South Carolina Public Service Authority
(Santee Cooper)
API teamed with Global Infrastructure Partners (GIP) to acquire Santee Cooper, the state-owned electric utility, for $9.6 billion. This Santee Cooper example helps quantify the value of the “tax shield” and the daunting economic, social, and political challenges that privatization faces in the U.S.
Santee Cooper had been capitalized with $8 billion of largely tax-exempt debt. The debt funded over $4 billion in a now mothballed nuclear power investment and 5,400 megawatts of coal generation that was increasingly non-economic.
The API/GIP proposal preserved Santee Cooper’s tax shield and used a “hybrid rate regime” to optimize value. Our team proposal capitalized on API’s “super tax-exempt” structure, making API/GIP one of four finalists. However, this process and the subsequent asset transfer effort failed to garner the requisite legislative support.
A recent Moelis report drafted for South Carolina regarding the disposition of Santee Cooper, estimated that “privatization” would result in $5 billion of additional costs ~ a 60% increase – Largely due to new federal and state taxes, debt defeasance costs and moving to an IOU rate regime (See Figure 1 below).
Figure 1: 20-Year NPV of Incremental Costs of Generic Privatization of Santee Cooper
Note to Figure 1: Cost of capital calculation assumed $5.65 billion rate base for both Santee Cooper and hypothetical IOU; 3.5% cost of debt for Santee Cooper; 50/50 debt/equity capitalization structure for the IOU; 10% authorized return on equity and 3.5% cost of debt for IOU. Taxes calculation assumed 25% blended federal and state corporate income tax rate; 2% of net assets in service for property taxes; and $18 million per year in Santee Cooper sums in lieu of taxes.
(See more in the Report of the Department of Administration Pursuant to Section 9 of the Joint Resolution (A95, R113, H4287) Regarding The South Carolina Public Service Authority.)
Under an AIK of Santee Cooper to the South Carolina retirement system, the state would avoid this $5 billion of value destruction and capture almost $2 billion in savings from efficiencies and a new, more economic, energy resource plan – “Physical Asset Optimization.”
Moreover, the reduction in pension underfunding from the AIK would generate taxpayer savings for years to come and make electricity more affordable. This asset transfer process failed, but some interest remains to revisit an AIK of Santee Cooper to the pension system.