Piedmont Natural Gas Co. wants to merge a taxpayer-subsidized, money-losing gas venture into its overall customer base, which could permanently inflate its rates, according to one of its own witnesses in a case before the North Carolina Utilities Commission.

Dr. Mitch Renkow, a professor of resource economics at N.C. State University, said he thinks “there is a substantial probability that (Eastern North Carolina Natural Gas) will never become economically viable.” If the ENCNG territory, extended through 14 counties in northeast North Carolina, could never turn a profit with its customer base, then all of Piedmont’s remaining customers in the state would have to subsidize it.

“Given that the customer base is smaller than had been anticipated,” Renkow wrote in testimony submitted to the Utilities Commission for Piedmont, “the only way for (ENCNG) to recoup the high capital cost associated with construction would be to charge very high rates.

“This would certainly limit any future growth of the customer base and more than likely lead to a shrinking of the existing customer base, thereby exacerbating the problem.”

ENCNG was created as the result of an equal-owner partnership between the former Carolina Power & Light (now Progress Energy) and the Albemarle Pamlico Economic Development Corporation, a northeastern North Carolina economic development agency. APEC was originally formed as a gas district in order to obtain gas bond funds, which North Carolina voters approved in 1998. APEC in 1999 and 2000 persuaded the Utilities Commission to award $188 million of the $200 million in bonds to ENCNG.

Piedmont purchased Progress Energy’s share of ENCNG when it also bought North Carolina Natural Gas from the electric utility in 2003. Piedmont now wants the Utilities Commission to approve its acquisition of APEC’s share of ENCNG for $1.

According to reports that APEC has made with the Internal Revenue Service, State Senate President Pro Tem Marc Basnight was “a driving force behind forming APEC and securing the bonds for the pipeline.” The bonds were sought because the 14-county region in northeast North Carolina was considered economically unfeasible for gas service infrastructure, because of its relatively sparse population.

The bond funds were to be used only for construction of the pipeline, not for ongoing operations and maintenance. An insufficient number of customers left ENCNG incapable of continuing the gas business on its own.

“The likely impact on economic development in the area of (ENCNG) remaining a stand-alone entity will be decidedly negative,” Renkow said.

“There will be costs to all other Piedmont customers in the form of higher rates,” he said. “In effect, these customers will be cross-subsidizing (ENCNG) customers.”

Piedmont is seeking permission, in a separate but related case before the Utilities Commission, to raise its rates enough to increase revenue by $36.7 million per year. According to the Utilities Commission Public Staff, a separate agency whose role is to advocate for consumers, about $8.3 million (the amount of ENCNG’s annual losses) of that increase is attributable to the proposed merger.

If approved, residential customers can expect to see their annual gas bills increase by more than $9. Piedmont is willing to absorb ENCNG only if the Utilities Commission first approves the rate increase for all customers.

Determining rate increases for commercial and industrial customers, because of variances in size, is more difficult to determine. However, industrial gas consumers cover a much larger margin over costs than do residential customers. Piedmont said industrial customers would cover about $2 million of the rate increase related to the ENCNG roll-in; the company has about 600 industrial customers in the state.

An advocate for industrial gas customers, the Carolina Utility Customers Association, opposes the merger and rate hike.

“It is quite clear from the testimony presented by (Piedmont) in this proceeding that the costs of the merger clearly outweigh the benefits of the merger,” said Kevin O’Donnell, an energy consultant for CUCA, in testimony for the Utilities Commission.

Besides the financial effect, O’Donnell noted that if ENCNG were allowed to “blend” in to Piedmont’s rates, the Utilities Commission would no longer be able to track the Northeastern territory’s economic viability. The state law that created the bond funds requires that if a project ever becomes economically feasible, then the bond funds must be repaid to the state.

“The Commission will no longer be able to determine if (ENCNG) ever becomes economically feasible,” O’Donnell said in his testimony.

But Piedmont and the Public Staff say that economic feasibility can be determined even if ENCNG is allowed to merge its accounting with Piedmont’s. According to Jim Hoard, assistant director of the accounting division for the Public Staff, an “economic feasibility test computation” could be calculated periodically to measure the territory’s viability.

“Piedmont should be required to maintain records such that it can calculate the amounts of investment, revenues, cost of gas, operation and maintenance expenses, depreciation expenses, general taxes, and other expenses, associated with providing natural gas service to and within the (ENCNG) area,” Hoard said in written testimony.

But in April 2000, the Public Staff’s accountants (including Hoard) were concerned about CP&L’s direct ownership of the northeast pipeline project, and requested that a separately held company be created by the utility and its partner, APEC.

“Forming a separate company will permit the business activities related to CP&L’s participation in (the Northeast gas project) to be clearly segregated from CP&L’s regulated electric operations, its regulated gas operations that are currently conducted by NCNG, and its various non-utility operations,” the Public Staff argued. “Segregation will facilitate adequate regulatory oversight of CP&L’s regulated electric operations and NCNG’s regulated natural gas operations.

“In addition, a separate subsidiary for this business activity will make it simpler to track costs.”

The Utilities Commission agreed with the Public Staff in 2000, and required that the separate company – ENCNG — be formed to run the Northeast gas project separately from CP&L’s electric and natural gas (through NCNG) operations.

Hoard told Carolina Journal that since the gas pipeline construction is almost finished, separate tracking is no longer necessary.

“When Piedmont owns all of Eastern, Piedmont could realize some cost savings from combining the three (gas companies) into one,” Hoard said. “As long as Piedmont can provide information that will allow the Commission to effectively monitor the economic feasibility of the bond project, I do not believe that Piedmont must be required to maintain Eastern as a separate entity.”

But in 2000, the reasons for separating ENCNG seemed to have a lot to do with clearly segregating costs.

“The financial records for (ENCNG) will reflect the revenues it generates, the costs it incurs and any shared service costs attributable to it,” the Public Staff accountants said at the time.

Representatives of the Carolina Utility Customers Association see flaws in a future viability calculation.

“The ‘economic feasibility test computation’ method is not as sound as keeping separate books,” Sharon Miller, executive director of CUCA, said in an e-mail to CJ. “Such a method appears more a work of art than a work of science because the results can be skewed by the input (i.e. rate of growth, projected operations and maintenance costs).”

O’Donnell said that if Piedmont’s acquisition of ENCNG is approved by the Utilities Commission, it should be required to keep separate accounting for it. Failing that, he suggested that since state lawmakers pressed for gas expansion in the northeast, they should “use state revenues to fund the ENCNG project until it becomes economically viable on a stand-alone basis.”

O’Donnell said that if the Utilities Commission decided to allow a full roll-in, manufacturers should be excluded from the extra costs from the ENCNG project.

Kevin O’Hara, Piedmont’s vice president for business development, disagreed with O’Donnell’s assessment. He argued in testimony for the Utilities Commission that the merger should consider the costs and benefits to all ratepayers, but also “the citizens of the State of North Carolina, and economic development efforts in the various regions of the state.” He said that because the General Assembly and voters approved the $188 million in bond funds for the project, that approval of the merger “will help to ensure that this investment is preserved.”

In contrast to Renkow’s testimony on behalf of Piedmont, O’Hara played down the effect of ENCNG’s roll-in.

“The ENCNG costs that will be involved in that process are a very small part of Piedmont’s overall cost structure,” O’Hara said.

“Mr. O’Donnell appears to discount savings that will result from the integration of (ENCNG) into Piedmont’s system, including, most notably, projected savings of $10-$20 million in system strengthening costs that would otherwise be incurred to serve growing load on the NCNG system.”

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