News: CJ Exclusives

Many Communities See High Electric Bills

KINSTON – Electrical customers in North Carolina served by city-owned electric utilities commonly grouped under the association name of ElectriCities have experienced steep increases in their bills in recent months. In Kinston, for example, rates went up three times in 2002 for a total 10 percent increase. Given the financial structure of city-owned power suppliers, relatively high rates are likely to continue for the foreseeable future.

Communities such as Kinston, Tarboro, and Elizabeth City are paying the price now for poor decisions in the 1970s and early 1980s to become part owners of nuclear plants and focus on short-term profitability for the power agencies and their members.

Until the 1950s and 1960s, a number of municipalities operated their own electrical generating plants. Advances in technology, however, made such relatively small-scale operations inefficient. The towns, in time, became wholesale customers of major electrical utilities such as Duke Power or Carolina Power & Light (now Progress Energy), and in turn resold power to local customers.

While a workable relationship, many of the municipalities desired to again produce energy on their own. In the 1970s, changes in state law and the nuclear power plant building boom would allow them to get back into the game.

In 1975, the General Assembly enacted Chapter 159B, allowing municipal power systems to do jointly what they could do each do individually. As a practical matter, this allowed systems to join together and form a separate legal entity (power agency) to own power plants. A 1977 state constitutional amendment took this a step further, allowing municipalities or the new joint agencies to be part owners of plants with private utility companies or cooperatives. In either case, individual towns and cities would be responsible for the debts that the power agencies accrued in their behalf.

Previous to these changes, municipal systems were restricted to being 100 percent owners of their plants or contracting for power from an outside source.

Two municipal power agencies were formed to take advantage of these changes. Both soon become part owners of nuclear power plants.

The North Carolina Municipal Power Agency Number One began negotiating with Duke Power in 1976 about acquiring a share of a nuclear plant. In 1978, it acquired a 75 percent interest in the Catawba Number 2 nuclear reactor then under construction on Lake Wylie, just south of Charlotte. High Point took the largest share in NCMPA1. Gastonia, Lexington, Monroe, Statesville, Shelby, Albemarle, and 12 other towns in the Piedmont also are part of the power agency.

At about the same time, 32 communities, including Greenville, Rocky Mount, Wilson, Kinston, and New Bern, formed the North Carolina Eastern Municipal Power Agency. In 1981, the NCEMPA entered into a contract with CP&L. The power agency bought a 13 percent to 18 percent stake in two already operating nuclear reactors (the two Brunswick units near Wilmington) and three coal-fired power plants (Mayo Creek 1 and 2 and Roxboro 4). More significantly, NCEMPA obtained a 16.17 percent in the Harris nuclear plant then under construction near Raleigh.

NCEMPA and NCMPA1 are sometimes inaccurately referred to as “ElectriCities.” While members of the two power agencies are typically also members of ElectriCities, ElectriCities is a separate trade organization for municipal power systems that manages NCEMPA and NCMPA1 operations. ElectriCities also includes members in South Carolina and Virginia that are not part of NCEMPA or NCMPA1.

Becoming the risk taker

In becoming part owners of electrical plants, the two public power agencies, and by extension the individual municipalities that belonged to them, were acting as entrepreneurs. With such risk-taking behavior come the rewards of profit — lower-cost electricity and cash payouts that the towns hoped to obtain — as well as the potential for loss.

Unfortunately, the municipalities could not have picked a worse time to invest in nuclear plants. The Three Mile Island accident slowed down construction and increased cost. As a result, the Catawba 2 and Harris plants proved to be the most expensive sources of electricity for their respective utilities.

Many of the economic assumptions upon which NCEMPA and NCMPA1 had based their decisions to buy into the plants also proved incorrect. Most notably, interest rates were at high levels, and the two power agencies were capitalizing the interest costs until after the plants entered service.

Paying the piper

Still, not all of today’s higher rates may be attributed solely to bad luck or slow economic growth. The power agencies also made a conscious decision to offer lower rates in the systems’ early years — and payouts to member municipalities — at the expense of increased debt. The procedure is described in detail in Power Play, a March 2000 John Locke Foundation Policy Report written by Marshall Lancaster. Lancaster was executive director of ElectriCities from 1972 to 1978.

In the report, Lancaster describes a typical example. “When Catawba did go into commercial operation, the agency initially sold to Duke electricity amounting to 97% of the agency’s ownership of Catawba 2. This heavy buyback, coupled with slower agency growth, produced an unexpected result: In the early period of the arrangement, after all costs and offsets were calculated, Duke was in a position of actually having to write monthly checks to NCMPA1. The agency, meanwhile, continued its regime of borrowing to pay interest. Once again, the agency and the participants chose to spend most of the savings.”

This approach was even verified at the time by NCMPA1’s Washington counsel during testimony before the North Carolina Utility Commission. “The rate that the Power Agency is charging the cities now, I believe is less than the wholesale rate, but part of that’s due to the way they’ve been using their ability to finance and advance… I think now the Agency has gone out and financed to pay today’s rates against what may happen in the future.”

In fact, over half of the two agency’s bonds were issued to cover interest expenses. In 1999, the state’s rural electrical cooperatives, after adjusting for the different percentage of ownership, had $555 million less debt than NCMPA1 despite having borrowed money initially at a higher average interest rate. The co-ops own a 56.25 percent share of the Catawba 1 reactor.

When combined, these factors saddled NCEMPA and NCMPA1 — and ultimately the member towns and cities that make them up — with heavy debt burdens. As of Jan.1, 2002, NCMPA1 had $2.2 billion in debt while NCEMPA had $3.1 billion in outstanding bonds.

Heavy debt service payments, in turn, cause NCEMPA and NCMPA1 rates to be higher than those of surrounding power suppliers. Lancaster estimated the difference at 16 or 17 percent for both agencies.

The debts also effectively tie the municipalities to the power agencies for the foreseeable future. Kinston, with a population of just under 25,000, is responsible for about $270 million of NCEMPA debts. For Rocky Mount and Greenville, the amount is about $500 million a piece. Smaller communities are affected as well. Red Springs is responsible for more than $18 million of ElectriCities’ debt.

Member cities have little choice but to pass along rate increases from the power agency. Should they not do so, the resulting gap would have to be closed by other municipal revenue sources.

Lowrey is a Charlotte-based associate editor of Carolina Journal.