THE ECONOMIC IMPACT OF DOMINION ENERGY S CURRENT PROPOSAL TO COMBINE WITH SCANA

Transcription

1 THE ECONOMIC IMPACT OF DOMINION ENERGY S CURRENT PROPOSAL TO COMBINE WITH SCANA MEMORANDUM DATE: April 13, 2018 TO: Dominion Energy FROM: Joseph Von Nessen, Ph.D EXECUTIVE SUMMARY This memo highlights the results of an analysis commissioned by Dominion Energy to study the economic impacts to South Carolina that would likely arise from the acquisition of SCANA by Dominion Energy. These results are intended to provide additional data and information for stakeholders to consider as they evaluate the nature of this acquisition. This memo and the analysis it summarizes should not be interpreted as either an endorsement or repudiation of the Dominion Energy proposal. The key findings of this analysis are as follows: Dominion Energy proposes to provide approximately $12.3 billion in savings to SCANA/Dominion Energy customers via three factors cash refunds totaling $1.3 billion, a rate reduction totaling $10.8 billion, and the purchase and use of a $180 million combined gas cycle plant without capital costs to customers. The total economic impact on South Carolina resulting from this $12.3 billion in customer savings is estimated to total approximately $18.7 billion in economic output across South Carolina. This figure reflects the dollar value representing all final goods and services produced in South Carolina that would be attributed (either directly or indirectly) to these customer savings. About 46.1 percent of this impact results from the savings to residential customers. This $18.7 billion corresponds to approximately $4.6 billion in labor income for South Carolinians that would likely arise from additional employment opportunities associated with new contract labor, an increase in the number of hours for existing workers, and both temporary and permanent hires. The economic impacts that derive from the $12.3 billion in customer savings benefits are primarily the result of the high percentage of customer savings that would be spent in the local economy and thus create an increase in local demand. This stimulus effect operates in a similar manner to that of a federal tax cut for individuals and businesses. The $18.7 billion economic impact estimate represents an economic multiplier (or ripple) effect of approximately In other words, for every $100 that is provided to SCANA/Dominion Energy customers in savings, it is estimated that a total of $149 in new economic activity will be generated across South Carolina.

2 OVERVIEW This memo highlights the results of an analysis conducted for Dominion Energy to determine the short- and long-run economic impacts to South Carolina that would likely arise as a result of the acquisition of SCANA by Dominion Energy. Specifically, the results documented in this report are the estimated economic impacts that would likely come about from each of the following factors, which together approximate a total of $12.3 billion in savings to both residential and nonresidential customers: - Factor 1: A $1.3B cash payment to current South Carolina SCANA/Dominion Energy customers - Factor 2: A $10.8B customer benefit plan resulting in an immediate reduction in monthly bills - Factor 3: A $180 million combined cycle gas plant to be purchased without capital costs to customers Following a brief summary of all results, the economic impact of each factor will be detailed individually. A description of the methodology used is then provided at the end of this memo. Note that all estimates documented in this memo derive from raw data provided by SCANA and Dominion Energy but are calculated independently using regional economic input-output models. All estimates are reported in current (2018) dollars SUMMARY TOTALS Total Economic Impact of the Acquisition of SCANA by Dominion Energy Factor $1.3B Cash Payment Refund $479,752,878 $922,073,538 $1,931,009,954 $10.8B Customer Benefit Plan $3,992,182,629 $7,668,998,037 $16,070,219,274 $180M Plant $175,768,915 $337,652,755 $707,544, Grand Total $4,647,704,422 $8,928,724,330 $18,708,773,263 Total Economic Impact of the Acquisition of SCANA by Dominion Energy by County County Abbeville $4,030,828 $8,222,961 $16,022,372 Aiken $484,172,798 $888,728,837 $1,966,540,844 Allendale $36,101,248 $64,445,694 $147,402,524 Bamberg $15,848,196 $31,032,399 $63,546,375 Barnwell $43,968,717 $84,221,990 $177,095,282 Beaufort $255,335,575 $518,763,450 $1,015,849,531 Berkeley $172,961,362 $325,464,435 $699,123,634 Calhoun $74,020,840 $124,849,531 $305,319,564

