investors who had nothing to lose, a state-operated financial partner and a small state looking to be on the leading edge of a nuclear renaissance.” Particularly, the BLRA is one of the key stimuli that allowed SCE&G to overcome the large capital costs and undertake the costly project, which raises the question of how the BLRA failed so dramatically in incentivizing nuclear energy.
Although advanced cost recovery addresses the issue of large up-front capital costs associated with nuclear energy development, increased oversight processes must be incorporated into legislation in order to better distribute the associated risks of the projects.
Under the BLRA, a utility may recover capital costs associated with the nuclear facility. First, a utility may file a project development application to raise rates to fund preconstruction costs. The utility’s application must describe the plant’s anticipated generation capacity and projected annual capacity and provide information about the need for the generation capacity and the reasonableness and prudence of the fuel source and generation types. Further, the application must also provide “other information . . . to establish that the decision to incur preconstruction costs related to the potential nuclear plant is prudent considering the information known to the utility at the time and considering the other alternatives available to the utility for supplying its generation needs.”
The application will be approved “if the utility demonstrates by a preponderance of evidence that the decision to incur preconstruction costs for the plant is prudent.” This prudency determination is based on the decision to incur preconstruction costs, not a specific cost item. If the utility meets the prudency standard, then pre-construction costs are fully recoverable through advanced cost recovery unless later costs or decisions are determined to be imprudent. The prudency determination under this section cannot be challenged or reopened in a subsequent proceeding. A utility can also recover prudently incurred costs after deciding to abandon the project if it demonstrates that the decision was prudent.
In an application for baseline review, the utility must include, inter alia, information regarding the anticipated construction schedules, costs, and schedule for incurring those costs; the specific type of units and their suppliers; the selection process for the type of units, components, suppliers, and contractors; risk factors; proposed rate design; and potential revised rates. The commission then will issue a base load review order if it determines that the utility’s decision to construct the plant is “prudent and reasonable considering the information available to the utility at the time.” The base load review order approves various components of the project, such as schedules, estimates, and projections and establishes that prudent costs, so long as they are in accordance with the base load review order, are properly included in rates. This initial base load review order is intended to provide “a comprehensive, fully litigated and binding prudency review before major construction of a base load generating facility begins” to prevent repeated litigation of the project’s prudency thus decreasing the risk and costs of the project. Therefore, prudency of the entire project is final and will not be reopened.
Utilities are then required to provide quarterly reports to the Office of Regulatory Staff about the project’s progress, including the any new costs, updated schedules, and other information. In turn, the Office of Regulatory Staff is required to continually monitor the project and retains the right to inspect the utility’s records and books regarding the project.
Utilities may petition the commission for a modification of the base review order, which will be granted if the commission determines “the changes in the schedules, estimates, findings, or conditions . . . are not [a result of the utility’s] imprudence” and “the changes [to] class allocation factors or rate designs . . . are just and reasonable.” If granted, this petition for modification modifies the base review order, which is used to make other determinations, such as whether to approve revised rates. If a utility materially and adversely deviates from the base load order,
the commission may disallow the additional capital costs that result from the deviation, but only to the extent that the failure by the utility to anticipate or avoid the deviation, or to minimize the resulting expense, was imprudent considering the information available at the time that the utility could have acted to avoid the deviation or minimize its effect.
Utilities may also annually request revised rates, which can be petitioned for review by an aggrieved party. In deciding whether revised rates will be approved, the commission must decide (1) “whether the plant is being constructed in compliance with the construction schedules and cost schedules approved by the Commission in the BLRA Order, and [(2)] whether the proposed revised rates reflect allowable plant capital costs, an appropriate cost of capital, a proper allocation of revenue requirements among customer classes, and proper rate designs.” The utility submits its request along with information to support revised rates, then the Office of Regulatory Staff (ORS) conducts a review and audit of the request and information. The ORS compares the review and audit results to the utility’s request to determine whether to approve the revised rates. Written comments are allowed concerning the revised rate request, and the ORS may revise its report accordingly before issuing its order. If the ORS fails to issue an order concerning the revised rates request, it is considered granted. Finally, if a request to increase rates is granted, the utility must notify its customers on the next billing.
