A taxpayer-funded natural-gas pipeline project for eastern North Carolina, at the center of a government conspiracy alleged by a Raleigh businessman, was facilitated through legislation pushed by State Sen. President Pro Tem Marc Basnight and apparently steered to the control of his friends.

William Horton, president of The DFI Group, has sought unsuccessfully to build ethanol plants in eastern North Carolina for more than 20 years. He claims that since 2000, associates of Basnight have obstructed his plans to build plants in Martin and Beaufort counties because Horton was perceived as an obstacle to the Basnight faction’s pipeline project. (A related story explains Horton’s planned use of out-of-state natural gas suppliers and how, he alleges, this motivated officials and economic developers in the northeast to attempt to take over his project).

In 1998 voters approved, by a 51 percent to 49 percent ratio, $200 million in bonds to extend natural-gas pipelines to 22 unserved counties in the state.

However, the weight of Basnight’s influence apparently enabled political allies in eastern North Carolina to manage $188.3 million of the available funds. None of the money is likely to be paid back because the bond legislation doesn’t require it, and because the pipeline project isn’t expected to be economically feasible for decades, if ever.

Utilities Commission’s influence

Political groundwork for the pipeline was laid in 1995, when Basnight sought to get his own choices appointed to the seven-member Utilities Commission. The governor officially nominates board candidates.
One nominee was Basnight’s brother-in-law, Bobby Owens, a power in state politics. Owens had been the chairman of the Dare County (Basnight’s home) Board of Commissioners. He also ran former Gov. Jim Hunt’s eastern N.C. office.

Basnight wanted Hunt to appoint Owens to the Utilities Commission in 1995, but Owens withdrew from consideration after an uproar ensued over of his lack of experience. Critics, including editorial writers of The News & Observer of Raleigh, derided the move as political patronage because Basnight waged a “blatant campaign” to get Owens on the commission. Owens added fuel to the fire by saying, “I have earned my right to the trough.”

But Owens’s name resurfaced for the position again two years later, and his nomination won legislative approval despite more criticism. The salary for the job was $97,388 a year.

Another Basnight ally, former state Sen. Richard Conder of Rockingham, won an appointment to the commission in 1997 as well. Members of the commission serve eight-year terms.

North Carolina Natural Gas

Over time since the 1960s, the commission was gradually awarded exclusive franchise rights for northeastern counties to North Carolina Natural Gas Inc. Still, the company did not provide natural gas to 17 of those counties because they lacked a sufficient number of potential, mainly industrial, customers.

In the early 1990s, state legislators created financing incentives for local natural-gas companies to extend service into unserved areas. The legislature also passed “use it or lose it” legislation in 1995, the same year Basnight tried to get Owens on the commission. The bill, sponsored by Rep. Bill Owens, D-Elizabeth City, another Basnight ally, required all franchisees to provide natural gas to at least part of the unserved counties by July 1, 1998, or else they would lose their rights to the territories.

When the three-year time limit expired in 1998, the commission determined that NCNG’s franchise for the 17 northeastern counties should be reviewed.
While NCNG’s future in the northeast came into question, lawmakers in the early summer of 1998 approved the $200 million bond referendum. Advocates thought the funds could make service to NCNG’s unserved territories more appealing.

Creation of AREA

But long before the commission called for hearings on NCNG’s franchise, competition for the territory, and eventually the bond money, materialized.

In 1997 Rep. Owens introduced another bill, which passed unanimously, that allowed cities and counties to create natural- gas districts.

In January 1998 the counties of Chowan, Pasquotank, Currituck, Camden, and Perquimans; the city of Elizabeth City; and the towns of Edenton, Hertford, and Winfall teamed up to create a natural-gas district called the Albemarle Regional Energy Authority. The group was led by then-Pasquotank County commission chairman Jimmie Dixon, another Basnight ally.

