…take a close look at what Edwards says about the national demand for power-dropping 3.6%. If we weatherize our homes the demand will (in theory) drop even lower. The price will still continue to rise because not only is this a supply/demand issue but a debt issue. All, and I mean all, of these towns have to make a certain amount of money on electricity regardless of what the wholesale rate happens to be.
High Point expects to see a 4.9 percent wholesale electric rate increase from North Carolina Municipal Power Agency Number 1 in June, and customers of the city’s municipal electric service will likely see a corresponding rate increase on their July bills, although the High Point City Council has not yet set the retail rate.
There may not be a city in North Carolina with more short-term problems than High Point: the collapse of its manufacturing industry, threats to its signature furniture market, 11.9 percent unemployment.
But the City of High Point has also come up on the winning side of some long-term bets in infrastructure and energy that leave it with a competitive advantage over other cities.
Foremost among those bets was the 1976 creation of the North Carolina Municipal Power Agency Number 1 – a coalition of 19 cities and towns in the piedmont and western North Carolina that provide power directly to their residents, rather than leaving it up to a private company such as Duke Energy – and that agency’s 1978 decision to buy a large chunk of the 2,258-megawatt Catawba Nuclear Station in York County, South Carolina.
North Carolina Municipal Power Agency Number 1 actually owns 37.5 percent of the Catawba station, and the same percentage of the output of that plant, and bought it at the 11th hour before the 1979 meltdown at the Three Mile Island Nuclear Generating Station in Pennsylvania that ended the construction of nuclear power plants in the United States. The agency also owns part of Unit 1 of the 2,200-megawatt McGuire Nuclear Station in Mecklenburg County.
High Point is the largest city that belongs to the agency, and its 97,000 electric customers are the bulk of the agency’s 164,000 customers. Asheville is the next largest. High Point owns 18 percent of the agency’s stake in the Catawba plant.
It’s not hard to imagine circumstances under which High Point’s buy-in to the Catawba plant could have turned bad and left the city with a huge stranded investment: a meltdown at the plant, regulatory changes, the emergence of cheaper sources of energy. Energy is a commodity, and large commodity investments are always a gamble.
“A few years back, when they were looking at deregulating rates, it looked like a poor investment, because it would have left the city with a whole bunch of debt and no way to pay it off,” said Assistant City Manager for Operations Randy McCaslin. “But now that the deregulation discussion has gone away and environmental regulations are coming, it’s turning out to be a very good investment indeed.”
The timing of the city’s bet resulted in it, and the other agency members, getting a steady supply of abundant energy just before the door was slammed on nuclear power and before years of fossil fuel price increases. Also, nuclear power emits no greenhouse gases and won’t be affected by any regulation of them.
The Obama administration’s support has sparked a resurgence in nuclear power in the United States. The Nuclear Regulatory Commission has 26 applications for nuclear plants pending. The administration in February approved an $8 billion loan guarantee for two Southern Company nuclear reactors in Georgia that would be the first built in the United States since the ’70s. But nuclear plants take a long time to license and build; the Georgia plants would not come online before 2017.
That leaves cities like High Point that own nuclear generating capacity in good shape, if their plants aren’t aging or their operating licenses expiring. The agency and High Point breathed a collective sigh of relief recently, when Catawba’s license was extended to 2043 and McGuire Unit 1’s to 2041.
High Point’s share of the Catawba and McGuire plants produces more electricity than the city’s customers use, and the agency sells the excess and applies that profit against rate increases. For example, the agency’s expected wholesale rate increase in June would have been 5.1 percent, not 4.9 percent, had it not been able to apply the profits from excess electricity sales to the rate.
Although joining the agency turned out to be a good bet, the agency, like power companies, is not without its problems, as Graham Edwards, the CEO of ElectriCities, the association of North Carolina, South Carolina and Virginia public power companies, told members of the High Point City Council in a briefing on Thursday, March 18.
Edwards said the biggest financial challenges the agency faces are a recession-driven drop in demand for its excess power, increases in taxes and capital and operating costs and a decline in investment earnings caused by low interest rates.
Edwards said national demand for power dropped by an average 3.6 percent in 2009, and demand for the agency’s output from the Catawba plant dropped 3.9 percent during the year. He attributed that decrease primarily to industrial customers cutting down on production. That effect is even more pronounced in other areas of the country. Edwards said the Midwest, where manufacturing is in free fall, saw a 60 percent drop in demand in 2009.
“We saw that as well,” he said. “That dynamic, combined with low energy sales, has caused our profits to decline.”
Declining profits and the high cost of running a nuclear power plant – 93 percent of the agency’s $507 million are “fixed costs” that can’t easily be lowered – have the agency increasing its wholesale rate and will mean a rate increase for High Point Electric Services customers. The High Point City Council will set the retail rate, and McCaslin said the rate increase won’t necessarily be the same as the wholesale increase. He said the retail rate increase could be higher than 4.9 percent – or could be lower, if High Point Electric Services can reduce its expenses.
Edwards said High Point would have faced an even higher wholesale rate increase had the agency not been able to refinance some of its debt and reduce costs. The Catawba plant was financed at 14 percent interest rates in the high-interest late ’70s, but the agency has since refinanced that debt down to 5 percent interest.
The agency calculated a much larger, 8.9 percent wholesale rate increase before applying refinancing, interest income and excess energy sales to bring that increase down to 4.9 percent. Still, 4.9 percent is a large increase, and it won’t be the last. The agency expects 5 percent increases in 2011 and 2012 and a 3.5 percent increase in 2013.
“We cannot continue to raise rates, even at 5 percent a year,” said High Point City Councilmember Bernita Sims. “It prices people out of the market.”
High Point ratepayers may see some relief in 2020, when 85 percent of the agency’s debt will be paid off, drastically reducing its costs, 35 percent of which are debt service. Edwards said, “2020 is a magic date.”
But customers expecting their electric rates to drop by 35 percent in 2020 will probably be disappointed, according to McCaslin and High Point City Manager Strib Boynton, who said the agency will have to begin to capitalize its next source of energy then. High Point Electric Services rates are now comparable to Duke Energy’s, but Duke Energy has applied for a rate increase that would make its rates higher.
“You’ve got to take into consideration the high up-front cost of the plant,” McCaslin said. “You probably will not see a huge drop-off in rates.”
Boynton said rates won’t drop like a rock in 2020,
but that High Point customers are still in better shape than customers of electric companies that depend more on fossil fuel plants with high carbon outputs that will probably be regulated.
Boynton said, “The bottom line is that’s when we’ve got to plan for the next source.”