NC Senate Bill 720 Requires NCEMPA to Negotiate the Sale of Generation Assets

April 12, 2013

Friday, April 12, 2013, by Katherine Street
Electric Utility consumers typically receive service from investor-owned utility companies, electric cooperatives, or municipal electric providers. Electric utility systems consist of generation, transmission and distribution facilities, and electric utility entities may provide any or all of these functions.
In the eastern part of North Carolina, the majority of municipal electric providers comprise the North Carolina Eastern Municipal Power Agency (“NCEMPA”). NCEMPA is a group of 32 cities and towns in the state that provide electric distribution service to citizens within their respective municipalities, and in some cases, to customers outside their municipal boundaries. NCEMPA also jointly owns portions of several generation facilities with Duke Energy, an investor-owned utility. NCEMPA is authorized by the North Carolina State Constitution, Article 5, Section 10, which provides that “municipalities  . . . may jointly or severally own, operate and maintain . . . facilities . . . for the generation and transmission of electric power and energy, or both.”
NCEMPA ended up in the generation business with the purchase of ownership percentages in both nuclear and coal-fired generation facilities in North Carolina. The privilege of electric generation ownership has proven to be extremely costly. As of January this year, NCEMPA’s outstanding debt for its share of the jointly owned generation facilities was $2,025,720,000.00. In addition, the generation NCEMPA owns is insufficient to serve the electric demands of the municipal electric providers that make up the organization. The shortfall is compensated for through long-term supplemental power purchase agreements with Progress Energy, now a part of Duke Energy Corporation. Approximately thirty-five percent of the money that municipalities pay NCEMPA for wholesale power goes to service the debt incurred as a result of the generation facility purchases. As a result, the rate-paying citizens of the municipalities pay on average approximately twenty-five percent more for their retail electric utilities.
Although the rate disparity has not gone unrecognized, a solution has not thus far presented itself. As Graham Edwards, the CEO of ElectriCities of North Carolina, Inc., an organization that provides management services to NCEMPA, commented in a blog post last year, “we wish there was a “magic bullet” that could reduce the debt we acquired when the municipalities bought in to the power plants with Progress Energy and Duke Energy, but no such opportunity exists.
Such an opportunity may have been created with the introduction April 2, 2013 of Senate Bill 720. The bill compels NCEMPA to engage in negotiation with either Duke Energy or another investor-owned utility in an effort to facilitate the sale of the generation assets of the NCEMPA member municipalities and thereby relieve the electric customers of the burden of the generation debt. The bill also imposes on NCEMPA an obligation to “actively engage in negotiations with Duke Energy for the purpose of renegotiating its contractual obligations to purchase electricity exclusively from Duke Energy.”
Notably absent from the bill is a requirement that the municipalities also negotiate for the sale of their electric distribution system assets. Requiring the municipalities to negotiate for the sale of their electric distribution systems would increase the chance of successful negotiations by providing the purchasing investor-owned utility the retail rate base with which to recover the cost of their investment in the NCEMPA generation facilities. The lack of a requirement to divest themselves of their distribution assets, coupled with the retention of the ability to set their own retail electric utility rates under the authority of N.C. Gen. Stat. § 159B-16.1, the current rate disparity between the investor-owned utilities and the NCEMPA municipal electric providers may be reduced by rate increases for the investor-owned rate payers instead of a reduction in rates for NCEMPA municipalities.