SCE&G, part of shareholder- owned Scana Corp., is about to build two new nuclear reactors with its partner Santee Cooper, S.C.'s public utility owned by the state. Together the two units are expected to cost $9.8 billion. The location is the site of the V. C. Summer plant in Jenkinsville, S.C.

To cover the costs, both Santee Cooper and SCE&G will have to raise their electric power rates to their customers. South Carolinians, whether they pay their power bills to a local co- op or to a shareholder- owned utility, get a good deal, a discounted rate compared with the country's average residential electric power rate.

The challenge of this article is to explain how those rates get determined in a somewhat hidden context of financial and market considerations.

As a shareholder- owned regulated utility, SCE&G needs permission from South Carolina's Public Service Commission (PSC) to adjust electric power rates. Santee Cooper, owned by the tax payers of South Carolina and their elected officials, does not appear before the PSC because Santee Cooper is already acting purely in the public interest. Scana's SCE&G, on the other hand, is in business to generate profits and, thereby, dividends for its shareholders, the owners of the corporation.

For most of the latter half of the 20th century from his lectern at the University of Chicago Graduate School of Business, economist and Nobel laureate Milton Friedman said, "The No. 1 purpose of the corporation is to serve the needs of its shareholders."

The PSC understands Dr. Friedman, and the PSC understands its mission: to serve the needs of the people of South Carolina. The PSC, then, must keep SCE&G's parent fit and flush, but the PSC must also hold down the cost of a kilowatt- hour of electric power.

The concept began about 100 years ago when the recovering pockets of the Confederacy had to come up with a means to attract capital to build generating capacity, outrageously expensive sources of electric power to distribute to the homes of South Carolinians.

Before there was an income tax, before the 16th Amendment was ratified in 1913, there wasn't much of a tax advantage in municipal bonds, the modern means to build municipal projects. So the questions were, "How do we attract capital? Bonds have no tax advantage, and, besides, the populace has too little faith and credit to assure the investors of payment. Should we guarantee a return on the equity of common shares owned by people who bought the shares at a stock exchange? Can the return be based on the payment of the rates? If the rates can be regulated, then the return can be regulated. Is that not true?"

Here's what happens in 2008.

Shareholder- owned electric utilities, like cities, operate on borrowed money, so the cheaper the borrowed money, the cheaper the electricity rates to the customer. To hold high the value of a share of stock is to hold down the cost of borrowing money. Interest rates stay down when the assurances of payment stay up. If the corporation is authorized to issue more shares in case it has to raise funds fast to pay off debt, and if those shares can continue the high value of what's already outstanding in the market place, the interest rates are low and the electricity rates are low, too.

The PSC enters into negotiation with Scana (SCE&G) to determine the new rates for electric power, and while they're at it, they determine the targeted return on common equity.

In a decision on October 12, 2005, the PSC approved a return on common equity of 10.25%. On June 15, 2007, Scana asked the PSC to allow for a return on common equity of 11.75%, and on January 1, 2008, Scana began charging electric power rates based on a return on common equity of 11%. Every time Scana asks for a rate hike, it's based on the targeted return on common equity. If that targeted return is not met in the next year, Scana asks for another rate hike.

Presently, Scana is pushing SCE&G to ask for a 37% rate increase to help with the two new nuclear reactors in Jenkinsville. The targeted return on common equity that comes with the 37% increase has not been reported.

The term "common" comes from common shares of stock, as removed from "preferred" shares.

In a grander sense, a share of Scana stock has to attract investors in competition with precious metals, real estate, oil exploration wildcatting, and all other kinds of opportune investments. In other words, the shareholderowned utility's return on common equity has to have a healthy comparison with its peers on the stock exchange, and it also has to compete for investors' dollars outside the stock market, too.

As complicated as all this must be for the typical residential rate payer and the average Scana shareholder, it's part of a system that worked pretty well for the last century. In December 2007, the average price of a residential kilowatt- hour in South Carolina was 9.05 cents. While in Connecticut, a kilowatt- hour was 17.86 cents, and in Hawaii, 28.27 cents. For the United States as a whole, the average cost per residential kilowatt- hour was 10.31 cents, still 14% more than in South Carolina.