The Public Service Commission (PSC) is “vested with power and jurisdiction to supervise and regulate the rates and service of every public utility in this State and to fix just and reasonable standards, classifications, regulations, practices, and measurements of service to be furnished, imposed, or observed, and followed by every public utility in this State.” A final order or decision by the commission may be appealed. For an agency action to be final, it “must mark the ‘consummation’ of the agency’s decision-making process—it must not be of a merely tentative or interlocutory nature” and it “must be one by which ‘rights or obligations have been determined,’ or from which ‘legal consequences will flow.”
In reviewing decisions of the commission, the “[c]ourt employs a deferential standard of review . . . and will affirm the . . . decision if it is supported by substantial evidence.” The court has a highly limited review role, and the commission’s findings are presumptively correct because the commission is considered an expert on utility rates. Thus, the court will only overturn a decision for compelling reasons, and the challenging party has the “burden of convincingly proving the decision is clearly erroneous, or arbitrary or capricious, or an abuse of discretion, in view of the substantial evidence of the record as a whole.”
In the case of the V.C. Summer Plant, SCE&G filed its application with a projected cost of $6.3 billion. The PSC approved its application, finding the construction “reasonable and prudent.” In determining the reasonableness of the projected cost, the PSC analyzed the cost compared to reported data, the construction contract, contingencies, inflation, and delay as a cost risk. The PSC particularly relied on the contractual guarantees to mitigate cost risks, which proved to be in error.
The V.C. Summer Project failure is “widely considered one of the biggest business failures in the state’s history.” Due to rate increases allowed under the BLRA, customers paid over a billion dollars to fund a project that would never be completed, sparking public outrage in the wake of the project cancellation. Electric customers were left to foot the bill of the failed project, with the BLRA operating as a “‘blank check’ from them to utilities.” One ratepayer testified at a rate hearing as to her hardship as a result of dramatically increased electric bills, stating, “I have a hot water heater, but I have to keep it turned off . . . . I have an air conditioner, but I can’t afford it. I sleep under a little fan . . . and I can’t breathe. I’m dying, so I may not be here for the next rate hearing.”
In response, the BLRA was repealed in 2018. The legislature amended the BLRA to add the definitions of prudency and imprudence. The prudency standard requires a “a high standard of caution, care, and diligence in regard to any action or decision.” The prudency review includes costs incurred or actions taken by others on behalf of the utility, including contractors, agents, officers, and third parties who were delegated authority via contract. The statute gives guidance to the commission in making its prudency determination by providing that the commission must consider the timeliness of the utility’s acts, prior imprudent acts that led to the decision, and any other factors relevant to the determination. To be imprudent, an act or decision may, but need not, rise to the level of “negligence, carelessness, or recklessness.”
The 2018 amendment also changed the revised rates approval process by giving the commission more discretion to consider additional factors other than the agreement between the utility and the Office of Regulatory Staff when deciding whether to approve the revised rates.
The BLRA provides that the Office of Regulatory Staff is charged with protecting the public interest by reviewing the “reasonableness and necessity” of costs. In the amendment to the BLRA, following the abandonment of the V.C. Summer Project, the legislature also amended the qualifications and abilities of the consumer advocate under the Consumer Protection Code. Further, the Consumer Protection Code was amended to provide that the consumer advocate will be notified of filings with the PSC that may impact utility rates and is allowed to intervene to protect consumers’ interests.
Other states similarly implemented advanced cost recovery frameworks to spur nuclear development around the same time as South Carolina, joining in on the so-called “Nuclear Renaissance.” Florida and Georgia’s efforts resulted in similar cost overruns and project delays as the V.C. Summer Project, providing further insight into how advanced cost recovery frameworks at this time did not implement sufficient safeguards to prevent failed projects.
Similar to the BLRA, the Florida cost recovery statute, § 366.93, provides for “alternative cost recovery mechanisms for the recovery of costs incurred in the siting, design, licensing, and construction of a nuclear power plant” The statute also granted authority to the Florida Public Service Commission (“FPSC”) to establish rules to promote investment in nuclear energy and recovery of prudently-incurred costs. Under the statute’s authority, the FPSC established the Capacity Cost Recovery Clause (“CCRC”), which, among other rules, established an annual review of the reasonableness of the projected construction costs and the prudency of the actual costs. The statute also provides for cost recovery of pre-construction and construction costs if the project is not completed. The statute was challenged multiple times, including in Southern Alliance for Clean Energy v. Graham, which resulted in amendment of the statute and administrative rule. Following this challenge, the legislature amended the cost recovery statute in 2013.
