The North Carolina Utilities Commission heard testimony late last month about Piedmont Natural Gas Co.’s desire to merge a money-losing gas operation into its overall rate base, which turned into a discussion over who should pay for the unsustainable economic development project in the northeast part of the state.

Piedmont wants to buy full control of Eastern North Carolina Natural Gas from the Albemarle Pamlico Economic Development Corporation for $1. Piedmont and APEC are business partners with equal stakes in ENCNG, which was created by APEC and former co-owner Carolina Power & Light in 2000 to receive taxpayer-funded gas bond revenues.

APEC was originally formed as a gas district by a coalition of northeastern North Carolina local governments in 1998.

ENCNG has been using the bond funds to construct more than 600 miles of gas pipeline in northeastern North Carolina. However the company has only about 1,000 customers, and has no operating capital to sustain it for long on its own. Dr. Mitch Renkow, a professor of agricultural economics at N.C. State University, said in prior written testimony on behalf of Piedmont, “there is a substantial probability that (ENCNG) will never become economically viable.”

The bonds were promoted to North Carolina taxpayers as a way to encourage economic development in areas of the state without natural-gas service. ENCNG received $188 million of the $200 million in bonds that voters approved in 1998.

According to Piedmont and the Utilities Commission Public Staff, a state agency that represents utility consumers, ENCNG is losing about $8.3 million annually. In a separate but related case before the Utilities Commission, Piedmont is asking for permission to raise its rates to produce $36.7 million more in revenue per year.

At the hearing on June 23, a consultant for the Carolina Utility Customers Association argued against the “roll-in” of ENCNG into Piedmont, because the burden of the money-losing Northeast project would fall disproportionately on manufacturers in the state.

“I believe that it is very important … to understand that Piedmont is seeking a huge subsidy, the extent of which Piedmont will not even analyze, from industrial customers to pay for an entity that Piedmont will not purchase without asking manufacturers to subsidize its purchase,” said Kevin O’Donnell, president of Nova Energy Consultants, who represented CUCA before the Utilities Commission.

CUCA, which represents large manufacturers in North Carolina, has questioned why the Public Staff and Piedmont have studied the proposed merger’s impact only on residential customers. If implemented, the rate increase is expected to increase the average residential bill by about $9 annually.

Representatives of Piedmont have said if the Utilities Commission would not allow a roll-in of ENCNG into its overall rate base, then it would not follow through with a merger.

Under cross-examination by CUCA lawyer James West, Piedmont Vice President for Business Development Kevin O’Hara said that continuing ENCNG losses would continue to be shared by APEC and Piedmont if a merger didn’t happen. But O’Hara also suggested that if a roll-in failed, Piedmont might withdraw from the project altogether.

“You would pull out of your 50 percent ownership?” West asked O’Hara.

“Well, it is not a position we would take right now,” O’Hara said. “But it is something we would certainly look at, yes.”

Such an action by Piedmont would leave APEC unable to maintain the northeastern gas project on its own. The economic development nonprofit reported about $156,000 in revenue on its last two tax returns on file with the IRS – for fiscal 2002 and 2003. That was exceeded by $165,000 in total expenses for 2002 and $164,000 expended in 2003. Included in APEC’s reported revenue was $100,000 in government contributions for each of the two years.

APEC’s executive director, John Hughes, received almost $88,000 in compensation and benefits for 2003, and was reimbursed for $4,060 in expenses. He was paid $85,000 in salary and benefits the prior year, with $6,960 in expenses.

APEC’s 18 directors also received compensation: $10,200 in 2003 and $17,200 in 2002.

At the Utilities Commission hearing, West asked O’Hara how APEC was funding its half of ENCNG’s losses.

“It’s not right now,” O’Hara said. “…the operating cost(s) associated with that system are being funded by Piedmont with operating cost going into a deferred account…to be treated or addressed in the upcoming rate case.”

The accumulating losses, in addition to the ongoing ones, would be recovered by ENCNG ratepayers or a larger group of ratepayers, O’Hara said.

“It’s not believed (ENCNG) is going to be economically feasible in the near future,” O’Hara said. “And long term is very questionable.”

But O’Hara said merging ENCNG into Piedmont would produce some cost savings, because it would get rid of duplicative regulatory, tax, and financial reporting requirements.

“It will be a big fat benefit to eliminate that work,” O’Hara said.

O’Hara also said Piedmont would realize $10 million to $20 million in savings in its system growth needs by integrating the ENCNG infrastructure. But West contended that Piedmont could inexpensively lease the portions of the ENCNG system that it needed for growth, without merging in the entire company.

But the testimony turned into a debate about the economic development merits of sustaining ENCNG when Piedmont witness Renkow took the stand.

“I believe that maintaining (ENCNG) as a stand-alone entity would defeat the purpose for which the system was constructed…,” Renkow said at the hearing. “…the promotion of economic development in the eastern part of North Carolina.”

West, cross-examining Renkow, questioned his credentials and understanding of the natural-gas business. Renkow admitted that he didn’t have any prior knowledge of the ENCNG or Piedmont system, or even how much a dekatherm of natural gas costs.

West asked Renkow whether, as he had claimed in earlier written testimony, natural-gas service typically attracts new industry.

“Looking at the ENCNG system as it stands now,” West asked more directly, “do you believe that that is a potent tool for attracting new firms to the area?”

“It hasn’t proven to be a terribly effective tool as of yet,” Renkow said. “Whether it will in the future, I cannot say.”

West also challenged Renkow on his view that he saw “no alternative to a roll-in” to ensure the economic viability of the northeast gas project. West suggested, and Renkow concurred, that Piedmont’s shareholders – or perhaps taxpayers — could absorb the losses.

“But the taxpayers have already ponied up a fairly large chunk of money in that regard,” Renkow said.

One Utilities Commissioner, Robert V. Owens, telegraphed how he might vote on the case as the hearing closed.

“I well know that it’s going to be a long time before it’s a viable situation,” said Owens, a relative of State Senate President Pro Tem Marc Basnight, who helped get Owens on the commission during Gov. Jim Hunt’s administration. Owens is from Dare County.

“How does eastern North Carolina get out of this dilemma?” Owens asked. “I mean, the only way it can be done is over a long range, a long period of infrastructure. We know that’s gas, roads, education and all the other little amenities that go with helping the economic engine such as eastern North Carolina grow and develop.

“Let me remind you folks, Raleigh is not eastern North Carolina …Yes, we are poor, very poor. We have probably more outhouses in eastern North Carolina than any other area in the state of North Carolina.

“We have to be a part of this and pull ourselves out and somebody needs to reach down, as Piedmont has done today, and offer us a hand. And I congratulate them.”

Paul Chesser is associate editor of Carolina Journal. Contact him at [email protected].