Tue 07/31/2018 06:30 AM
Event Driven Takeaways
  • Federal district court Judge J. Michelle Childs yesterday, July 30, held the first of two days of hearings on SCANA’s request for a preliminary injunction to prevent implementation of legislation temporarily cutting the construction surcharges SCANA collects to offset the costs of its now-abandoned $9.5B V.C. Summer Nuclear Power project. The complaint was brought by SCANA’s principal operating subsidiary South Carolina Electric & Gas, or SCE&G.
  • Dominion Energy has made clear in recent weeks that the disposition of this action will not cause it to abandon the bid for SCANA. Dominion’s position was reiterated in court and was not disputed by any of the parties.
  • Judge Childs, who on Friday dismissed SCANA’s original complaint, is still entertaining three motions to dismiss the revised complaint filed by the defendants, the PSC, and the each of the two intervenors, State House Speaker Jay Lucas and State Senate President Pro Tempore Hugh Leatherman, collectively on behalf of the General Assembly.
  • Following opening statements, SCE&G presented four witnesses: two company executives and two utility rate experts who testified to the imminent harm SCE&G will face if the PSC is not enjoined from implementing the rates.
  • SCE&G alleges that the two acts, collectively referred to in the complaint as “the Act” passed by the General Assembly in late June is unconstitutional on four grounds: the Act is a bill of attainder, it is an unconstitutional taking of SCE&G property, it deprives SCE&G of substantive due process and it deprives SCE&G of procedural due process.

Federal district court Judge J. Michelle Childs on Monday, July 30, held the first of two days of hearings on SCANA’s challenge to the constitutionality of recently-enacted legislation and its request for a preliminary injunction against implementation of the mandated experimental rates that temporarily slash the surcharges SCANA collects to offset the construction costs of its now-abandoned $9.5 billion V.C. Summer Nuclear Power project.

The complaint was brought by SCANA’s principal operating subsidiary, South Carolina Electric & Gas, or SCE&G, and names the South Carolina Public Service Commissioners, or PSC, as defendants. State House Speaker Jay Lucas and State Senate President Pro Tempore Hugh Leatherman, together representing both chambers of the General Assembly, have been granted intervenor status to oppose SCE&G’s complaint.

On July 27, Judge Childs dismissed SCE&G’s original complaint but gave the company leave to refile an amended complaint that became the basis of this week’s hearings. The PSC, Speaker Lucas and President Pro Tempore Leatherman have all filed new motions to dismiss SCE&G’s amended complaint. Judge Childs asked questions of the parties about the amended motions to dismiss at the close of Monday’s session on the injunction but did not indicate when she expected to rule. She said that she expected to continue with the second day of hearings on the injunction on Tuesday, July 31.

While the arguments on the motions to dismiss centered on the appropriateness of federal court intervention in a state regulatory matter, the bulk of yesterday’s hearings was spent on the plaintiff’s efforts to demonstrate that SCE&G will suffer immediate and irreparable harm if the two acts passed by the General Assembly, Bill Number 287 and Joint Resolution 285, are implemented, as mandated, by the PSC.

Opening Arguments

David Balser, of King & Spalding, opened arguments for SCE&G by arguing that “the Act”, which is how SCE&G refers to both bills collectively, is unconstitutional because it is a prohibited bill of attainder, is an unconstitutional taking of SCE&G property without compensation, denies SCE&G its substantive due process rights, and denies SCE&G its procedural due process rights. Balser also argued that the bill was retroactive in its effect, both by changing rates going back to April 2018 and also by changing the definitions of prudency that the PSC will use in its proceedings.

Those contentions were hotly contested by counsel for the two intervenors, House Speaker Lucas and Senate President Pro Tempore Leatherman. In a peculiarity of the case, the PSC, as a quasi-judicial body, cannot defend itself in court because it is currently adjudicating the matter at issue before the court, and cannot reveal its thinking on a matter still pending before it.

Counsel for the intervenors advanced a variety of arguments against SCE&G’s allegations. In essence, counsel argued that SCE&G faces neither imminent nor irreparable harm from the legislation. Counsel repeatedly returned to the theme that the SCE&G was, in fact, prematurely seeking an injunction in order to impact the PSC proceedings later this year on its merger application with Dominion as well as the prudency determination on SCE&G’s decision to abandon the nuclear project in July 2017.

The Witnesses
SCE&G called four witnesses, two of its own executives and the first two of its outside experts, on July 30 to demonstrate that the company will suffer immediate and irreparable harm if the Act is implemented.

SCE&G’s Chief Financial Officer Iris Griffin was the first witness.She testified that the experimental rate mandated by the Act could cause SCE&G to be downgraded to junk bond status by the credit rating agencies and that would foreclose the company from accessing the deepest and most liquid capital markets. Griffin argued, under cross-examination, that the company has already begun to slow its discretionary maintenance efforts and would be constrained in storm prevention and clean-up should it lose access to the capital markets. Griffin noted that SCANA, as the holding company, has already been downgraded but that SCE&G has, to date, maintained its investment grade rating although it is on negative credit watch for a downgrade due specifically to the legislation that is the subject of this proceeding.

SCE&G also called its chief internal regulatory counsel, Chad Burgess. Although Burgess was only supposed to testify about SCE&G interaction with the PSC in the wake of the Act passing in late June, counsel for the intervenors used the opportunity to try to introduce into evidence the so-called Bechtel Report. This was a report completed in 2016 for SCANA and its junior partner Santee Cooper, which was extremely critical of the ability of the project to get completed on time.

SCANA has maintained that the report, which was made public in 2017 by Governor Henry McMaster, is a privileged document prepared for potential litigation against Westinghouse, the contractor for the nuclear project. It was Westinghouse’s bankruptcy in March 2017 that led to the rejection of the fixed cost contract with SCANA that triggered the final decision in July 2017 to abandon the project.

Intervening counsel hoped to show that SCANA did not have “clean hands” in obtaining the rates and therefore is not entitled to equitable relief now that those rates are being temporarily vitiated. However, while the report itself may be made part of the public record, Judge Childs did not allow any testimony or other materials to be introduced that would back up the claims of intervening counsel.

SCE&G had some success with its two outside expert witnesses, Robert Hevert and Ellen Lapsom, both of whom are acknowledged experts in utility financial health. Lapson, who had spent 17 years at Fitch Ratings developing their credit rating methodology for the utility sector was particularly effective in rebutting arguments that the irreparable harm to SCE&G was as much the product of other factors, such as those stated in the company’s most recent 10-K and 10-Q, as it was of the Act. Lapson sharply disagreed, likening the situation to one where an enfeebled person is walking down a slippery sidewalk and you decide its ok to push them into the street because they probably would have slipped and fallen anyway.

Judge Childs was attentive throughout the day’s proceedings, although she also acknowledged that she had been reviewing the briefs on the motions to dismiss while also presiding over the hearing. She announced that the second day of hearings on the request for a preliminary injunction would take place as scheduled at 9 a.m. ET on Tuesday, July 31.

--Andrew Lowenthal