3 Total Economic Impact of the Acquisition of SCANA by Dominion Energy by County Charleston $1,219,005,638 $2,336,515,516 $4,909,216,395 Colleton $64,621,622 $129,137,447 $258,009,612 Dorchester $307,901,167 $622,674,039 $1,226,205,050 Edgefield $52,949,167 $98,189,820 $214,637,699 Fairfield $26,100,928 $49,236,636 $105,450,280 Greenwood $333,368 $721,909 $1,307,387 Hampton $41,473,159 $81,023,829 $166,372,956 Jasper $38,132,062 $74,872,719 $152,810,359 Kershaw $1,366,185 $2,325,791 $5,626,104 Lexington $636,102,288 $1,237,532,396 $2,553,974,972 McCormick $7,353,946 $14,340,478 $29,512,198 Newberry $14,519,815 $27,352,934 $58,677,217 Orangeburg $60,369,380 $121,776,135 $240,550,253 Richland $1,049,226,835 $2,007,680,936 $4,226,925,205 Saluda $36,568,299 $69,942,726 $147,332,205 Union $5,240,998 $9,671,721 $21,265,245 The proposed $1.3 billion Dominion Energy customer refund is estimated to generate a shortrun economic stimulus for the state of South Carolina that will total approximately $1.9 billion in economic output. This figure reflects the dollar value representing all final goods and services produced in South Carolina that would be attributed (either directly or indirectly) to the Dominion Energy refund. Dominion Energy proposes to implement a $10.8 billion customer benefit plan that would include $8.5 billion in savings associated with lower capital recovery costs (20-year vs. 60-year timeframe), $1.7 billion in savings associated with capital write-offs, and $575 million in savings associated with ongoing rate refunds. If implemented, such a customer benefit plan would likely generate a total of nearly $16.1 billion in new economic activity in South Carolina over the next 60 years that would not exist otherwise. This new economic activity would be generated because the lower capital recovery costs, capital write-offs, and ongoing rate refunds would translate directly into reductions in customer bills. These bill reductions, in turn, would provide customers with savings that would be primarily spent in the local economy and generate additional economic activity. Due to an ongoing increase in demand for electricity in South Carolina, Dominion Energy is also proposing to purchase a $180 million combined cycle gas plant. Such a project, which would normally be at least partially financed through a rate increase for customers, will in this case be provided to customers without a rate change. The preservation of consumer spending that will be maintained as a result of no new rate increase associated with this plant will generate a total of $708 million in economic output for South Carolina over the span of a 35-year period. The total economic impact on South Carolina resulting from all three aforementioned factors including the proposed refunds, rate reductions, and future discounted power services associated with the acquisition of SCANA by Dominion Energy is estimated to total approximately $18.7 billion in economic output. This will correspond to approximately $4.6 billion in labor income for South Carolinians that would likely arise from additional

4 employment opportunities associated with new contract labor, an increase in the number of hours for existing workers, and both temporary and permanent hires. This $18.7 billion total economic output estimate represents an economic multiplier (or ripple) effect of approximately In other words, for every $100 that is provided to SCANA/Dominion Energy customers in savings, it is estimated that a total of $149 in new economic activity will be generated across South Carolina ECONOMIC IMPACT RESULTS BROKEN DOWN BY FACTOR Factor 1: $1.3B Cash Payment (Refund) to South Carolina Customers The first economic impact examined would arise from a proposed $1.3 billion customer refund that would generate a temporary economic stimulus for the state of South Carolina, totaling approximately $1.9 billion in economic output. This figure reflects the dollar value representing all final goods and services produced in South Carolina that can be attributed (either directly or indirectly) to the Dominion Energy refund. Approximately 46 percent of this impact would result from refunds to residential customers. The total economic impact of the Dominion Energy refund will also include approximately $480 million in new labor income for South Carolinians. Because of the one-time nature of this proposed refund, this new demand for additional labor will most likely be fulfilled through a combination of additional hours of existing workers, temporary/part-time hires, and additional contract labor. Estimated Economic Impact of $1.3B Refund on South Carolina Direct Impact $256,973,975 $536,598,789 $1,213,992,479 Multiplier Impacts $222,778,903 $385,474,749 $717,017,475 Total Impact $479,752,878 $922,073,538 $1,931,009,954 Estimated Economic Impact of $1.3B Refund on South Carolina Residential Customers Only Direct Impact $123,319,783 $327,476,607 $546,110,479 Multiplier Impacts $106,338,500 $188,607,058 $346,598,328 Total Impact $229,658,283 $516,083,665 $892,708,807 Estimated Economic Impact of $1.3B Refund on South Carolina Non-Residential Customers Only Direct Impact $133,654,192 $209,122,182 $667,882,000 Multiplier Impacts $116,440,403 $196,867,691 $370,419,147