The amendment, among other changes and clarifications, established two time restrictions on preconstruction cost recovery, which incorporated the “intent to build” language relied on by the court in SACE v. Graham. First, if construction does not begin within ten years after receiving a license from the NRC, the utility must petition the FPSC to continue cost recovery. The FPSC then must determine whether the utility has an “intent on building the plant” to continue recovering cost. Intent to build is established “only if the utility proves by a preponderance of the evidence that it has committed sufficient, meaningful, and available resources to enable the project to be completed and that its intent is realistic and practical.” Second, if construction does not begin within twenty years of receiving a license from the NRC, then the utility cannot continue to recover costs under the statute. The “intent to build” requirement only applies when the utility has not begun construction. Otherwise, the standard for pre-construction and construction cost recovery remains that the plant is “feasible” and the projected costs are “reasonable.” The statute also still allows for recovery of all prudent construction costs if the nuclear plant is not completed.
The Florida Levy County project is another example of a utility company abandoning an expensive nuclear project and leaving ratepayers to foot the bill. Duke Energy in Florida, empowered by the cost recovery statute, planned to build two nuclear reactors in Levy County but abandoned the project in 2013 after spending over $1 billion dollars. Like the V.C. Summer Nuclear Plant in South Carolina and the Vogtle plant in Georgia, the Levy County project also entailed an engineering, procurement, and construction contract with Westinghouse and The Shaw Group for the two AP1000 nuclear units.
However, after spending nearly $1 billion dollars on the project, Duke Energy terminated the project and its construction contracts, citing the “regulatory uncertainty” surrounding advanced cost recovery. Although Duke Energy ultimately received two combined licenses from the NRC, it announced a settlement with the FPSC in 2017 in which it agreed not to build the reactors and instead invest in alternative energies, such as solar. Low natural gas prices and low energy demand at the time made nuclear energy a less desirable source for Duke Energy to pursue. Additionally, with advanced cost recovery allowing recovery of a portion of any costs incurred, reports showed that Duke Energy stood to profit from the project regardless of whether the plant was built. Finally, reports also showed an equivalent natural gas plant would be cheaper than continuing to pursue the Levy County project. Thus, the Levy County project demonstrates how utilities under an advanced cost recovery framework incur little risk in pursuing ambitious nuclear projects and suffer few consequences in the case of abandonment.
Passed in 2009, the Georgia Nuclear Energy Financing Act amended Georgia Code § 46-2-25 to provide advanced cost recovery when it previously did not allow recovery until after the project was completed. The Georgia Nuclear Energy Financing Act allows a utility to “recover . . . the costs of financing associated with the construction of a nuclear generating plant,” provided the costs are approved by the Georgia Public Service Commission (“GPSC”). The Act also removed the GPSC’s “prudency” review of costs incurred, distinguishing Georgia’s cost recovery statute from those of South Carolina and Florida. Instead, the Act grants the commission the authority to review costs with “any specific accounting treatment for the costs recovered,” suggesting the commission has broad discretion in deciding whether to allow cost recovery.
Unlike the cost recovery statutes in South Carolina and Florida, the Georgia Nuclear Energy Financing Act does not contain a provision that provides for how cost recovery is to be handled in the event of project abandonment. Although the cost recovery statute does not include such a provision, the Georgia Code provides that if a utility cancels a project as a result of disproval of proposed revisions to costs, schedule, or project configuration, that utility may recover its actual investment costs through rates. Opponents criticized the Act’s lack of provisions addressing construction timelines and limits on rate charges to customers. Subsequently, the Act was repealed for plants approved after January 1, 2018, making utilities unable to raise rates in advance for a project. Projects certified before January 1, 2018 can continue to be funded by advanced cost recovery.