Minutes from a Pasquotank commissioners’ meeting Feb. 2, 1998 said, “Commissioner Dixon stated it is being recommended that the [member counties and municipalities] pass a resolution of support for Sen. Basnight’s efforts to obtain natural gas for the area and to also establish a [gas] authority…” The minutes don’t state who made the recommendation, but Basnight apparently played an important role.

“They said [Basnight] was the driving force behind creating their group,” said Brian Kennedy of Columbia Gas Transmission, one of the companies that later tried to work with the group. When contacted by Carolina Journal, a Basnight spokesman declined to comment about the matter.

The group planned a trip to Raleigh April 21, 1998 to meet with Basnight. Dixon reported to his fellow commissioners after the meeting that members of the natural-gas committee met in Basnight’s office with Gisele Rankin of the Utilities Commission Public Staff and the senator’s general counsel at the time, Norma Mills.

According to AREA meeting minutes, the group “asked Mrs. Mills if we were heading in the right direction. She agreed that we were and encouraged us to form an authority and to talk with the various gas companies to see what proposals they would make.”

NCNG’s future hadn’t yet been resolved, and the bond referendum wasn’t on the ballot yet, but AREA positioned itself to take over the franchise anyway.

At a Pasquotank commissioners’ meeting Aug. 3, Dixon said the authority had the support of the Utilities Commission. “Mr. Dixon noted that although there are other regions in the state interested in forming natural gas authorities, the Albemarle Regional Energy Authority would be the first to receive funding for expansion of natural gas,” according to the minutes of the meeting. Dixon repeated the claim at the commissioners’ meeting in September.

Dixon also did not respond to questions submitted by CJ.

AREA vs. NCNG

Despite its failure to extend service to 17 counties in its franchise territory, NCNG decided to defend its rights to the rural areas because of the prospect of bond money. The company planned to provide service immediately in Pasquotank, Camden, Onslow, Bertie, and Martin counties. Still, AREA and other political and business leaders vigorously opposed continued franchise rights for NCNG.

NCNG was less committed to serving 12 other counties without outside funding: Washington, Carteret, Pender, Chowan, Currituck, Dare, Gates, Hyde, Jones, Pamlico, Perquimans, and Tyrrell.

“NCNG is very interested in serving all unserved areas,” Terrence Davis, former senior vice president of operations for the company, said in written testimony. But Davis said the small number of potential customers and shortage of “industrial load” made the prospect unattractive.

“In the event the bond referendum is approved by the voters,” Davis said, “NCNG believes that it, among all potential service providers, would be in the best position to make the most efficient and effective use of these funds…”

The first public hearing on NCNG’s franchise rights for the northeast counties was scheduled for Oct. 27, 1998, one week before the vote on the referendum.
Of the 17 individuals who testified against NCNG, 16 represented AREA-related entities. One of the most repeated complaints was that NCNG had the exclusive franchise for 40 years and did nothing with it. Officials also testified that because natural-gas service didn’t exist in the region, it harmed their ability to attract business and industry.

Dixon testified that because of the lack of natural-gas service, “we are eliminated from 40 percent of all the industrial clients that come to North Carolina.”

Referring to earlier testimony by Pasquotank’s director of economic development, Randy Harrell, Dixon said, “…he’s had clients that come, fly in at the local airport and once they hopped off the plane the first question was, do you have natural gas availability?

“And [Harrell] said, ‘no.’ And so they turn around and got on a plane and left. They weren’t even interested in looking at us.”

Dixon asked the Utilities Commission to allow AREA “to be the appointed franchise of the five-county area.” He said his group could then negotiate with another company with natural-gas expertise.

Gas interest hinged on bond funds

Natural-gas companies didn’t seem interested in serving the northeast counties until the referendum passed Nov. 4.

AREA’s meeting minutes before the election show discussions with only one gas company, Frontier Energy, which said its interest in the northeast was contingent upon passage of the referendum.

After the referendum passed, other companies courted AREA officials aggressively, even though bond awards wouldn’t be decided for months and the commission had just begun hearing testimony about NCNG’s franchise.