5 Total Impact $250,094,595 $405,989,873 $1,038,301,147 Factor 2: A $10.8B Customer Benefit Plan Resulting in an Immediate Rate Reduction Dominion Energy is currently proposing that within 90 days of an acquisition, South Carolina customers would experience a permanent reduction in the portion of their monthly electricity rates that currently go towards a VC Summer surcharge. This rate reduction would, over the span of 60 years, generate approximately $10.8 billion in customer savings (in 2018 dollars). Much of these customer savings would be spent within the local economy, thus generating additional rounds of economic activity via the economic multiplier (or ripple) effect. These multiplier effects, combined with the initial customer savings, are estimated to generate a total of $16.1 billion in total economic output across South Carolina s economy. As with the impact figures associated with the $1.3 billion Dominion Energy customer refund, this $16.1 billion estimate reflects the dollar value representing all final goods and services produced in South Carolina that could be attributed (either directly or indirectly) to this customer benefit plan. This $16.1 billion in economic output also corresponds to nearly $4.0 billion in new labor income for South Carolinians that would arise from an increase in employment opportunities among a variety of industries. These opportunities would arise as a direct result of an increase in demand in these industries due to additional consumer spending activity that comes about when Dominion Energy customers spend a portion of the dollars they save from reduced electricity rates within the local economy. Estimated Economic Impact of $10.8B Customer Benefit Plan on South Carolina Direct Impact $2,138,349,672 $4,461,546,975 $10,103,854,010 Multiplier Impacts $1,853,832,958 $3,207,451,062 $5,966,365,264 Total Impact $3,992,182,629 $7,668,998,037 $16,070,219,274 Estimated Economic Impact of $10.8B Customer Benefit Plan on South Carolina Residential Customers Only Direct Impact $1,022,843,881 $2,716,169,582 $4,529,571,395 Multiplier Impacts $881,997,043 $1,564,352,210 $2,874,769,726 Total Impact $1,904,840,924 $4,280,521,793 $7,404,341,121 Estimated Economic Impact of $10.8B Customer Benefit Plan on South Carolina Non-Residential Customers Only Direct Impact $1,115,505,791 $1,745,377,392 $5,574,282,615 Multiplier Impacts $971,835,914 $1,643,098,852 $3,091,595,538

6 Total Impact $2,087,341,705 $3,388,476,244 $8,665,878,153 Factor 3: $180M Combined Cycle Gas Plant to be Purchased Dominion Energy plans to purchase a new combined cycle gas plant in the coming years in order to satisfy an ongoing increase in demand for electricity in South Carolina. In most cases such a project would be at least partially financed through a rate increase for customers something that will not occur with this particular plant. As a result, this represents another net economic benefit for South Carolina customers. The benefit can perhaps best be described as the marginal increase in rates that South Carolina customers would normally have to pay (but will not in this case) if a plant like this were bought out of necessity to maintain electricity service in the face of increasing demand. Data were provided by Dominion Energy that specifically document the increase in customer rates that would normally occur following such a project. These data, which represent the savings to South Carolina customers, will translate into a total economic impact of approximately $708 million in economic output over the span of approximately 35 years. This also corresponds to approximately $176 million in labor income for South Carolinians that would not exist otherwise. Estimated Economic Impact of Uncharged Customer Expense for $180M Combined Cycle Gas Plant Direct Impact $94,147,848 $196,434,217 $444,855,264 Multiplier Impacts $81,621,067 $141,218,538 $262,688,771 Total Impact $175,768,915 $337,652,755 $707,544,034 Estimated Economic Impact of Uncharged Customer Expense for $180M Combined Cycle Gas Plant Residential Customers Only Direct Impact $45,034,052 $119,588,261 $199,429,215 Multiplier Impacts $38,832,808 $68,875,729 $126,571,152 Total Impact $83,866,860 $188,463,991 $326,000,368 Estimated Economic Impact of Uncharged Customer Expense for $180M Combined Cycle Gas Plant Non-Residential Customers Only Direct Impact $49,113,796 $76,845,956 $245,426,048 Multiplier Impacts $42,788,259 $72,342,808 $136,117,619 Total Impact $91,902,055 $149,188,764 $381,543,667