Georgia’s cost recovery statute allowed Georgia Power to use advanced cost recovery for the construction of two new nuclear reactors at Plant Vogtle. Georgia Power received approval in 2009 to build two new nuclear reactors estimated to cost $14 billion and projected to be completed in 2016 and 2017. Like SCE&G, Georgia Power also entered into an engineering, procurement, and construction contract with Westinghouse, contributing to the financial stress that eventually led to Westinghouse’s bankruptcy. Construction began in 2013, but after Georgia Power pushed back the timeline and increased cost estimates numerous times, the reactors are scheduled to be completed at the end of 2022 and beginning of 2023. After the Westinghouse bankruptcy, Southern Nuclear took over project management, and unlike South Carolina and Florida’s nuclear projects, the Plant Vogtle project is still pushing forward to completion. Despite biannual reviews by the Georgia Public Service Commission, the timeline continues to be pushed back, and the projected cost has amounted to $9.2 billion, leaving ratepayers to foot at least part of that bill. Georgia demonstrates advanced cost recovery’s power to spur nuclear development without the guarantees of cost recovery in the case of abandonment. However, at the same time, Plant Vogtle continues to sink money into the project to avoid abandonment, which equally harms the ratepayers. Thus, the advanced cost recovery framework needs some form of earlier intervention to prevent harm before abandonment or before costs skyrocket.
Despite the failure of the V.C. Summer Project, prioritizing nuclear energy is still a key step towards reducing emissions and mitigating the effects of climate change. The V.C. Summer Project demonstrates the need to make changes to the current nuclear energy incentivization scheme and begs the question of how to go about furthering the goals of the BLRA without allowing a similar failure. Although utilities stand to make a profit from nuclear development, they also undertake a significant risk in building the first nuclear reactors in over thirty years. This risk is attributable to a variety of factors including low natural gas prices, negative impacts on credit from costs and delays due to the scale and timeline of projects, and general uncertainty making financing difficult. Therefore, some partnership between utilities and the government is necessary to developing nuclear energy. Although the BLRA is now repealed, the legislature made significant changes, such as adding the prudency definition, demonstrating that the BLRA is still a workable statutory scheme if some crucial changes are made.
One possible point of reform is the prudency standard implemented in cost recovery legislation. The prudency standard governs the PSC’s decision whether to approve the utility’s modifications to schedules, cost estimates, and rate increases, making it a crucial element of the cost recovery framework. The prudency standard’s importance is magnified when viewing it in the context of the abandonment of the V.C. Summer Project. Despite numerous cost overruns and delays in the V.C. Summer Project, rate increases were continually approved by the commission. Viewing the rate increases in the context of the project’s ultimate failure, the process by which the commission approved such changes becomes highly questionable.
In contrast to Florida and South Carolina, Georgia’s cost recovery frameworks do not include a requirement that a utility’s costs are prudent. However, it has been suggested that “this language may not carry any significant weight in application” because, in application, states are lenient in determining costs that may be recovered regardless of whether a prudency standard is included in the language of the statute. Specifically, a prudency standard is difficult to pin down as having a specific definition. Due to prudency’s amorphous nature, “without a floor determination of what is not a prudent cost, it is difficult to know whether the prudence review has any real meaning.” Although the prudency and imprudence definitions were added by amendment following the abandonment of the V.C. Summer Project, the BLRA was repealed, making it difficult to determine whether this amendment would have any real effect.
During the V.C. Summer Project construction, the commission’s prudency determinations were unsuccessfully appealed. For example, in South Carolina Energy Users Committee v. South Carolina Electric and Gas, the industrial utility customers and an environmental group appealed the PSC’s order approving SCE&G’s application for modification of the base load review order to update the schedule for a delayed completion date and increase cost estimates under section 58-33-270(E) of the BLRA. The court first noted the difference between a deviation proceeding, where the utility has already deviated from the approved order, and a modification proceeding, where the utility has applied to change the order. In a deviation proceeding, “a party must demonstrate by a preponderance of the evidence that the utility has deviated from the original base load review order, and then the utility may only recoup costs that were not the result of imprudence.” Conversely, in a modification proceeding, section 58-33-270(E) applies and modification is granted if the changes to the schedule and estimates are not the result of the utility’s imprudence and the changes to the “class allocation factors and rate designs are just and reasonable.”
The appellants argued that the PSC should have conducted a prudency review of the entire construction project “going forward.” The court disagreed, reasoning that the BLRA did not contemplate such a requirement, and the legislative purpose behind the BLRA counsels against allowing such a review. The court agreed with the PSC’s reasoning that allowing such reevaluation would open utilities to repeated litigation, defeating the BLRA’s purpose of decreasing risk to utilities.
