A natural gas pipeline project in Northeastern North Carolina, built through the help of taxpayer-backed bonds, is hemorrhaging money and its managers are trying to find a way to stop — or hide — the bleeding.

Eastern North Carolina Natural Gas was formed four years ago through an equal partnership between the Albemarle Pamlico Economic Development Corporation and Carolina Power & Light, now Progress Energy. ENCNG received $188.5 million of $200 million in voter-approved bond funds to construct a natural gas pipeline through 14 Northeast counties, where the population was too sparse to justify the project otherwise.

Piedmont Natural Gas Co. purchased Progress Energy’s gas interests, including ENCNG, two years ago, and now wants to absorb the few Northeast gas customers and massive operating losses into its statewide ratepayer base. If permitted by the North Carolina Utilities Commission, a merger would mean that state taxpayers would foot the bill for paying the bonds and all of Piedmont’s customers in the state would bear the burden of a business loser for years to come.

Jim Hoard, assistant director of accounting for the North Carolina Utilities Commission Public Staff, estimates that Piedmont’s residential customers could see their annual gas bills increase by $4 annually, and small commercial customers could pay as much as $25 more per year.

“The roll-in of [ENCNG]’s rate base into Piedmont’s rate base has a huge potential to increase the rates of Piedmont’s current customers,” said Sharon Miller, executive director of the Carolina Utility Customers Association. “CUCA questions the benefit to existing ratepayers.”

Keep separate, pay back bonds

The Utilities Commission, as a condition for approval of bond monies for APEC and Progress’s predecessor, CP&L, required that the partners form a separate organization “to ensure that adequate cost allocation and record keeping procedures are implemented.” The statute providing for the bond funds calls for the money to be paid back to taxpayers if the project becomes economically feasible. ENCNG is the vehicle collecting the bond funds, building the pipeline, and operating the system.

Piedmont’s plan to merge ENCNG means cost allocation and record keeping could get murky. Without separate tracking as the NCUC required, determining whether the $188 million in bond money should be repaid to taxpayers could be impossible.

“I don’t know how you track that roll-in,” said Don Harrow, vice president of governmental relations for Piedmont, in August 2003.

A year’s time has not made the answer to that question any clearer.

“If the legislation was written that way, I don’t know that the Utilities Commission has the authority to [allow roll-in],” said State Rep. Drew Saunders, a Huntersville Democrat who co-chairs the Public Utilities Committee in the House. “It may require further legislation to do that.”

Keeping the accounting for the Northeast pipeline project separate from CP&L’s (now Piedmont’s) operations served two purposes: to determine when the Northeast project becomes economically feasible, if ever, for the purpose of repaying bond funds to the state, and to segregate ENCNG’s ratepayers from CP&L’s/Piedmont’s other customers.

Piedmont’s roll-in plans would erase the dividing line between ENCNG customers and the rest of Piedmont’s ratepayers.

Project was always questionable

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

Fed up, State Senate President Pro Tem Marc Basnight, D-Dare, and fellow lawmakers moved in the early 1990s to create 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 bill 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 Utilities Commission determined that NCNG’s franchise rights for the 17 counties should be revoked. Lawmakers in the summer of 1998 also approved the $200 million bond referendum. Advocates thought the funds could make service to NCNG’s formerly unserved territories more appealing.

Almost simultaneously 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 alliance, which subsequently became APEC and half-owner in the ENCNG project, quickly (and successfully) sought control of the franchise rights and bond funds for their Northeast gas pipeline project. But without experience, expertise, or other financial backing to operate the gas business, AREA/APEC needed a business partner, and CP&L joined in.

Required by the Utilities Commission to separate their Northeast operations from the rest of their business, CP&L/APEC exposed how vulnerable the stand-alone project was. Nearly all the $188.5 million in bonds, plus $22.5 million kicked in by Piedmont, were used to build the pipeline, leaving little to absorb the years of expected operating losses.

Losses continue

Hoard, the Utilities Commission Public Staff accountant, said ENCNG has lost $4 million so far, excluding the gas pipeline construction costs and bond funding. He said last year ENCNG had $3.66 million in expenses against $1.56 million in revenue. Because of the loss, the company saved $1.05 million in taxes.

“It will get better, hopefully,” Hoard said.

But the plans to roll-in ENCNG into Piedmont indicate that APEC and Piedmont officials don’t expect much improvement soon, and that they aren’t willing to let the Northeast project be a long-term money loser. At an APEC meeting last October officials said “Piedmont’s ability to fund [ENCNG’s] operations is limited.” They plan to file a rate case with the Utilities Commission, who must approve increases, by March 2005.

According to documents obtained from APEC by Carolina Journal, the rate case will propose that “operating costs to support and maintain [ENCNG’s] natural gas system will be covered in Piedmont’s NC rates.” They hope they will be able to implement the new rates by November 2005. Minutes from a March 30, 2004 APEC board meeting state that the “current forecast shows ongoing operating loss(es).”

Part of the problem has been that customers have not come on board as quickly as ENCNG officials had hoped.

APEC meeting minutes from June 30 state, “While [roll-in] was not envisioned initially, the lower-than-projected marketing results brought on by the recent declining rural economy makes it the best option for future operational and financial success.”

ENCNG apparently has had trouble converting propane customers because of high gas and start-up costs. ENCNG’s rates equate to about $1.35 per gallon of propane gas for residential customers, while actual propane costs $1.136 per gallon.

“Is our customer growth where we’ve wanted it to be?” said David Trusty, a Piedmont spokesman. “Probably not.”

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