7 METHODOLOGY The economic impact of each of the factors examined in this analysis can be broken down into direct, indirect, and induced effects. The direct effects in this analysis specifically refer to the initial rounds of spending activity on the part of residents and businesses that occur as a result of the additional dollars they will have available due to the lower rates and immediate refunds issued by Dominion Energy. For example, a South Carolina resident receiving a refund (or a lower rate) will likely spend a significant portion of this refund (or the savings obtained from the lower rate) within the local economy. The portion spent by the customer would be considered a direct effect. Similarly, a business that receives a refund (or a lower rate) will also spend a portion of these dollars within the local economy on various goods and services such as labor, computer equipment, office supplies, raw materials, etc. Once again, this initial set of purchases is known as the direct effect. The indirect and induced effects refer to all of the additional rounds of spending activity that occur within the local economy that are the result of the initial direct effects. Indirect effects refer to additional rounds of spending occurring within business supply chains, while induced effects refer to additional rounds of spending occurring as a result of additional labor income. For example, if a portion of a refund issued to a business is spent on computer equipment, the computer vendor experiences an increase in demand as a result. This computer equipment vendor must then purchase additional materials from its own set of suppliers. The computer vendor suppliers, in turn, then purchase additional materials from their suppliers, and so on. All of these subsequent rounds of supplier spending are known as indirect effects. In a similar fashion, the computer vendor mentioned above may also have to hire additional workers to fill the new demand created by the direct effect. When workers are hired and paid additional wages, they spend part of these wages in the local economy on various local businesses, which also creates additional rounds of spending activity. These additional rounds of spending due to increases in wages are known as induced effects. Collectively, indirect and induced effects are known as economic multiplier effects, which explains why an initial injection of new funding into a local region typically leads to an increase in total economic activity that is far larger than the initial funding amount. Multiplier effects are determined by many factors, including the size of the supplier network and the particular region being examined. In this analysis, all economic impact estimates were calculated using the IMPLAN software package with specific parameters for the South Carolina economy. In assessing the economic impact of the Dominion Energy refund and rate reductions to residential customers, standard household spending patterns for residents of South Carolina were applied. For example, a household with an annual income of $100,000 will on average spend less of a $1,000 refund than will households with an annual income of $50,000. In assessing the economic impact of the Dominion Energy refund to non-residential customers, the assumption was

8 made that refunds would be spent by businesses in similar proportions to their standard (industry-specific) spending patterns. The total economic impact of Dominion Energy documented in this memo can be expressed in dollars by using estimates of either value added or economic output. Value added is an estimate of the net contribution to gross domestic product (GDP). By contrast, economic output is a broader measure that incorporates the overall value of production and is the most commonly used metric to summarize the overall economic impact of a specific phenomenon.

9 Author Profile Dr. Joseph Von Nessen is a Research Economist in the Darla Moore School of Business at the University of South Carolina where he specializes in regional economics, regional and national economic forecasting, and housing economics. He earned his Ph.D. in economics at the University of South Carolina in Dr. Von Nessen regularly conducts a wide variety of economic impact analyses, feasibility studies, survey research, and market research projects. He also frequently develops customized industry-level forecasting models for clients in both the private and public sector. Dr. Von Nessen engages in industry-level and regional economic forecasting for organizations at the state, national, and international level. He has served as lead researcher on impact studies and forecasting projects for clients as diverse as Sonoco, BlueCross BlueShield, Boeing, the South Carolina Housing Authority, and the City of Aiken, among others. He has also been the recipient of many grants from both local and national sources, including the U.S. Department of Energy and the U.S. Department of Defense. Dr. Von Nessen is responsible for the preparation and presentation of the University of South Carolina's annual statewide economic forecast. He serves on the advisory committee of the South Carolina Board of Economic Advisors, and is regularly invited to brief the Federal Reserve Bank of Richmond on economic conditions in South Carolina and the Southeastern United States. He frequently appears on programs at national conventions, including the International Builders Show, the 21 st Century Building Expo, the Association for University Business and Economic Research (AUBER), and the North American Regional Science Council and its subsidiaries. He is also a frequent participant in programs associated with Leadership South Carolina and the Riley Institute at Furman University. Dr. Von Nessen is a frequent speaker for business and government leaders throughout the Southeast, providing information and consultation about business, housing markets, and local economies. He also makes frequent media appearances to discuss various local economic topics of interest.