Although the court is bound by the legal constraints of the BLRA, viewing South Carolina Energy Users Committee v. South Carolina Electric and Gas in the post-abandonment context demonstrates a need for advanced cost recovery legislation to provide for repeated review of the project’s overall prudency. It is now obvious in hindsight the sheer cost and delay of the V.C. Summer Project, none of which prevented the individual approvals of plan modifications and rate increases.
Therefore, to maintain the BLRA’s purpose in developing nuclear energy, the legislation must also contemplate regular, repeated review of the overall project’s prudency. For example, the Bechtel Report, an audit conducted by an engineering and construction company, Bechtel Corporation, revealed the V.C. Summer Project shortcomings, such as actual cost estimates and mismanagement. This type of outside auditing should be incorporated into the statutory prudency review, so that the PSC relies less on biased reporting by the utility itself and more on third-party review. Using outside auditors also aids the PSC in reviewing the utility projects, which can often be highly complex. By conducting regular overall prudency reviews, the PSC will consider the project’s prudency up to that point and going forward, as suggested by the appellants in South Carolina Energy Users Committee. Therefore, rate revision proceedings will weigh more towards protecting ratepayers, rather than being highly permissive toward utilities’ requests to increase rates, while still allowing cost recovery to promote nuclear development.
Ratepayers were left outraged by the rate increases that ultimately funded an abandoned project. Issues with the consumer’s role in advanced cost recovery include a lack of information and transparency and a lack of opportunities for consumer input. The BLRA allows for public comment to the PSC and ORC concerning revised rates. For example, a resident testified before the PSC at a rate increase proceeding regarding the impact of the increased electricity rates. Yet, the PSC continued to approve increased rates, demonstrating the futility of public comment. Also, although notification to customers of the increased rates is required, effective public participation often requires early intervention.
One major obstacle to consumer participation is its difficulty and its cost-prohibitive nature, partially due to the complex nature of utility construction projects. The Sierra Club, a non-profit environmental organization, and the South Carolina Energy Users Committee, an organization of SCE&G’s industrial customers, challenged SCE&G’s application for revised cost and construction schedules. Thus, public influence appears to be possible, but it is realistically limited to expensive, complicated, and generally inaccessible options, such as litigation. Additionally, those challenges to the V.C. Summer abandonment proved to be ultimately unsuccessful.
Thus, public influence appears to be most effective via pressure on the legislature, as seen in the repealing of the BLRA following public outrage. The V.C. Summer Project also shows that, although it may be an ineffective method of influence, political influence of legislative action comes too late, when the damage is already done. Therefore, an effective public influence opportunity must be provided earlier in project development.
A consumer advocate is designated by the state and represents the public in utility proceedings. Under the BLRA, the Office of Regulatory Staff (ORS) is charged with the responsibilities of representing the public interest in proceedings and acting on behalf of the public interest “when considered necessary” via inspections, audits, and recommendations. The ORS likely had the grounds necessary to act due to the projects’ numerous delays and cost increases. Thus, the ORS could have invoked its authority to act on behalf of the public much earlier in the project, possibly mitigating some of the resulting harm to the public. Therefore, the ORS’s statutory authority evidences a lack of action by the consumer advocate, rather than a lack of mechanism for consumer advocacy. Following the V.C. Summer abandonment, the legislature also authorized the ORS to represent customers in revised rate hearings before the PSC and provided funding for consumer advocate in those hearings.
Thus, to be an effective consumer advocate, the ORS must be called to intervene earlier and more often throughout project development. An effective public influence opportunity that could be incorporated into the BLRA is a mechanism for members of the public to directly appeal to the ORS to intervene with inspection and audit powers. This mechanism would allow the public to intervene earlier, hold utilities accountable, and as a result, create a more transparent construction process.
The ORS and PSC’s failures also implicate lack of legislative oversight. The Public Utilities Review Committee (PURC), comprised of six legislators and two members of the public selected by legislative leaders, nominates and oversees the ORS and PUC. The PURC is also required to conduct annual reviews of the ORS executive director, PUC members, and PUC actions to submit to the General Assembly.
Before and during the V.C. Summer Project, utilities, including SCE&G’s parent company, SCANA, hosted PURC members at lavish “appreciation dinners.” Although the utilities’ motive in hosting these dinners is contested, the dinners nevertheless demonstrate the close relationship that PURC had with utility executives, calling into question its impartiality and extent of oversight.