Later in November 1998, Carolina Power & Light announced that it would purchase NCNG and that it hoped to get bond money to provide natural-gas service to the northeast counties. AREA lawyer Allyson Duncan told AREA officials that CP&L was interested in working with them. However, CP&L stayed on the sidelines while the APEC-NCNG battle ensued.

Several other natural-gas companies, from inside and outside of North Carolina, were also eager to team with AREA on a pipeline project. However, none of those companies’ representatives interviewed by CJ could explain why they didn’t pursue the franchise for themselves. They all ceded the territory to AREA.

Fight for franchise and bonds

The battle between AREA and NCNG over the franchise escalated in pleadings before the commission. Duncan and NCNG lawyer Edward Finley Jr. engaged in several motions to gain an upper hand before the commission.

Finley requested from AREA its plans to provide natural gas to its five-county region, a move Duncan called harassment.

“AREA’s expressed position is [to] deny NCNG’s request,” Finley said, “so as not to foreclose AREA’s opportunities to provide natural gas serv[ice] in the northeastern counties.”

In other written testimony, Gerald Teele, NCNG senior vice president and treasurer, argued that NCNG would have had to dramatically increase rates its other customers paid if it had extended service into the northeastern counties. He also said the commission would have frowned upon such an action.

“It must be borne in mind that in the absence of the $200 million in bond funds,” Teele said, “none of these parties would be coming forth with…a viable, economically feasible plan…”

Enter Basnight

Debate about NCNG’s franchise came to a head Dec. 7-8, 1998, when the commission conducted hearings in Raleigh. Basnight, in a statement read by Mills, weighed in with a passionate argument against NCNG.

“Perhaps NCNG now intends to expand into the northeast by applying for some of the recently approved bond proceeds,” Basnight said. “Despite the availability of these proceeds, however, I do not believe that NCNG should be granted an extension of the exclusive franchise…”

Then Basnight said the idea for a referendum existed as far back as 1995, at the same time the “use it or lose it” law was passed and he tried to get Bobby Owens on the commission.

“The natural-gas bond legislation was just barely a dream in my mind and in the minds of other legislators when the General Assembly enacted the ‘use it or lose it’ legislation,” Basnight said.

During the hearings, Owens was one of the most active interrogators among the commissioners. More than other commissioners, Owens’s questions to NCNG’s opponents elicited answers about the northeast region’s plight without natural-gas service. On the other hand, Owens’s questions to Davis pointedly challenged him about the long period of time the company held the franchise rights but failed to provide service to most of the area.

According to minutes of AREA’s meeting Dec. 14 , Duncan told the group, “North Carolina Natural Gas became very contentious during the hearing, and questions from the Utilities Commission were very hostile.” The minutes said Duncan “felt extremely positive about the hearing.”

The commission decided March 17, 1999 that NCNG could retain its franchise in only Bertie, Martin, and Onslow counties, and that NCNG must forfeit its rights to the 14 other counties.

The timing of legislation, the strategy of NCNG’s opponents, and the makeup of the commission wasn’t a coincidence, some observers said.

“I think it was a master plan [AREA and Basnight] had,” said a retired gas-industry executive who didn’t want to be identified. NCNG never had a chance, the executive said.

“That hearing was the only time I thought the decision had already been made,” he said, “because of pressure from Basnight. With (Bobby) Owens (on the commission), it was like having Basnight himself there.”

Another observer of the NCNG proceedings said, “Senator Basnight is a powerful legislator. [AREA] had the political support and took advantage of it.”

Utilities Commission Chairman Jo Anne Sanford told CJ that commissioners abide by strict rules of judicial conduct.

“We don’t foretell decisions,” she said. “We don’t say we’re going to do this or that on official decisions.”

After the decision Sanford told The News & Observer of Raleigh, “It will be a free-for-all, in a good sense of the word. The franchise that prevented anybody else from providing gas service will no longer act as a barrier.”

