Will Barker: The issues behind Kinston’s electric rates

Will Barker is the current Mayor Pro Tem on the Kinston City Council and sits on the board of directors of NCEMPA.  Will’s term with the Kinston City Council expires in December 2011.

Kinston Free Press

Guest Columnist

Electric rates have been a long-standing concern for City of Kinston utility customers. While everyone knows our rates are higher than Progress Energy customers (approximately 30 percent), few residents understand the issues behind our high electric rates. Since joining the Kinston City Council in 2007, I’ve had the opportunity to learn more about the fundamental issues impacting our electric rates.

While our current focus is trying to achieve rate parity with Progress Energy — or at least a significant rate reduction for City of Kinston electrical customers — there is a need for discussing why we are in our current position.

The city used to purchase its power from CP&L, the predecessor to Progress Energy.  Currently, the city purchases its power from the N.C. Eastern Municipal Power Agency (NCEMPA).

The City of Kinston, along with 31 other municipalities, is a member of NCEMPA, which was formed as a result of power supply concerns in the 1970s. NCEMPA shares ownership of five power generation sites with Progress Energy. The two most notable sites are the Shearon Harris and Brunswick nuclear facilities.

The City of Kinston has an 8.7 percent ownership of NCEMPA and is required through a power purchasing agreement to purchase its power from NCEMPA. Because of this arrangement, it is important to note, the City of Kinston does not own the debt — NCEMPA does. Furthermore, the City of Kinston is bound by the power purchasing agreement to buy its electricity from NCEMPA. There are options for a member municipality to leave NCEMPA and purchase its supplemental power on the open wholesale market but there are many other things to consider that have a significant effect on the total cost.

The debt that has been attributed to the high cost of municipal electric rates is largely a result of construction costs incurred in building the Shearon Harris nuclear facility. The current debt owed by NCEMPA is $2.255 billion and approximately 70 percent of that debt is associated to Shearon Harris. As a result, approximately 30 percent of each customer’s electric bill goes directly toward paying down our ownership share of the NCEMPA debt.

An item that is often overlooked in the discussions about the NCEMPA debt is that it is from the issuance of revenue bonds and not simply borrowings from a financial institution. Because NCEMPA is a governmental agency formed under N.C. General Statutes, the processes of issuing debt and early pay-off of debt are much more different than that of a private entity. As of December 31, 2010 there were 47 different bond issuances outstanding bearing interest rates from 3 percent up to 7 percent.

In order for the municipalities to achieve rate parity with Progress Energy, the debt must be removed from NCEMPA. There doesn’t appear to be a silver bullet that allows us to easily shed that debt before the scheduled payoff in 2026. Many people hoped the pending merger between Duke and Progress Energy would provide an opportunity to eliminate or reduce our debt, and we carefully explored that possibility.

Kinston and five other municipalities even hired an independent attorney and a consultant to advise us beyond the advice we were getting from NCEMPA and ElectriCities staff. We were informed by the independent attorney and consultant that neither debt relief nor rate parity, as a result of merger issues, was possible. All parties stated that relief resulting from market power issues, joint dispatching of our generation facilities and protection from merger related issues should be sought.

One of the primary limiting factors for debt relief relates to a lawsuit and subsequent settlement between NCEMPA and CP&L. Based on this settlement, NCEMPA does not have the opportunity to re-open the issues surrounding the Shearon Harris nuclear facility cost of construction and subsequently, the debt.

We have also researched whether NCEMPA should sell its generation assets or have Progress Energy be forced to take the existing debt in exchange for the generation assets. Progress Energy has clearly stated it is not interested in purchasing the generation assets at this time, and currently no one can force them to assume our debt and assets as a condition of its merger with Duke Energy.

Also, because each municipality owns its own electric distribution assets, no municipality can be forced to divest of its own distribution system. Simply put, if there were a willing buyer of the electric generation assets, the 32 NCEMPA member municipalities would have to agree to sell and any subsequent decision of what to do with each municipality’s electric distribution system would be subject to vote by the elected officials of each municipality.

But here is what we have done:

  • ElectriCities has negotiated an agreement with Duke and Progress Energy that protects Kinston customers from merger-related costs while allowing us to benefit from savings achieved as a result of the merger. That should provide some meaningful, but not extraordinary, savings.
  • NCEMPA has repeatedly taken advantage of opportunities to restructure our debt and lower our interest rate. Last year, for example, NCEMPA completed a refinancing that will save $35 million over the next 12 years.
  • NCEMPA continually looks for opportunities to renegotiate power supply agreements to achieve savings. For example, we recently signed a new long-term agreement with Progress Energy for supplemental power (the energy we need over and above the amount we own) that will provide long-term, competitively priced power for Kinston and other NCEMPA members.
  • NCEMPA employs “load management” practices that save Kinston and other cities $40 million a year by minimizing the need to purchase power at peak prices.
  • NCEMPA and Kinston work together to promote energy efficiency and educate customers about how to lower their energy usage. The Free Press recently profiled a local family who reduced its energy bill by more than $500 in four months since receiving a home energy audit and making recommended home repairs.

The N.C. General Assembly has appointed a special committee to look into ways to provide relief from high electric rates in cities like Kinston. When that committee began its work in October, it started by examining the history behind the creation of the power agency and what led to the challenges we face today. There will be another meeting on January 10, 2012 at the Legislative Office Building in Raleigh.

Many residents are worried that high electric rates will impact our ability to successfully recruit and retain businesses. Our experience has shown that while energy costs are an important factor for businesses, factors such as tax rates, quality of the labor force, and infrastructure needs rank just as high.

Recent economic development successes — including the expansion of Smithfield Foods, West Pharmaceuticals and Dapaco — demonstrate that Kinston has a lot to offer prospective employers.

 

Will Barker is a Kinston City Councilman and sits on the board of directors of NCEMPA. The opinions of the guest columnist are not necessarily those of The Free Press.

 

Breakout box:

The Free Press guest columnist feature appears every Wednesday in this space. Would you like to be considered as a guest columnist? Contact Managing Editor Bryan Hanks at (252) 559-1074 or at bhanks@freedomenc.com.