Following the abandonment, the legislature replaced PSC members who had reputations for being “utility-friendly” and enacted the Energy Freedom Act, which mandated that the PSC focus on protecting customers. Regular replacement of members will likely prevent the entrenchment of utility-friendly officials. In addition to replacing existing PURC and PSC members, external auditing may also aid in the issue of member bias. By requiring outside review as an element of public proceedings, the members will be less able to deny the realities of the project’s shortcomings since the information regarding the project will not originate from the utilities themselves.
Judicial review of decisions by the commission also proved to be an ineffective means of calling into question the utility’s construction plan. In Friends of Earth v. Public Service Commission of South Carolina, an environmental group appealed the commission’s approval SCE&G’s application to construct the two nuclear reactors. The group argued that the court should apply a heightened scrutiny to the commission’s decision.  The court declined to do so, refusing “to substitute its judgment for that of the Commission, in an area in which the Commission is recognized as the expert,” demonstrating the difficulty in having an administrative decision overturned by challenging in court.
The administrative review process has also been criticized in the context of utilities in that the judiciary makes determinations based on the complex factual record established earlier by the agency or the utility itself in its application. Utility construction projects are often complicated, implicating energy, environmental, and many other areas of concern. Furthermore, the facts are not easily discoverable like in a civil matter. Thus, the review process gives the agency and utility significant influence over the proceeding. For example, in South Carolina Energy Users Committee v. South Carolina Electric and Gas, the court afforded few words in considering the appellants’ sufficiency of the evidence argument, dismissing it by stating “the Commission parsed all of the evidence presented during the hearing and provided a detailed summary of all of the testimony on which it based its very technical findings. Thus, there is no doubt that the Commission’s findings are supported by substantial evidence in the Record.”
Ultimately, judicial determinations will be determined by applying the law, i.e. the BLRA, so courts are constrained by the limitations of the law. Although arguments may be made to urge more in-depth and less deferential judicial review, like in Friends of Earth v. Public Service Commission of South Carolina, courts are likely to decline to exert more power than the law proscribes them so as not to interfere with separation of powers, specifically the legislature’s delegation of authority to the PSC.  Thus, changes aiming at preventing abandonment of projects like the V.C. Summer Project must target the legislation and commission more directly rather than the judiciary.
Reform of advanced cost recovery legislation also must grapple with the disincentivizing effects on utilities. Advanced cost recovery disincentivizes developing energy-efficient technologies by encouraging costly projects. Since utilities are state-regulated monopolies, they are motivated by the rates that the state allows them to collect rather than market forces in a market-based electricity state. Therefore, utilities are incentivized to embark on costly capital projects to collect on favorable rates of return. Utilities also do not have an incentive to use power more efficiently, decentralize production through diversification, or innovate in energy storage.
The Supreme Court has given regulators flexibility in the method by which they determine rates of returns, so long as the rate of return is reasonable and fair to the utility. In South Carolina, and most other states, the PSC determines rates based on the revenue requirement, which is “the total amount of revenue the utility would need to provide a reasonable opportunity to earn a fair rate of return on its investment.” The revenue requirement takes into account operating expenses, rate base investment, and rate of return. The rate of return is the amount the utility is allowed to earn as a return on its investment. Since the rate of return determines the utility’s profits, it is one point of reform that has substantial influence on utilities.
One point of possible reform of cost recovery legislation is changing the process by which the regulatory body determines the utility’s rate of return, for example by adding incentive to the rate of return on the rate base or implementing a tiered rate of return. A rate of return incentive scheme would allow an increase in the allowable rate of return on associated costs when the utility undertakes the process of developing nuclear energy via advanced cost recovery. The risk of utilities purposefully driving up costs to increase their rate of return may be mitigated using a prudency review standard of costs.
Alternatively, a tiered rate scheme would increase the rate of return at each stage of the project. By increasing the rate of return during the construction phase, the tiered rate scheme would provide a higher profit margin to incentivize using cost recovery to undertake and ultimately complete the project. The tiered rate scheme could also disincentivize delaying or cancelling the project by lowering the utility’s rate of returns and thus lowering its profit margin. Therefore, the utility could still recover costs in the case of abandonment but at a lower profit margin. Utility manipulation of the tiered rate scheme could be mitigated with a requirement of regular reporting and a more rigorous feasibility and reasonableness standard than the current intent to build standard.