NCNG filed for an appeal of the commission’s decision, and CP&L remained in the background despite its pending purchase of the gas company.

AREA, APEC & CP&L

AREA met March 8, 1999, nine days before the commission’s decision on the franchise, and set a deadline of April 1 for submission of proposals from private companies “for providing natural gas to our area,” according to meeting minutes.

On April 20 AREA’s directors decided to enter negotiations with CP&L to provide natural-gas service to unserved areas. AREA would request “that CP&L restrain NCNG as much as possible from proceeding with their appeal to the Utilities Commission,” according to meeting minutes. Within months the CP&L-NCNG deal was consummated and the appeal was dropped.

As discussions progressed and the franchise for the 14 unserved counties opened, AREA and CP&L decided they would join in an attempt to get the rights and bond money for the whole region. As a result, AREA officials began discussing a conversion into a nonprofit organization. All the wrangling between AREA and NCNG became moot.

Suddenly, minutes of meetings by AREA officials and Pasquotank County commissioners that previously had detailed discussion about natural-gas service failed to provide information on the issue. Beginning in June 1999, discussions about formation of the nonprofit, except for AREA directors approving the reorganization, were shrouded in secrecy.

What emerged from the process was the Albemarle Pamlico Economic Development Corporation, which represented the 14 counties that NCNG lost. A representative from each county was appointed by their respective commissioners, and the new group assumed the partnership with CP&L.

Other documents obtained by CJ provide some insight to APEC’s creation. In an appeal to the IRS for 501(c)(3) status, APEC stated that “Marc Basnight is… a driving force behind forming APEC and securing the bonds for the pipeline.”

Dixon was elected chairman of APEC. The presence of R. V. Owens III on APEC’s board of directors further strengthened Basnight’s influence on the corporation. Owens, the son of Bobby Owens, is Basnight’s nephew and one of his key political operatives. He also is a prolific fund-raiser for Democrats.

According to an article in the March 2002 newsletter of the North Carolina Citizens for Business and Industry, R.V. Owens III “…combines his fierce determination on behalf of economic development for Northeastern North Carolina with his realization that technology is the best hope for speeding up the process. Owens and others recognize the lack of natural gas and high-speed Internet access in most of the region is a negative. Ever the visionary, Owens led others to wonder aloud why fiber optic cable couldn’t be laid at the same time in the 800-mile trench for the natural gas pipeline that is being dug.”

Seeking bond funds

In the only minutes of APEC meetings obtained by CJ, county members were told that the corporation would aggressively seek the franchise and bond money and that it would “loan” its name to CP&L. Under the APEC name, CP&L would own both the transmission and distribution lines and submit a surcharge or royalty to APEC, even though taxpayers served as the money source. While CP&L would own the system, APEC would have input about the placement of distribution lines.

On Oct. 26, 1999, APEC and CP&L notified the commission that they would apply for the exclusive franchise for the 14 counties and for $197.5 million in bond funds. Commissioners said that in the first hearing they would consider only Phase 1, which would serve the six northeastern-most counties of the 14, for the first round of bond money. APEC and CP&L sought $44.2 million for Phase 1.

Sanford’s prediction of a “free-for-all” for the franchise never materialized.

Utilities Commission considers plan

As the commission’s hearings progressed, CP&L and APEC formed a separate corporation, called Eastern North Carolina Natural Gas, and substituted it instead of APEC as the applicant for the franchise and bond funds. Both APEC and CP&L (now Progress Energy) own equal stakes in ENCNG.

In testimony before the commission, some groups expressed concern about parts of ENCNG’s proposal, especially the need for almost all of the $200 million in bond funds. The Carolina Utility Customers Association argued that it should be allowed to participate in commission hearings about ENCNG’s request.

“If [ENCNG] is going to try to get all of this money which is designed for the entirety of this state…,” said lawyer James West, “…I believe we have the right to intervene and determine whether the project is of such significance and of such benefit that they should, in fact, get that amount of money.”

