High Electricity Rates for Electricities NC Towns.

Representative Leo Daughtry at the start of the recent North Carolina legislative session placed a bill for consideration in the NC Legislature that would limit members of Electricities group to using electricity payments for just that electricity purposes. With the reaction from these towns you would have thought he entered a bill to eliminate the towns entirely. Frankly it might have felt that way if you were a town commissioner or elected representative in one of those towns. How did we come to this, and why is this a topic for small town investor?

 

Let's first say how the Electricities group got started. About three decades ago Carolina Power and Light, the predecessor to Progress Energy, and Duke Energy were having trouble financing new power plants as the costs of building those plants got higher and higher due to the increasingly regulatory atmosphere, as well as the very high interest rates during this period. The state government in North Carolina was also concerned by the prospect of not having enough electricity for the smaller towns in the state . So legislation was passed that allowed these towns to buy into the new power plants and become power plant owners. Enter public power agencies, one in the eastern part of NC and one in the western part of NC. These power agencies thought buying into the new power plants being built by Carolina Power and Duke Energy would give them a leg up on cheaper power costs for their respective towns. Not only could they help the privately owned power companies with financing, but they could do it cheaply by offering municipal bonds at a lower interest rate. So Electricities was created with the issuance of Eastern Municipal Power Agency bonds and North Carolina Municipal Power Agency bonds for the western part of NC.  Most of these bonds were 30 year bonds that would be essentially start being paid off about right now in 2011. 

 

Now as interest rates decreased during the mid 1980's from a double digit percentage to mid single digit percentages these power agencies took the opportunity to call these higher interest rate bonds and issue bonds with a lower rate. Refunding if you will, but with a twist the sinking fund that normally accompanies bonds and offers a timely payoff was not included. The new bonds and any called from that point on were reissued as 30 year bonds extending the maturity date. The towns in the compact used the sinking funds for other expenses, anything that could be tied in any way to power expenses. They also transferred funds from the power fund to keep tax rates down in some towns. If this does not seem kosher to you it isn't.  As in any case when you place a pot of money in front of a politician they find other uses for it.  If you were thinking your local politician was less prone to such temptation than say your Congressperson to the Social Security money pot then you are thinking silly.  Another quirk in this scenario is that with lower interest rates on the new bonds going forward versus the initial cost structure and prevailing rates now offered excess funds from already set electric rates flowing into the pot, money that should be put towards debt became available for other uses. Of course other uses won out.

 

 

At this point in the original bonded debt cycle the bonds should have been begun being paid off and electricity rates begin dropping due to less revenue needed for bond debt service. Instead we got lots of new bonds that if I read correctly will not get paid off until the late 2020's.  I should say, if then, since who knows what the politicians might do next. One other note just like any government bureau the Electricities organization wants to perpetuate their existence, so they are in no hurry for the bonds to be paid off either and those agencies are another cost added into the mix of electrical rates for the agency's towns.

 

Now frankly I welcome Representative Daughtry's bill as needed long ago. Unfortunately  there are too many , read city council, municipal power workers, and the other agencies involved,  who have access to political power who would get hurt if the bill actually became law.  Unfortunately Representatives Daughtry's bill got watered down considerably and ended up only applying to towns in his district. So the taxpayers and ratepayers in all these towns will continue to bear the brunt of higher power costs and the towns in Rep. Daughtry's district have already found a way around the watered down version of the new law.

 

 My opinion is that the state should step in and require as part of the proposed merger of Duke and Progress Energy the ending of the current municipal systems and power agencies. That would involve the new Duke Energy to assume the bonds and assume the assets of the town power systems. Yes, it would be an added expense to the utility, but the added expense could be spread over a much larger group of power consumers and make the monopoly power system fair. The NC Utility commission could grant some additional rate adjustments to compensate Duke for the added cost structure. Of course this idea is too common sense and again hurts the people and agencies with vested interest so it would never be considered.

 

Full Disclosure I own Eastern Municipal and Municipal Power Agency bonds.