Bechtel Report Evidence of Government Failure

The House energy committee met today to discuss the contents of an audit of the failed nuclear construction project. This audit was conducted by Bechtel Corp., the largest engineering and construction company in the country, and it was released by Santee Cooper only after intense pressure from lawmakers and the governor.

The report, commissioned at Santee Cooper’s urging in 2015 and completed in early 2016, details the extensive mismanagement of the nuclear project. Problems included: the lack of a complete design for the nuclear reactor; poor-to-nonexistent project management; unrealistic project plans and schedules; and that, according to one massively understated conclusion, “The Contract does not appear to be serving the Owners…particularly well.”

The real takeaway, however, is that lawmakers – particularly legislative leaders – evidently did not know at the time that the plant construction was failing. This constitutes a major failure on the part of every level of governmental oversight in place, from the Office of Regulatory Staff (ORS) and the Public Service Commission (PSC) to the General Assembly.

Santee Cooper: The (non-existent) first line of accountability

Santee Cooper – a government agency that acts as a utility – owned 45 percent of the project and holds $4 billion of debt from it. Yet all reports agree that Santee Cooper had entrusted the entire project oversight to its partner SCANA (the parent company of SCE&G). Like every state agency, Santee Cooper must be operated for the benefit of the people of South Carolina. It cannot properly safeguard the public interest – not to mention the interests of ratepayers in all 46 counties who will have to repay that debt – by taking a hands-off approach.

The project started in 2009, but the earliest reported pushback from Santee Cooper wasn’t until 2014. Until the Bechtel report was commissioned in 2015, Santee Cooper’s involvement basically consisted of a series of angry emails – hardly the guardianship of taxpayer interests one would expect from a government agency. Even the audit commissioning came six years into the project’s construction, although there were red flags from the very beginning.

It wasn’t until 2017 – eight years and billions of dollars later – that Santee Cooper decided to abandon the project.

ORS and PSC: Approval without question?

The Base Load Review Act (BLRA) limited PSC’s ability to disapprove the rate hikes by design. However, state law gives the ORS the responsibility to conduct “inspections, audits, and examinations of public utilities regarding matters within the jurisdiction of the commission” when it is in the public interest, and/or requested by the PSC.

Constantly amended schedules, unfinished designs and cost overruns should have been more than sufficient grounds for either the PSC or the ORS to trigger a state regulatory audit long before 2015.

Legislative oversight of state regulatory agencies

The Public Utilities Review Committee (PURC) not only nominates the PSC but oversees its performance. State law requires the PURC to conduct annual performance reviews of both PSC members and the executive director of the ORS.

The PURC is comprised of six lawmakers and two members of the general public, which are selected by two legislative leaders – the House speaker and Senate judiciary chairman. State law requires the PURC to conduct annual performance reviews for PSC members individually and for the PSC as a whole, and those reviews must be submitted to the General Assembly.

However, state law also requires PURC to evaluate the PSC’s actions “to the end that the members of the General Assembly may better judge whether these actions serve the best interest of the citizens of South Carolina, both individual and corporate.” The law goes on to state that the PURC must “undertake such additional studies or evaluations as the review committee considers necessary.”

Clearly, any mismanagement issues on the scale of the V.C. Summers disaster should have surfaced during the PURC’s oversight of the PSC and the ORS, and the conditions that should have triggered an ORS audit could also have motivated PURC to investigate further into the project themselves.

The Speaker of the House and the Senate Judiciary Committee Chairman, as the two legislative leaders at the top of the regulatory accountability structure, are ultimately accountable for the fact that the state was blindsided by the contents of the Bechtel report – to the cost of the ratepayers all over South Carolina.

Will the Bechtel report change anything?

Whether or not the Bechtel report will prevent SCANA from recouping further costs from ratepayers is uncertain and will almost certainly be determined in the courts. However, it is not a simple question.

The BLRA states that when a plant is abandoned, the costs are recoverable if the utility can prove that the decision to abandon the plant was prudent and that, based on information available at the time, the costs incurred were not imprudent – a term not defined anywhere in the statute. This makes it very difficult to prevent the off-loading of construction costs onto the ratepayers by design, as that provision ensured that plant construction was a much safer bet for creditors.

The primary lesson of the Bechtel report is that the information it contains and the legislative response is unquestionable evidence of a massive failure on the part of state government. Lawmakers are accountable both for the legislation that led to the current energy crisis, and for the entire approval and oversight process. The true solution is to dissolve their power monopoly over the energy industry.

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