The commission heard testimony April 12 on ENCNG’s bond and franchise request for the 14 counties. The hearing again drew the interest of the northeast’s most influential advocate: Basnight.

In a statement read by Mills, Basnight thanked the commission for its decision to strip NCNG of its franchise, “because it paved the way for what is before you now.”

Basnight asked the commission to support APEC’s (ENCNG’s) plan because “it provides the hope of opportunity for enhanced economic development to our region as a whole…” He also argued for the entire 14-county franchise and for the commission to earmark the entire $197.5 million requested by ENCNG, even though the panel was considering only Phase 1.

“Without the promise and commitment of bond funds,” he said, “the award of a franchise is meaningless for us.

“I urge you to consider the application as a whole, because the needs of our region need to be addressed as a whole.”

Basnight also called for the closure of the application process for bond funds. Only Frontier Energy had submitted other proposals, to serve Warren, Ashe, and Alleghany counties, for a total of about $11 million. Together with ENCNG, the total amounts requested by the two applicants exceeded the $200 million available.

On July 12, 2000, the commission awarded $38.8 million to ENCNG for Phase 1 of its project. With no oncoming proposals on the horizon, the commission closed the application process.

“We expected a lot more to apply,” Rankin said. “I think a lot of [the companies] viewed it as a dicey proposition.”

An easy $150 million

Between Frontier and ENCNG, the commission had already awarded $50.4 million in bond funds. In March 2001, ENCNG requested the remaining $149.6 million in available money for the remaining eight counties of its project.

The commission granted ENCNG’s request by early June, since little objection was raised against the request. Still, some observers were surprised that the 14 counties ended up with more than 93 percent of the bond funds. One gas-industry executive said he thought the area would never get more than 50 percent of the money.

“I thought it was a statewide thing,” he said. “I thought the (Utilities) Commission would want to do the right thing.

“But then I thought about it and said, ‘well, look who’s driving the train: Marc Basnight.’”

The executive said he thought NCNG was doing its best to “chip away” at serving the rural northeast.

“But it wasn’t the grand scheme that (APEC leader) Jimmie Dixon and Basnight wanted,” he said.

East benefits from state debt

So far, ENCNG has about 350 customers for Phase 1 of the project. CP&L, now Progress Energy, is selling the $7.5 million stake it invested in the venture to Piedmont Natural Gas Corp. CP&L began buying gas companies in the late 1990s because electric companies expected deregulation, which made purchasing sources of power appealing. Deregulation never happened, and now Progress is getting out of the gas business.

ENCNG’s board consists of four APEC directors and four Progress Energy executives. It includes Dixon and John Hughes, president of APEC. Hughes is chairman of ENCNG’s board. Norma Mills is the ninth member of the ENCNG board and breaks all tie votes. Dixon is chairman of APEC’s directors.

ENCNG pays Progress Energy (and a few other contractors) for administrative costs, operations, maintenance, construction of the pipeline, and its distribution network. ENCNG appears to exist only as an entity to receive bond money allocations, to pay Progress Energy for its services, and to pay APEC for some economic development efforts.

The project involves installing about 750 miles of steel gas-transmission lines and plastic distribution lines throughout eastern North Carolina. Municipalities including Elizabeth City, Plymouth, and Morehead City are receiving natural gas for the first time. The project should be completed by late 2004, but several of ENCNG’s counties are not served yet. The company is up for a Utilities Commission “use it or lose it” review for those counties this month.

When the referendum was originally presented to voters statewide, the legislation stated the money would be issued as grants or loans, to benefit unserved counties throughout the state. Former state Treasurer Harlan Boyles’s prophecy that the funds would become taxpayer subsidies appears accurate. Most observers believe that the money is a grant, not a loan.

“Once the project is deemed feasible, it has to be paid back,” Rankin said. “No one expects it to be feasible anytime soon.”

Chesser is associate editor at Carolina Journal.