At the state level, four states have presently enacted legislation to subsidize existing nuclear plants. The key distinction between these states and states like South Carolina is the type of electricity market: retail-choice or state-regulated. The subsidizing states all have retail-choice electricity markets and no cost recovery, so the subsidies allow nuclear plants to survive economic pressures as a result of declining electricity prices due to market competition from natural gas and renewable energies.
Conversely, South Carolina, and many other states, have a state-regulated electricity market, by which state commissions can adjust prices to protect plants. Therefore, although subsidies may sustain nuclear power in market-based states, subsidies are likely not the way forward in a state-regulated electricity state like South Carolina. Thus, improvement in the incentivization of nuclear energy in a state-regulated electricity market necessarily requires reforms to the cost recovery framework itself.
While subsidizing nuclear energy may prove to be an effective stimulant to nuclear development, subsidies are not a viable state-level incentivization approach in a state-regulated electricity market like South Carolina. As an alternative to the development of new nuclear plants, subsidies for existing plants may help those plants survive market competition from other energy sources. However, subsidies should be adjusted for market changes in electricity prices; for example, decreasing subsidies when electricity prices increase and vice versa. Subsidies should also require plant efficiency in order to ensure that subsidies are targeting plants that are actually viable.
At the federal level, the Biden administration has backed a tax credit for nuclear plants similar to that already given to wind and solar power. The planned tax credit purportedly prevents plants from taking advantage of both state and federal tax subsidies and requires a showing of financial hardship. Senate Democrats subsequently introduced a bill in June 2021 to allow this tax credit for some existing nuclear plants
The abandonment of the Virgil C. Summer Nuclear Expansion Project demonstrates the need for a reallocation of risk furnished by the Base Load Review Act. In its initial form, the BLRA left utilities with little to no risk in undertaking ambitious nuclear projects and left them largely to their own devices as far as modifying schedules and costs estimates. Despite the substantial failure that the project represents, nuclear energy is still a viable, if not necessary, way forward to mitigate the effects of climate change. Thus, states must learn from failures such as this one and must implement more oversight processes into legislation. In particular, the BLRA must incorporate repeated overall project prudency reviews that examine the project’s overall viability going forward and include auditing of the utilities’ construction. On a similar note, the public must be provided a method of direct intervention via a call for the ORS to intervene and use its statutory authority to challenge the project’s viability to protect the public’s interests. Both changes would ensure more transparency in project development that was lacking the V.C. Summer Project. Finally, rate of return determinations can be adjusted based on the construction progress, incentivizing utilities to not only undertake the project but to complete it. Overall, advanced cost recovery is still a viable option to incentivize nuclear development by reducing utilities’ risks in undertaking the project. With important changes to the current statutory scheme, the public can be put on equal footing with the utilities, making nuclear projects benefit all through reduced emissions.
costs associated with the design, siting, selection, acquisition, licensing, construction, testing, and placing into service of a base load plant, and capital costs incurred to expand or upgrade the transmission grid in order to connect the plant to the transmission grid and includes costs that may be properly considered capital costs associated with a plant under generally accepted principles of regulatory or financial accounting, and specifically includes AFUDC associated with a plant and capital costs associated with facilities or investments for the transportation, delivery, storage, and handling of fuel.
S.C. Code Ann. § 58-33-220(5) (2015). Contingency costs, meaning costs unexpectantly incurred, are not included in the recovery of capital costs under the BLRA. S.C. Energy Users Comm. v. S.C. Pub. Serv. Comm’n, 388 S.C. 486, 496, 697 S.E.2d 587, 593 (2010) (reversing the Commission’s grant of contingency costs under the BLRA). ↑
all costs associated with a potential nuclear plant incurred before issuance of a final certificate under the Utility Facility Siting and Environmental Protection Act, including, without limitation, the costs of evaluation, design, engineering, environmental and geotechnical analysis and permitting, contracting, other required permitting including early site permitting and combined operating license permitting, and initial site preparation costs and related consulting and professional costs, and shall include AFUDC associated with those costs. For potential nuclear plants located in other states, the costs must be those incurred before issuance of a certificate by the host state under statutes comparable to the Utility Facility Siting and Environmental Protection Act.
§ 58-33-220(12). ↑